The video shows that there are different opinions on whether Bitcoin is the currency of the future or just the next speculative bubble. The value of one Bitcoin has increased from £0.04 in August 2010 to £347.62 in February 2014 reaching even £751.38 for a short time in December 2013. For many investors, such a strong increase leads to the question whether Bitcoin may be the next tulip mania?
Nobel Prize winner 2013 Robert Shiller (2002) in his book "Irrational Exuberance" defines speculative bubble as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” In fact when applying this definition to Bitcoin’s value increase it seems that there are signs of a bubble. For instance, the appearance in media has been intense and has driven investors’ enthusiasm during the last few months. Bitcoin unlike other currencies is neither accepted nor backed by any government (Greenberg, 2011), its value has soared suggesting that the increase is based only on the investors' perception.
However, Bitcoin also has some innovative features that may justify the rise of the value. First of all, Bitcoin is similar to the US Dollar because it is also a fiat currency that to a large extent exists only on databases. In other words, Bitcoin is not as different from existing currencies as many may think. Secondly, Bitcoin starts to become a generally accepted medium of exchange which is the main purpose of money. Many shops accept Bitcoin as the medium of exchange already now and many plan to do so. Thirdly, according to Mengerian Theory (Menger, 1982) uncontrolled currency can exist and Bitcoin can be the first modern decentralized currency. And finally there are many advantages for retail users of Bitcoin such as almost free transactions and universality.
Instead of thinking of Bitcoin as a bubble or evolutionary form of money, it can be argued that it may be both at the same time. Like Internet companies after the Dotcom bubble, some digital currencies e.g. Bitcoin may disappear, if there is indeed a bubble, but the idea of digital currencies will probably remain giving rise to new forms of money.
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