Gold and Bitcoin have one thing in common: They are not an official means of payment and their amount is not controlled by a central bank. During the financial crisis, both were in demand as parallel currencies that cannot be increased at will. Possibly too much in demand. Bitcoins’ prices had increased almost twenty-fold since the beginning of the year alone, and even forty-fold over the year. Things weren’t quite as fast for precious metals, but gold had also increased more than sevenfold from its low of $ 255.
On Wednesday afternoon, the price of the Internet currency had reached a historic high at over $ 260. But in the evening a wave of sales suddenly set in, and things have been falling rapidly ever since. The prices fell to around $ 75 by Friday afternoon, their lowest level since the end of March. Bitcoin was one of the hottest objects of speculation until Wednesday, fueled by hype in the social networks and scared investors who moved their money to a parallel universe that cannot be manipulated by the state after the expropriation of Cyprus. In March, a hedge fund was founded that speculates specifically on the digital currency.
This huge demand of exchange tutorials met limited supply. Bitcoins cannot be generated arbitrarily, an algorithm severely limits the number of newly created units. The maximum volume is limited to 21 million Bitcoin. Currently, a maximum of 3600 units are added per day. But the closer the limit gets, the fewer new bitcoins are created.
Risk of speculative bubbles
There are currently around ten million digital arithmetic units in total. Even in the best of times, the value of all digital “coins” was just over two billion dollars, hardly higher than the economic output of the miniature state of San Marino with its 31,700 inhabitants. Even a slight increase in interest, such as after the uncertainty in Cyprus, can therefore lead to a price explosion.
A speculative bubble had already formed in the summer of 2011. Back then, hacker attacks on several Bitcoin trading platforms undermined trust in the new money. The uncertainty led to a sudden flight of the users, which overwhelmed the electronic exchanges: The price dropped from around 30 dollars within two days by half. It later went down to almost two dollars. This time it was the same: the only difference was that it went down from a higher level. Bitcoins could still be transferred, only the exchange into other currencies such as euros or dollars collapsed at times.
“Bitcoin must first develop an intrinsic value that acts as an anchor,” says Sébastien Galy, currency expert at the major French bank Société Générale. This is the only way to build trust. However, Galy admits that this intrinsic value is difficult to calculate in the case of a novelty: “Only one thing seems certain: the process of determining this value will be bumpy,” says Galy.
A bitcoin could be worth more than 40,000 euros if you refer exchange tutorials
Some assumptions have to be made for the determination: If the Bitcoin were to replace all euro cash, the mathematical value could rise to 42,857 euros. Because the volume of banknotes is around 900 billion, the total number of Bitcoins is limited to 21 million. In the other extreme case, where payments with digital money are either banned or prove to be fashionable, the value of a bitcoin tends towards zero.
A Bitcoin fan club meets every Thursday in Berlin’s “Room77” to celebrate monetary independence despite all fluctuations. Until the question of the intrinsic value of the new currencies has been decided, many more cool beers will flow through the throats of the money revolutionaries.