Are Virtual Currencies Currency?

Photo: flickr

Author: Eiji Ogawa, RIETI

Bitcoin bubble and burst

Cryptocurrencies or virtual currencies such as Bitcoin are at the center of a scandal. Bitcoin’s exchange rate against the U.S. dollar, which stood at 997.73 USD/BTC at the beginning of 2017, made an uninterrupted climb and peaked at 19,289.79 on December 17, 2017, rising 19-fold over a period of 11.5 months. From that day onward, Bitcoin trended downward, plunging to 6,838.82, roughly one-third of its peak value, on February 5, 2018. In the midst of this collapse came the Coincheck incident in January. Coincheck, an exchange for virtual currencies including NEM, was robbed of 58 billion yen worth of NEM belonging to its customers, prompting the Financial Services Agency (FSA) to conduct an onsite inspection into the company as well as other virtual currency exchange operators. Also, we all remember another related scandal, in which Mt. Gox, a Tokyo-based Bitcoin exchange, had to halt all Bitcoin withdrawals.

As shown in the below Figure, Bitcoin’s exchange rate against the U.S. dollar has changed drastically over the years, having undergone two bubble-and-burst episodes. Bitcoin’s exchange rate against the U.S. dollar surged more than 11-fold over a 3.5-month period, from 100 in mid-August 2013 to 1,151, the peak value at the time, on December 4, 2013. However, Bitcoin tumbled shortly afterward, falling below 500 at the end of March 2014 with half of its value lost in 3.5 months. Then came the 19-fold elevation and the subsequent free fall in 2017. Such a rapid and continuous escalation followed by a sudden free fall are nothing but the creation and collapse of a speculative bubble, and this process has been repeated over time.

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