Bitcoin Currency

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The Infeasibility of Bitcoin as a Currency

Georgia Huang

Advanced Placement Economics
Dr. Bruce
March 23, 2014

A decentralized digital cryptocurrency, Bitcoins are touted by proponents are a way to avoid detection and taxes. However, bitcoins are not a viable long term currency due to security issues, extreme instability, legal issues, and trade regulations.
Can Bitcoin be considered a currency?
In a macroeconomic context, there are five main economic goals. One is price stability, or the goal of preventing deflation and providing a low and stable rate of inflation. Bitcoin is so subject to severe price volatility that it is impossible to stabilize as a currency. Ranging anywhere from $5 to $1200, bitcoin prices fluctuate by a floating exchange rate. Eric Posner, a professor at the University of Chicago’s law school, reports that bitcoin is over seven times as volatile as gold and over eight times as volatile as the S&P 500. There is no price ceiling or price floor. Additionally, bitcoin prices are easily influenced by speculation and the media; popular technology site Slashdot posted an article about bitcoin that made the price increase sevenfold in a few days in 2010. Another post on Time in April doubled the price in less than seven days. A Bitcoin bubble is created as press coverage of soaring prices attracts more users and sends the price up even further. This is a serious hindrance to the adoption of bitcoins as a medium of exchange; few would conduct business where one product costing $5 today becomes $15 tomorrow. Unlike modern currency, Bitcoin does not have a central bank or government institution to monitor the currency or maintain price stability. Though decentralization avoids interferen...

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...cent scams and reports of illegal activity, US authorities have also begun tightening its authority over digital currencies; US attorney Preet Bharara of Manhattan recently convicted the leaders of Liberty Reserve, an online money laundering firm that worked with the Silk Road. Russia, China, India, and Indonesia have all imposed rather strict regulations, with China restricting bitcoins so that they cannot be exchanged for yuan. With this announcement, prices dove to one-third the original price from 7588 yuan to 2560 yuan, causing a chain reaction in other nations. Japan-based exchanges fell from $717 to $480 per bitcoin, further highlighting the instable nature of the digital currency. With increasing protectionism, Bitcoin is losing its liquidity, which does not make it an attractive option for investors and traders.
Opinion: What is the future of bitcoin?

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