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Bitcoin: The Perfect Bubble?

By Henry Blodget

bitcoin

If you're like most people, you have probably been hearing a lot about "Bitcoin" recently.

And, if you're like most people, you probably do not know what it is or what the fuss is all about.

Here's a snapshot.

Bitcoin is  an electronic currency--a new form of money.

It's also, possibly, the next great asset bubble. (Or investment, depending on how the story ends. Or both, depending on when you get in and get out.)

Bitcoins take the form of strings of numbers that can be electronically owned by and transferred among individuals and organizations. For now, the currency is primarily used for payments by  fringe retailers or illegal transactions, but it is being accepted more and more widely. And  organizations that exchange Bitcoins for standard currency are now being approved to operate as banks.

The premise and promise of Bitcoin--the part that appeals to folks who don't happen to be gold bugs, conspiracy theorists, or cryptography geeks (obviously they all love it)--is that the current plan is for only a finite number of Bitcoins to be created. This is in direct contrast to standard government-issued currencies, which governments can always print more of. If the supply of Bitcoins remains finite, this should theoretically eliminate inflation, which is one of the biggest drawbacks of paper money.

(Although inflation has remained low in recent years, it ravages the value of paper money over time. A dollar in 1900 is  only worth about $0.04 in today's currency.)

So Bitcoin is conceptually very interesting, especially since it is not issued by a government agency. (Here's a great presentation on  what Bitcoin is and why some people are so excited about it.)

What has suddenly grabbed the public's attention about Bitcoin, however, is the recent explosion in the value of the currency.

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