Bitcoin value hit yet another lifetime high of $6000 recently and is expected to touch $10,000 very soon.
While bitcoins have grown in popularity, its immediate and long-term prospects may not be too bright.
What are the challenges?
Volatility – Volatility in trading price of Bitcoins indicate that it is not reflective of its fundamental value.
This is a sign that many bitcoin buyers purchase the currency solely for the purpose of gambling.
Accumulation by investors who are betting on its future potential as a standard medium of exchange is also a possible explanation.
But one will have to wait to know if this is true.
Political Risks – Rise of bitcoins is a serious challenge to national fiat currencies issued by central banks.
National currencies allow governments to easily tax their citizens by printing a fresh supply of money whenever they need it.
Bitcoin strikes at the root of this centuries-long government monopoly power over money held by governments.
As political risks are too huge, market-based currencies will either be discourage by governments or completely banned.
What lies ahead?
When bitcoin will meet its end, is very hard to predict.
Its volatility in future might taper down if it survives for long.
Although, replacing national currencies is a far cry, it definitely has potential to survive as a medium of exchange on the fringes of the monetary system.
What should be the policy towards Market Based currencies?
A free market for private money can bring in serious competition that can improve the quality of our monetary system.
This will either reign in inflation or make it more predictable.
Speculative frenzies can indeed occasionally occur in such markets, as they do in fiat currencies issued by central banks already.
But it is simply bad public policy to fully dismiss the market’s tremendous ability to regulate our money.
