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The rise, fall and rise of Bitcoin

The digital currency Bitcoin has experienced a surge in value in recent weeks, increasing rapidly since October to exceed a value of $900 for one unit on the Bitcoin exchange Mt. Gox. The value of Bitcoin fell to $125 after the closure of the Silk Road (a website where users could buy and sell illegal items using Bitcoin) by the FBI on October 2nd 2013, but has since rallied well to briefly reach $900 on November 19th, before falling to below $500.

One of the reasons linked to this sudden surge in demand and the subsequent price increase is the discussion of Bitcoin and other virtual currencies in the US Senate. The hearing was prompted by the closure of the Silk Road website, and while this initially caused the exchange price of Bitcoin to fall, the subsequent high profile discussions of virtual currencies appears to have bolstered confidence in Bitcoin as an alternative currency.

Mythili Raman of the US Department of Justice acknowledged that virtual currencies offer consumers “legitimate financial services and have the potential to promote more efficient global commerce”. Such statements are likely to reinforce confidence in Bitcoin, and high profile discussion of virtual currencies is likely to increase awareness of these alternatives to traditional currency. This in turn will increase demand and may be partly responsible for the recent rise in Bitcoin values.

What remains to be seen is whether the increase in Bitcoin value is sustainable, as the currency has been prone to price bubbles since its inception. Some investors may also be put off by Bitcoin’s association with criminal activity, such as the currency’s association with the Silk Road and other similar black market websites. However, Bitcoin appears to be gaining in credibility and popularity, and the recent debate in the Senate seems to indicate that Bitcoin is here to stay.

To find out more, read our Case Study, Bitcoin: Pseudo-currency or the future? on our MarketLine store

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