Of course, a stronger Bitcoin is just another way of saying that things cost less in terms of Bitcoin. In other words, there's Bitcoin deflation. Just how much? Well, as you can see below, Peter Coy calculates that prices would have had to fall 98.5 percent the past year if they had been set in terms of Bitcoin. As point of comparison, prices fell about 10 percent a year during the worst of the Great Depression.

But prices aren't set in terms of Bitcoin. They're set in terms of dollars. So it doesn't hurt the real economy when the price of Bitcoin goes up. People just go on living their lives, mostly unaware of the virtual currency. But it does hurt the Bitcoin economy, such as it is, when the price of Bitcoin goes up. Why would anyone use their bitcoins to buy things when those bitcoins might double in value in a day—or hour—or two?

They wouldn't. Researchers found that 64 percent of bitcoins are in accounts that have never been used. And the ones that are being used aren't being used more. You can see that in the chart below from Jason Kuznicki, which looks at the dollar value of all bitcoin transactions each day divided by the dollar value of all bitcoins each day. It's hard to see any pattern here—and that's the point. If people were using bitcoins more, this ratio would be going up. It's not.

Bitcoin won't work as a currency as long as it's so deflationary. Why spend bitcoins today when they might be worth much more tomorrow? The only reason would be to buy or do things online that you can't buy or do with dollars (or euros or yuan)—something illegal. Now, black markets can be big markets, especially when it comes to evading capital controls, but not so big that Bitcoin would ever become more than a niche "currency."

What Bitcoin really needs is a central bank to stabilize its value. When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing. That is, they need to decide whether they want Bitcoin to be a Ponzi scheme for techno-libertarians or an actual medium of exchange. See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. In other words, Bitcoin really could have use as a payments system if it had a stable value. But it doesn't, so it's just a dotcom stock. And one that could be co-opted by banks that take its technology and use it with dollars instead.

So who's the perfect person to run Bitcoin? It'd have to be someone with central banking experience. Someone who understands why deflation is a problem. And someone who thinks virtual currencies hold promise. Someone like ... Ben Bernanke.

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