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Bitcoin's erratic path highlights its infancy

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It doesn't harbour germs and it won't get lost in your laundry or in your couch. But the virtual currency known as Bitcoin is proving to be highly unreliable, if the last 24 hours are any indication, begging concerns of its status as an investment vehicle or a way to transfer money in online transactions.

Bitcoin, while highly experimental--without mention of its rabidly speculative nature--is at the same time a breath of fresh air: it's stateless, meaning it's not subject to the machinations of any jurisdiction. Yet, it's difficult to trust something that can spike as sharply as it did last night--nearly $400, before returning to a price below $600 and bouncing another $100 higher--considering that it value has already been grossly inflated in a short timeframe. Bitcoin's value has increased more than 50-fold in a one-year period.

In absence of a central bank that prints currency, developers pump Bitcoin into the system by solving algorithms. Since it relies on a peer-to-peer network, Bitcoin is only as good as the number of so-called miners who generate the currency and the number of users who exchange it. Despite its unpredictability, Bitcoin has the approval of the U.S. Federal Reserve chairman Ben Bernanke, who vouched for it in a letter to the U.S. Senate Committee on Homeland Security and Governmental Affairs.

As is probably in contrast to the wont of a central banker though, there is little regulatory supervision over something like Bitcoin and Bernanke has admitted as much. The questionable security surrounding its transactions could lead to an array of possibilities for criminals to carry out nefarious chores online.

The Federal Bureau of Investigation shut down something known as the Silk Road in October, what was supposedly a bazaar to buy arms and drugs on the internet. A hearing on Monday before the Senate committee called Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies, which Bernanke attended, explored the risks of anonymous and hard-to-track trades.

"Certain aspects of virtual currencies appeal to criminals and present a host of new challenges to law enforcement," Mythili Raman, the acting assistant attorney general of the Justice Department, told the committee.

Raman said that vigilance would be need to preserve Bitcoin as a way to conduct legitimate commerce. While no steps were taken, the hearing was a sign of more scrutiny to come.

 

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