Bitcoin is a new digital currency that is open source, distributed, and has no central issuing authority. It is not backed by anything physical, like gold, yet it has been designed so that only a fixed number of bitcoins can ever be created. Bitcoins and bitcoin transactions are protected from counterfeiting and double spending by strong cryptography. Because there is no issuing authority, there are no fees for transactions, although fees may be charged for changing into other currencies, escrow services, etc.

Like gold, bitcoin is a form of free market money: money chosen by the people who use it because it suits their needs, rather than being money because some government decrees that its subjects shall use it, and backs up that order with force if necessary (legal tender laws).

Being a very young money, bitcoin does not have a very stable value. As you can see on the logarithmic chart below, one bitcoin is now worth 100s of times what it was worth two years ago, and 10s of times what it was worth one year ago. This is because while the number of bitcoins is growing quite slowly, the number of users, and the number of transactions using bitcoins, is growing rapidly, causing demand to outstrip supply.

Because it is a young currency, bitcoin has had various "teething" problems, and some of these have caused wild swings in value. As the software is refined, as more vendors start accepting bitcoin, and more users choose it for their transactions, these wild swings should damp out.

Over the next 10 years or so, the number of bitcoins in circulation will approach its final total, roughly double the number in the market now. But the number of users may well go from hundreds of thousands to millions, or even hundreds of millions… which means the value of bitcoins has a lot of upside. On the other hand, it is entirely possible that some flaw in the system may come to light, rendering bitcoins completely worthless. In any event, it is wonderful to see new forms of free market money offering choices for saving and facilitating trade.

Weighted value of bitcoin, 2010 to present:



click on the chart to download a pdf

Same chart with a linear scale:



click on the chart to download a pdf

Closeup (log scale):



click on the chart to download a pdf