Disclaimer: I’m not a market expert, or economist. I’m purely speculating.
Bitcoin is at an interesting junction. It recently reached a new high after stabilising at around $4-$10/btc for most of last year.
I was involved in the initial rise and burst of 2011. I got a few bitcoins in hand (reasonably below that bubble of $30/btc). When it dropped, it dropped to something like $2-3/btc from $30.
It didn’t drop to zero, which to my mind, meant that bitcoin still had an inherent value besides the speculators who gamed the market. In other words, it’s value as a quick, boundary-less p2p cryptocurrency. After that crash, Bitcoin underwent lots of growing pains. Large exchanges got hacked (note: not bitcoin itself, only the exchanges), but yet it still survived and kept growing.
There are a few reasons why I think we are seeing the new rise in prices:
1) SatoshiDice. A gambling site.
You send bitcoins to a specific address. When it receives the transaction, it rolls a dice. Depending on the address, you bet below a certain number. If the rolled number is below the limit, you win returns. The higher the number, the lower the returns, and vice versa.
This is big. When it launched, it was off to a slow start, but slowly gained massive market share. It is responsible for more than 50% of bitcoin traffic. Watch the transactions here. It’s ridiculously easy to play.
2) Bitcoin reward per block halved end of 2012.
Here’s a handy guide on what it means. To explain in short: Bitcoin rewards miners who help verify the block-chain with bitcoins. This is how bitcoins come into the system. It started with 50btc. Over time, this decreases to stop run-away inflation (one of the ideologies of bitcoin). More than 50% of bitcoins are already in circulation. By 2140 all of it will be mined. End of 2012 it halved to 25, decreasing supply. With basic economics 101: if demand stays the same and the supply decreases, the price increases.
3) Big names starting support of BTC (Reddit/Mega).
Both Reddit and Mega subscriptions can be bought with bitcoins. It gives more credibility to the ecosystem and increases demand.
4) More real-world use.
Bitcoin has been synonymous with ‘illegal’ activity such as the Silk Road deep web drug exchange. It was used primarily online, and for purposes digital goods. It’s starting to interface more with the ‘real’ world. Stuff like small atm’s to turn dollars into bitcoins, and bitcoinin (‘amazon’ of bitcoin). In other words, you can be paid in bitcoins and shop with it. Namecheap is consdering bitcoin support also.
So, basically in the short term, demand has increased and supply has decreased. This will push the price up. Speculators will jump along with this trend as usual. I suspect in the near short term, it will drop again, but not to the previous low.
As for the long-term future, I’m hedging my money on its success.
The biggest hurdle I think is still it being a very difficult concept to understand. I mean, if people like Steven Levitt (author of Freakonomics) don’t understand it, then how are most people supposed to understand it? But, with much like new technology, people don’t have to understand, only need to be convinced of it’s use and trustworthiness. Few people understand how the internet works, but they still use it. Bitcoin still needs a killer service on top of it that allows people to use it without knowledge of stuff like using hashes as addresses, why you need to download a massive blockchain before you can start, etc. It’s going to be interesting marketing/user experience exercise!
Another interesting thing that will happen, sooner than later, is governments are going to try and clamp down on it. Unfortunately, stopping it completely will mean killing off the internet. Not possible. Governments can discourage it’s use, but it will still be used. In fact, if they do start using it, it will lead to a Barbara Streisand effect. It will only spur it’s usage on.
Bitcoin is still though in it’s infancy. The whole money supply is supposed to only be in circulation in 100+ years (although it’s logarithmic). The price of bitcoins into the future will only rise (even when governments clamp down). The current $30+-/btc won’t be highest it will get. The eventual ‘lowest’ point in the future will be higher than $30 (in current value). This is probably the most unsubstantiated part of the whole post, but it just seems inevitable.
Either way, it’s going to be an interesting ride. Given how far it’s come and matured in the past 2 years, the ride feels a lot more safer.
I won’t be surprised if it eventually hits upwards of $1000/btc in the next 5 years.