Disclaimer: I am not an economist and I do not claim to have more than a freshman level understanding of it either. Economics was not my favorite subject and I often find it perplexing. What follows is only based on observation; I may not have considered all variables (mainly due to my ignorance of them). Either way, I thought what happened was pretty interesting. If there are any errors in my assumptions or observations, please feel free to correct me.
Bitcoins are a digital currency. Bitcoins aren’t issued by a bank or a central authority. Instead they are generated by computers when they solve complex problems (for more details, go here and here). I haven’t really read all the details about bitcoin exchange rates and how the bitcoin economy works, but at the very least I know that it does follow the law of supply and demand. So when demand increases and there is a fixed supply, the price will increase (bitcoins are constantly being generated, but it appears that demand is outstripping the rate of generation).
About two weeks ago is when I first decided I would try and get some bitcoins of my own. I decided I would try to generate them and assumed I would have some pretty soon (but I obviously didn’t know the details; it’s a little bit like winning the lottery). So I joined a mining pool online at bitcoinplus. I’ve around .04 bitcoins right now (not much). This was obviously taking too long so I thought about looking into buying some bitcoins. I checked the price over a period of days, it was hovering around $8/bc. I didn’t buy any and decided to check up on it later. A few days later (on the 3rd), I checked again, and this time the price had jumped to a little over $14/bc! What caused this spike? A day later, the price spiked again. This time to about $19/bc! I wasn’t sure what was causing the spike because the price had been more or less stable for the last few weeks.
That’s when I came across this Wired article that my friend sent me. It’s about an underground website (that is also anonymous) that lets you buy any drug. The drugs are priced in bitcoins. It would seem that there are a lot of people interested in buying these drugs and therefore these people require bitcoins. I’m theorizing that this is what led to the increased demand for bitcoins and hence the spike in bitcoin prices.
The Wired article was posted on the 1st of June. You can clearly see from the following charts how the price of bitcoins jumped on that one day (it’s about a jump of 30% on the 1st). The biggest spike was on the 4th; essentially a price increase of approximately 350% in just four days! Since the 4th, the price seems to be slowly coming down. Currently it’s sitting at around a little over $18/bc. I’ll probably keep a watch on the price of bitcoins over the next few days to see what happens. I’m assuming that the demand will die down and therefore the prices should eventually come down as well. Looking into this has actually ignited some interest in me to learn a little bit more about bitcoins and the bitcoin economy.
Normally you hear of currency values and stock prices rising on falling based on events in the world (positive or negative). It’s amazing to see how one little thing can change the prices of commodities. In particular, I found this (bitcoin) example particularly interesting because it’s a relatively insulated economy (i.e., it doesn’t seem to be affected by factors in the traditional market).
tl;dr version: Bitcoin prices were hovering around $8/bc. They jumped to $19/bc when Wired magazine posted an article about an underground market where you can buy illegal drugs using bitcoins.
Update: I was looking at closing prices and so it was showing only prices from the end-of-day. Here’s a chart that includes yesterday’s data. The closing price was a little over $30/bc. That’s an almost 700% increase since the 1st!
I came across a few quotes that illustrate why Central Banks (like the Fed) are bad. I think they accurately describe the economic situation that Americans face today. These are from president Andrew Jackson; the only president to abolish the Central Bank and the only president who got rid of the national debt (all emphasis is mine):
The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it. –Andrew Jackson
I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country. –Andrew Jackson
Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. –Andrew Jackson
It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. –Andrew Jackson