March 20, 2014 Articles

The Puzzle and Promise of Bitcoin

Why are investors excited by an innovation that is similar to and more volatile than traditional currencies?

By Alexander Aganin, Julia Brighton, George Gigounas, Victoria Lazear, and Isabelle Ord

Bitcoin as a payment system is still in its infancy. It reached a maximum of only 102,000 transactions per day in December 2013, compared with nearly 500 million transactions worldwide per day handled by payment card networks in 2012. But it has captured the public imagination and the investment attention of many smart, serious financial minds. Setting aside short-term speculators, these investors are betting that Bitcoin will achieve stability through long-term, mainstream acceptance. Why the excitement about an innovation that, on its face, offers consumers a transaction medium very similar to credit cards, checks, or cash, except far more volatile? The key answers appear to lie in Bitcoin’s infrastructure efficiencies over traditional electronic banking (i.e., lower transaction costs and greater market reach), perceived anonymity, and reduced fraud and charge-backs to payees.

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