The Bitcoin currency – an online, anonymous currency, ‘mined’ by computing power – was fraught with problems from the start. Bitcoin’s supporters champion that it’s ‘safe from the instability of fractional reserve banking‘. Hardly. Bitcoin has proven to be a volatile currency, with only a tiny market for goods and services, no available deposit insurance, no use offline, and no central authority to calm rough markets.
First of all, the initial craze led to out-of-control appreciation. The value of one Bitcoin rose from a few cents to over $30 in the space of just a few months, then plummeted back to a few dollars. It was a classic case of irrational exuberance – people were buying up Bitcoin because they thought it would continuously rise in value. Also, the size of the Bitcoin economy was, and still is, very small: there are very few merchants who actually accept Bitcoin for payment. It can be exchanged into gift cards, goods, or back to regular money, but there are even still high transaction costs. Users must deposit money to an online payer such as Dwolla, then purchase on a Bitcoin exchange, like mtgox.
A series of scandals involving stolen user information from mtgox and multiple thefts involving huge sums of Bitcoins have no doubt ensured that the odds of the crypto-currency going mainstream are virtually nil.
The one advantage of Bitcoin over a bank account or Paypal account is that they allow transactions to be made anonymously online. This explains the use of Bitcoins on Silkroad – a website where users can exchange Bitcoin for drugs and other illicit goods.
The Canadian Mint may have just unveiled Bitcoin’s successor, MintChip. MintChip will act just like Bitcoin wallet, but filled with fungible Canadian dollars. They will be small chips in electronic devices that hold digital Canadian currency which can be used to perform anonymous (or not) transactions, untethered from a bank account or credit card. It will have several advantages over Bitcoin: it will be backed by a stable Canadian monetary policy, a large online and offline market for goods and services, and have lower transaction costs.
I am certain that someone will develop an app that will allow people to trade Canadian dollars anonymously via cellphones or the internet, thus eliminating the only small advantage that Bitcoin had. Once mints and central banks around the world start unveiling similar portable digital wallets, and developers swiftly move in to ensure that transactions can be done anonymously, the Bitcoin experiment will end.