When the Silk Road, previously the world’s largest online exchange of illegal goods, shut down in October, many speculated that it would also mean the end of Bitcoin, the anonymous, digital currency that the site ran on. But a funny thing happened: nothing. The value of Bitcoin dipped with the news, falling slightly to around $200, but it has ballooned ever since, breaking the $1,000 mark for a single coin and attracting more buyers than ever.
With current prices hovering around $1,000 (a recent dip was caused by the Chinese government banning interaction between digital currencies and banks), Bitcoin is marching toward the mainstream. It’s not so much that the illegal enterprises based on the currency have disappeared—in fact, several competitors to the Silk Road have popped up in its place—but rather its reputation has changed from being mysterious contraband to a great investment, and everyone wants a piece.
Fear of missing out (FOMO, for short) is shorthand for that feeling you get on the Internet when you can witness in real time everyone but yourself doing awesome stuff. It’s seeing a snapshot from a Kanye West concert on your friend’s Instagram, or a Facebook album of a party you weren’t invited to. It’s also the feeling that the Bitcoin boom inspires, as Adrian Chen writes in a recent New York Times op-ed.
Bitcoin’s meteoric rise constantly suggests an imminent crash, but the steep curves of Bitcoin price charts also bring to mind the parabolic growth of companies like Facebook, Tumblr, and Uber.
Each new rise in price and each new industry that accepts Bitcoin as legitimate causes Bitcoin users to erupt in fanfare, and for good reason: many are getting rich capitalizing on crypto-currency mania while the rest of us are snoozing. Take Kristoffer Koch, for example. The Norwegian man forgot about the $26 he exchanged for 5,000 Bitcoins in 2009, remembered he had it just this year, and came back with what now amounts to $5,000,000 (though he dropped some to buy an apartment when Bitcoin was still worth just $210). The earlier you get in on Bitcoin, Koch’s experience suggests, the more money you make.
Chen is skeptical. “All I can say is that the crash is going to be great,” he writes. “Bitcoin is too dependent on speculative mania to be of practical use as a currency.” He’s right to point out that digital currencies as a whole are driven by speculation, and Bitcoin is nowhere near being as useful for buying goods as a dollar or a credit card (despite the existence of Bitcoin ATMs). But Chen misses the point that it’s not just tech aficionados being struck by FOMO. It goes all the way to the U.S. government.
The Senate held a hearing on November 18 to discuss just how best to approach Bitcoin, questioning digital currency company lawyers and entrepreneurs about their businesses. If the gathered politicians had suggested they might regulate digital currencies out of existence, as many feared they would, then Bitcoin would have been crushed. But they didn’t.
Mythili Raman, the acting assistant attorney general of the Justice Department, determined that Bitcoin is a “legal means of exchange” that could “offer legitimate financial services." Senator Mark Warner (D-Virginia) argued that the country needs to get its act together or it could literally miss out. “Too much regulation could chase Bitcoin business overseas,” Warner said. These losses would come in the form of taxation on the profits of Bitcoin companies, who make money by running trading platforms for digital currencies similar to the stock market, as well as users with ever-growing millions of dollars in crypto-currency holdings, who could be subject to capital gains tax.
No less than the chairman of the Federal Reserve backs Bitcoin’s potential. It “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system,” Ben Bernanke wrote in a letter to Senator Thomas Carper, who chaired the hearings. The government doesn’t see Bitcoin so much as a competing currency than as an opportunity to rethink the way money works. As interest in the currency continues to grow, whether as a cash alternative or simply a technological platform, its price will as well.
The misconceptions around Bitcoin are also being cleared away. Users are being discouraged from using Bitcoin for illegal activities with the aggressive Silk Road shutdown as well as the recent closure of Sheep Marketplace, a Silk Road alternative that had $100 million worth of Bitcoin stolen in a catastrophic security breach. In the hearings, the Shasky Calvery, director of the Financial Crimes Enforcement Network, stated that there is “no evidence that terrorist groups are using or interested in virtual currencies.” Thus, the way is paved for Bitcoin to become what it should be: a commodity that people value, with no more negative connotations than a piece of stock on the NASDAQ.
When does hype cease to become hype? Bitcoin’s meteoric rise constantly suggests an imminent crash, but the steep curves of Bitcoin price charts also bring to mind the parabolic growth of companies like Facebook, Tumblr, and Uber, which use technology to remake the world around us and are valued in the billions of dollars. Bitcoin has come at the right time, when users are ready for a new system to store their money. Digital currencies are start-ups, and buying in now is a way of investing in their future.
Senator Warner predicted that if Bitcoin becomes standard, “it could radically and dramatically transform the role of central banks.” Perhaps that’s exactly what is needed.