We’ve been following the ups and downs of Bitcoin now for quite some time. As a cryptocurrency it made its first steps into the light but timidly; for years the currency nestled down in the single-digit cents USD but with some media attention and careful cultivation it reached the bloggers. It’s seen at least one sudden rise in price and a series of huge crashes; we’ve also watched the community suffer through major security issues with the largest trading and service platforms: MtGox, MyBitcoin.com, and Bitomat.pl  (to name a few.)

In spite of (multiple) declarations of death, Bitcoin still chugs on.

Once again, the Bitcoin market is showing a healthy value blush but the community may be a bit more cautious with their trading this time. Last month, Bitcoin had settled to hovering around $2.50 and today it finally poked its head over $4 again.

This resurgence of value has caught the attention of media outlets like Ars Technica, in an article cross-posted in Wired Magazine, Timothy B. Lee argues that Bitcoin could be a threat to international money exchanges like Western Union, but couldn’t possibly be a proper currency in-of-itself.

Some of the major obstacles to Bitcoin reaching the biggest and brightest heights persist in the low population and thus the high value instability. Currencies such as USD don’t just have the backing of nation-states but maintain their value due to a massive population of traders and being part of an economy of $14 trillion. While the population of traders for Bitcoin is vanishingly small compared to USD, it still manages to hold a vested value of around $30 million. Not something to sneeze at for an infant currency.

Lee also argues that “Bitcoin is a bad currency” and this has caused parts of the community to rise up in rebuttal. Amir Taaki from Bitcoinmedia.com took that bull by the horns by pointing out exactly what I mentioned above: Bitcoin’s apparent instability is due to low population, not due to a mechanical or systemic problem with the currency.

Bitcoin is a smaller system with less people. Therefore it is much easier to move the market price. Everything has an equal and opposite reaction. When you jump in the air, the earth moves away from you too, but you are so comparatively small that the force you exerted on the earth is not noticeable. However something as large as the moon does cause the earth to wobble in its orbit. A buyer of bitcoins carries far more weight in this small market with their $10,000 than they do in the usd-eur forex market.

Volatility of bitcoin is a consequence of it being the early days. Of bitcoin being small. Of bitcoin being undeveloped. Of bitcoin not having reached its full potential.

As we speak, more services and population are snowballing into Bitcoin. In fact, just recently we predicted that we might be seeing a jump in the market value of bitcoins due to Dwolla’s new feature that adds instant-transaction cash, which would affect the liquidity of traders. With the ability to make exchanges faster and with less immediate risk, traders can do their thing with less wait, thus adding a substantial value to trading itself.

bitcoincharts.com

Bitcoin could replace Western Union?

Western Union currently provides a wire transfer service with high fees across international borders (and within them) for people to move money from place to place. They’re relatively cheap (compared to bank wire transfers) and provide a service by being in as many places as possible in order to reach a large base of customers. In order to threaten Western Union, Bitcoin will need to provide an equivalent number of services and not just transcend borders and offer extremely low transaction fees.

With enough of a population to support a service market that would provide the same reach as Western Union, Bitcoin would also obtain the critical mass to maintain a stable exchange rate. The primary obstacle is popular acceptance and we’re starting to see that happen with the addition of services that make the currency useful to merchants and everyday people.

Bitcoin still has a long way to go and claims about its eventual power will only draw blood with serrated speculation.

I’ve often argued myself that bitcoins are an excellent metacurrency in the same way that Lee from Ars Technica does. Except that I see it as an excellent basis for microtransactions in massively multiplayer online video games and as a social currency not just an international trade and exchange currency. Bitcoin’s ability to transcend borders due to its nature as a cryptocurrency makes it ideal for using online. Also, its massive divisibility means that it can be used for actual microtransactions—an exchange still facing the barrier of high transaction fees it unfeasible to do it with any traditional currency.