Bitcoin: The Future of Currency or Speculative Bubble?

bitcoin

Image from: Bitcoin / Shutterstock

In the past couple of months, Bitcoin has become a buzzword that’s popping up everywhere. It’s appeared in countless news articles, in social media, and even the U.S. Senate is talking about it. So what exactly is Bitcoin, and why does it matter?

Bitcoin is an anonymous, decentralized digital cryptocurrency that allows users to make secure peer-to-peer financial transactions over the Internet with little to no fees or delays. The most unusual thing about Bitcoin is that it is not produced by any one central agency (unlike the U.S. dollar, which is controlled entirely by the U.S. Treasury). In fact, it’s not produced by any agency at all–Bitcoins are produced by regular (albeit very tech savvy) folks who devote their computing power to “mining,” or solving complex puzzles to generate more units of the currency.

As Bitcoin has gained popularity, its value has skyrocketed to astronomical levels. This time last year, one Bitcoin was worth just a fraction of one U.S. dollar. In November 2013, the currency reached its all-time high and was trading at $1240–-that’s an increase of more than 10,000%! In mid-December, the value of a Bitcoin hovered around $700 after recovering from a huge drop following China’s nationwide ban of the currency, an event that raised a lot of concern about the legitimacy of Bitcoin. However, as we begin the new year, Bitcoin is going strong once again, trading at around $1000.

Since the gain in value and popularity, thousands of brick-and-mortar stores and online retailers have jumped on the bandwagon and now accept Bitcoin as a form of payment. If you wanted to, you could even pay for a private space flight with Bitcoin since Richard Branson of Virgin Galactic now accepts the currency!

On November 21, 2013, the U.S. Senate held a hearing about the future of Bitcoin and its role in the current monetary system. Although the Obama administration expressed concern about the use of Bitcoin for illicit purposes due to its anonymity, the overall consensus was that the new currency could be extremely useful in our economy and that banning it would stifle innovation.

So what are people doing online to find out more about Bitcoin, and how has this activity changed since its gain in value and popularity?

Based on Compete’s data, when looking at traffic to Bitcoin-related websites (i.e. bitcoin.org, weusecoins.com, mtgox.com and others), the volume of visitors to these websites shows an astonishingly strong correlation of .91 with Bitcoin closing prices over the last year (any correlation greater than 0.7 is considered to be strongly correlated), which suggests that the more Bitcoin is worth, the more interest it receives from the Internet browsing population.

In November 2013, over 460,000 users perused Bitcoin websites, compared to only 26,000 users at the same time in 2012.

bitcoin-daily-closing-prices
unique visitors to bitcoin sites

More specifically, our data tells us that people are trying to find out more about how Bitcoin works, what it’s for, and if it’s a worthwhile investment. In November 2013, the most popular Bitcoin-related search terms were “Bitcoin value,” “how do Bitcoins work?” and “how to get Bitcoins?” In fact, the number of times the term “Bitcoin” has popped up in Internet searches has a .94 correlation with the market value of the currency.

total searches using the term bitcoin

Bitcoin isn’t the only cryptocurrency out there. After seeing Bitcoin’s Internet-wide success, other competitors like Litecoin and Peercoin have entered the market, boasting even better properties. Although there are a number of cryptocurrencies being traded today, amounting to a market capitalization of over $7 billion, Bitcoin still dominates the market, accounting for 92% of total shares.

cryptocurrency market capitalization

The data points to everyone wondering the same thing: is Bitcoin all it’s cracked up to be, or is it just a speculative bubble waiting to burst? Will one of these newer cryptocurrencies emerge out of the dust to steal Bitcoin’s thunder?

About Lisa Melnik:
Lisa is a data analyst at Compete. She just recently graduated from Boston University, where she studied economics and researched mathematical finance. Connect with her on LinkedIn.