Just to provide a point of reference, one Bitcoin was worth less than $4 only twelve hours ago. Although this is great for everyone who owns Bitcoins (disclaimer: self included), you have to wonder how damaging this sort of sudden deflation is to the overall ecosystem. Any merchants currently accepting Bitcoins might have to post prices in terms the relative value of Bitcoins in USD (or whatever other currency), based on minute-by-minute changes in the exchange. Which, obviously, is a huge pain point, and might cause them to rethink using Bitcoins at all.
Since the bitcoin prices are going up when compared to USD if the owners simply set the USD price and calculated the bitcoin price, that isn't too much of an issue for them. It would be a lot worse if the price had plummeted the same amount rather than rose.
20% higher prices in an alternate currency isn't exactly going to change much, many major websites that list prices in multiple currencies end up having that much gap anyway.
Bitcoin prices have a tendency to plummet, too. After they passed the $4 mark for the first time, the price dropped precipitously, as people began to worry about a bubble. I expect the same thing to happen now that the price has passed the $5 mark. (In fact, as of this writing, the price has already dropped from a high of $5.2 down to $4.95.) There are a lot of weird psychological factors at play here. Another issue is that the trading volume is far to small to see anything like a "real" price. There only seem to be a few thousand people buying and selling Bitcoins right now, and the majority of those Bitcoins are held by an even smaller group. Until millions of people start using Bitcoins, the exchange rates are based on the psychology of a tiny, tiny mob. This results in totally insane spreads like today, with $3.8 at the low end and $5.2 at the high end.
But here's the Catch-22: As more people start using Bitcoins, they become inherently more valuable. This causes the price to increase, bringing enormous, sudden profits to people trading on the Mt. Gox exchange. The new Bitcoin owners see this happen, and naturally get in the trading game themselves, since it looks like a great way to get rich quick. This drives the price even higher, bringing more attention to Bitcoin, bringing in more users, &c., &c. And so Bitcoins wind up being used for speculation more than as a medium of exchange.
The only way I could see this cycle breaking is if some merchant emerges that provides an attractive reason to spend Bitcoins on a large scale, instead of just trading them back and forth. The obvious use case (to me) is online gambling: An online casino or poker room that started accepting Bitcoins could then bring in U.S. players without risking prosecution for money laundering, since there is no bank intermediary they have to work with, and no way for them to know which customers are from the U.S. and which are from countries where online gaming is perfectly legal. Until a big institutional merchant gets in the game, Bitcoins are just going to be like baseball cards or Beanie Babies or tulips circa 1636.
As more people start using bitcoins (specifically by mining them), by nature of the design of the network, bitcoins become more secure. When this happens, the currency becomes perceivably more stable for the future, which should raise the price of each unit of currency. it's not a speculative bubble in this regard. it's more of a reinforcing trend. I won't disagree that bitcoins are highly speculative at the moment-- but it is just important to note that along with speculation comes increased security.
I don't think that that extra security is what we're seeing priced in the exchange, though. The traditional causes of volatility in commodities like gold and silver are increases in supply (new mines being discovered, new techniques developed, etc.) and people hedging en masse as they lose faith in the value of fiat currencies. (There are also speculative bubbles on occasion, as with anything else.)
With bitcoins, we know where the supply will peak (21 million bitcoins) and the rate the supply will grow. Since the supply is predictable, it shouldn't lead to the volatility we can see in the market. The other cause for rapid deflation in commodities - people hedging because of a weak dollar (or whatever currency) - doesn't seem to be in play right now, either.
The increase in security might account for an increase in value, but not 50%+ in one day. That sort of rapid deflation tells you that this is a bubble. We don't know what the stable value of a bitcoin is right now. It may be $100, it may be $1. But since nearly everyone using bitcoins right now are using them as investment instruments, we aren't seeing anything like a real price. Merchant and consumer adoption don't matter right now. All that matters is the market of other speculators. Watching the way the price shot up and down and up and down over the past 24 hours makes me think that a few people are manipulating the market and making a killing, and a lot of other people are getting scammed.
What law of nature causes the BC to become more secure?
We moved off the gold standard because it was too volatile, and we needed a way to stop rampant deflation and/or inflation (thus central banks expanding and contracting the money supply). That was the gold standard, where at least the underlying value was of worth outside of it's use as currency. In the BC universe, there is no system of regulating money supply, the underlying "value" is fictional, and AFAIK, thus there is no way to stop the deflation we're seeing already.
I've also argued BC's inability to handle inflation, no separation between M0/M1 money leads to infinite lending and thus infinite inflation.
Withoug a way to keep both of these under control, I really don't see how this system could end up stabilizing in a way that would be useful.
The ratio of Bitcoin speculation to trade is very high; it's less a currency than a peer-to-peer gambling system, the economic equivalent of a penny stock that is being repeatedly pumped and dumped. If you're a merchant, you certainly don't want to be holding Bitcoins. Leave them to the gamblers.
