Virtual Monetary Policy (is there such a thing?)

Bitcoin’s exchange rate to the US-dollar has dropped significantly in the last couple of weeks after its peak at $1236 on December 3rd. Today, it’s down to $730 or just over half its peak value. However, that is still more than 50 times over the $13 in the beginning of this year. Have we seen the peak in Bitcoin-value, or is it just fluctuation of the market? No-one could tell, of course, but you will be hard-pressed to find any real currency that had such dramatic ups and downs – this only occurs in failing economies like the hyper-inflation in the Weimar-republic in the 20’s. That is a good reason to treat Bitcoin more as a form of financial speculation rather than a reliable payment method. Or put differently, don’t re-neg your employment contract to pay your salary in Bitcoin just yet. The European Banking Authority seems to concur, the other day the issued a statement warning consumers on virtual currencies that there is no system in place to protect consumers who lose their virtual money if for example the payment platform fails or goes out of business. Also, it warns of the perils of anonymity (crime, tax evasion) and the risk of hacker attacks. It’s difficult to disagree with this sound advice, however the greatest threat might be something different altogether: virtual currencies challenge the bond between money and government. What about monetary policy in the next credit crunch (God forbid there is one!)?

Bitcoin to US$-rate

EBA warning

Weimar Republic hyper-inflation