Bitcoin Price Plummets, But It's Still a Good Bet
People like Bitcoin because they hate the Fed, or they don't trust banks, or they want to diversify. People are afraid of Bitcoin because of the lack of oversight, its intangible, its market value is volatile, and, well, it's new.
The latest round of volatility came earlier today as the "Silk Road," a black-market site on which Bitcoin was used, was just shut down. Bitcoin's exchange rate fell from $130(USD) to $85. It rebounded to $104.40 later in the day, but the relationship between Bitcoin and yet another entity that the U.S. government couldn't control being shut down (also see lavabit), makes people nervous. A number of recent Congressional actions have truly defied logic, analysis, or even post-Cro-Magnon thought status (cough, cough). But here's an outline outline of some things watchers should keep in mind before the American people let Bitcoin be shut down by the government or shuttered due to panicked markets.
Paul Krugman notes that Bitcoin has enabled those holding money to get richer, because in general Bitcoin has been highly inflationary over the past few years. He's right, as arguably the first Bitcoin transaction for a real good involved spending 10,000 BTC (Bitcoin Currency) on two pizzas from Papa John's, and at the time of writing this, 1 BTC is worth $104.40 USD. But that's natural, as the adoption of any currency with a market is bound to fluctuate as it becomes more widely accepted.
For Krugman the bit on inflation. is problematic because it encourages hoarding, and won't benefit the layman, but I say he's thinking too small. Bitcoin is a tool; it can be used selfishly, or as a conduit of positive development. The opportunities for access to banking services, non-hyper-inflationary currency, and potential mass-mobile sector adoption render it an incredibly valuable option, particularly for the developing world.
Bitcoin has already gained traction during Argentinian hyper-inflation, as well as the Cypriot and Spanish financial crises. Some might argue that not riding out the crises deepens instability. But at some point you've just got to jump ship and go into salvage mode. It wasn't like traditional macroeconomic policy in the afflicted countries warranted much faith come January 2012. It's not like a centralized bank did your average Joe many favors as capital controls kicked into high gear.
In the mobile-heavy developing world, Bitcoin offers a readily available and non-hyper-inflationary currency. With the closure of hawalas, or small money transfer institutions common in Africa, Bitcoin offers an instantaneous way for migrants to send remittances to relatives at home. Bitcoin is also extremely preferable to the whims of centralized banking in states that fail at governance. It's compatible with the basic catalysts of micro-banking; namely, that fees are very low, "wallets" are free, and it's readily available from remote townships to the slums of New Delhi. In short, even if it's not going to lift the global south from poverty, it's a very powerful tool that could definitely help.
In regards to the current volatility (that could completely sink anyone using the service like a micro-bank), refer to the famous Gartner "hype-cycle" diagram:
While Bitcoin is a currency (or cryptocurrency, if you want to be exact), it's also a disruptive technology. It's just getting started. To truly reach levels of mass viability it has to weather the news cycle and the leery public. Bitcoin value currently fluctuates massively in tandem with news coverage.
This is because we're just approaching the "peak of inflated expectations." So it's a bubble ... the viability of Bitcoin as a new way to store massive value in innovative ways is astounding. We just have to ride out the storm until the "plateau of productivity." Eventually there will be a set number of Bitcoins, wherein the trading price corresponds to a real and stable level of basic supply and demand. No tinkering Federal Reserve, no crony-capitalism, just the promising glow of a computer screen lighting up those we've left behind.