The Digital Currency Question: Is Bitcoin Here to Stay?

Ever since Bitcoin took off, investors have been worried about its prospects. It seems some of those fears may have been well-founded. One of the web’s largest Bitcoin exchanges just went offline …

Bitcoin is often thought of as a new form of currency, but it actually works just like the pound or the dollar. The only difference is that instead of passing around notes and coins, the tokens that are exchanged for goods and services only exist online.

Like any currency, its value will change according to what people are willing to swap for it – and that is usually determined by whether these traders and investors think it will rise or fall in value. That’s why Bitcoin has fluctuated so wildly in the past few months: it’s such a new idea that nobody really knows where it will end up, meaning that every small event can have huge consequences.

So with one of Bitcoin’s largest web exchanges MtGox’s recent departure from the web, it really is true that anything could happen. No wonder six major Bitcoin exchanges have published a statement blasting MtGox and its chief executive and reassuring investors.

“This tragic violation of the trust of users of MtGox was the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry,” they write.

MtGox has had plenty of troubles in recent weeks – earlier this month, it stopped all transfers to outside addresses after saying it had found a potentially serious loophole. Fraudsters could use this to create a glitch in the system that would double the amount of Bitcoins sent in any transaction and on top of this huge security threat, the site was also vulnerable to other attacks as a result.

“Whether bitcoins are here to stay depends upon their ability to satisfy the fundamental functions of money, viz. (1) unit of account, (2) medium of exchange and crucially (3) store of value. The MtGox fiasco highlights the inherent uncertainty over whether Bitcoins can act as a store of value over the medium term,” says Philip Brabin, ACCA Lecturer at LSBF.

But the events of the past few days have raised plenty of eyebrows among investors and analysts alike. According to the Financial Times, MtGox deleted every tweet from its Twitter account yesterday – just one day after chief executive Mark Karpeles had stood down from the board of trade organisation the Bitcoin Foundation. Unverified documents have even suggested MtGox has lost up to six per cent of all the Bitcoins currently in circulation, which could have huge ramifications.

Still, there may be further interesting developments to look out for. MtGox is believed to be suffering with insolvency problems at the moment, and as City AM points out, some observers have noted a change in the website’s source code that could mean an announcement is on its way about a potential acquisition. If MtGox is to change hands, investors fearing the kind of losses sustained by its customers may retain some hope.

It’s too early to tell just how badly MtGox’s problems have affected Bitcoin’s prospects, but they certainly haven’t done anything to boost the currency’s profile among the doubters. If there’s one thing we do know, it’s that a new and relatively untested currency needs to demonstrate some level of stability if it is going to impress investors.

<Principal image courtesy BTC Keychain/Some rights reserved>