Bernanke comments boost Bitcoin, but can the mania last?

So Ben Bernanke, chairman of the U.S. Federal Reserve and the world’s most powerful central banker, has given a cautious thumbs-up to virtual currencies.

Yay for bitcoin holders. Virtual currencies have shot into the spotlight recently mainly because of Bitcoin mania (more on that later). On Monday, U.S. authorities appeared at the first-ever congressional hearing to discuss the promise and perils of virtual currencies such as Bitcoin (Bernanke didn’t appear at the hearing, but he sent a letter).

In the letter, Bernanke said virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.” In general, even the other authorities who appeared before Congress seemed favourably disposed towards virtual currencies, adding legitimacy to the phenomenon. That should, in theory, push up the value of Bitcoin even further.

Before we tell you about Bitcoin, let’s explain what virtual currencies are. Virtual currencies are digital currencies that are neither controlled by any central bank nor come under the sovereignty of any single nation. Bitcoin is a digital currency managed by peer-to-peer technology without any oversight authority. In contrast, a physical currency like the U.S. dollar is issued and managed by the Federal Reserve as part of its mandate to manage monetary policy. (For more on how Bitcoins work, here’s an excellent summary by Forbes.com.)

Bitcoin is not the only digital currency around, but it is the one making the big waves right now. Other alternatives include Litecoin, Peercoin, Freicoin, Ripple and Linden Dollar, according to a CNBC report.

The way Bitcoin’s value has surged in recent weeks is just insane. Take a look at this chart. You can see that since October, Bitcoin has trebled in value. Its surge in popularity is astonishing even taking a longer time period.  In January this year, Bitcoin was trading at $13. Now, it’s at an eye-popping $700 plus (with some crazy volatility in between). At the moment, it seems like everyone  from high-profile investors to the businessman next door wants to know more – and grab a piece – of Bitcoin. 

These days, when the price commodity goes up today, you can typically pin it on the Chinese. Ditto for bitcoins. The recent extraordinary jump in the value of bitcoins happened after demand for the virtual currency soared on a little-known Chinese exchange. Last month, wired.com reported that BTC China accounted for close to one-third of Bitcoin trades, making it the No. 1 exchange for bitcoin trading, surpassing the Japanese exchange Mt. Gox, the top exchange for bitcoin trading until recently.

The total market capitalization of the bitcoin economy now exceeds $8 billion based on recent prices, according to website Bitcoincharts.com.

Bubble or not, Bitcoin’s ascent may not be over just yet.

[Image Credit]

P.S: Last we heard, Bitcoin had crashed to $540 after leaping to $900. In the space of 48 hours.  And the crazy volatility continues…

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