U.S. authorities acknowledged the benefits of "virtual currency systems" in a Senate hearing on Bitcoins, and Bitcoin traders reacted by sending the cryptocurrency skyrocketing above the $700 mark only to correct as profit takers reaped enormous from the rapid rise.
The possibility of U.S. intervention to crush Bitcoin has been an overhang on the currency from the get-go, and Monday's comments indicate that overhang could disappear.
Bitstamp Exchange 24-hour Chart
(Note the correction at the end of the chart)
As noted above, Bitcoin is a virtual currency, one with no assets backing it, no government issuing it, and no bank managing it. It is decentralized, created by a network of "miners" who do double duty as confirmation of Bitcoin transactions, and it is entirely anonymous. For more information, check out the Bitcoin primer I put together back in April.
The hearing was called by Sen. Tom Carper (D., Del.), who chairs the Senate Homeland Security and Government Affairs Committee. According The Wall Street Journal, Senator Carper said, "Virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others and confused the heck out of the rest of us, including me."
The Bitcoin community watched the hearing closely. That community is a mix of nerds and hobbyists who delight in the idea of "mining" Bitcoins with their computers, investors (including the Winklevoss Twins) who are speculating that Bitcoin will continue to rise in value, and libertarians and the paranoid who see Bitcoin as the only way to conduct transactions without the government being involved.
Bitcoins Don't Really Look Like This
And all of those factions have been leery of any government regulation or intervention. The U.S. already shut down the Silk Road—an anonymous Bitcoin marketplace dedicated mostly to illegal drugs, some arms, and other illicit products and services.
Shutting down Bitcoin itself would prove an enormously more difficult challenge (if it's even possible), but the U.S. could make life and business more difficult for Bitcoin, including making it even harder to move U.S. Dollars onto and off Bitcoin exchanges.
In fact, that's already an issue. Mt.Gox has been hampered from U.S. banks being unwilling to do business with the exchange, and there have been incidents of seizures with other exchange-related businesses. The FBI seized 144,000 Bitcoins from the Silk Road alone, an amount worth some $100.8 million at today's prices.
But on Monday, Mythili Raman, acting assistant attorney general for the U.S. Department of Justice's criminal division, told the Senate hearing, "The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce."
Federal Reserve Chairman Ben Bernanke added his own dose of good news when he told the hearing by letter, "[virtual currencies] may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system."
That's a far cry from a hands-off declaration, but Bitcoin bulls grasped the news by both horns and pushed the currency higher and higher throughout the day. As of this writing, Bitstamp was trading at $724.50, Mt.Gox was trading at $832, Coinbase was trading at $777.93, and BTC-E was trading at $760.
But, in the hour and a half it took me to write this article, the markets corrected even faster, sending Bitcoin back to the $530-$640 range. The markets remain highly volatile, and are rising again as I type this.
Also of interest is the relatively intense volume that has driven this increase. In addition to U.S. money being pumped into Bitcoin, Chinese investors have been shoveling money into the currency for weeks.
For an example of the size of this market, check out block #270360. It covered a 40 minute stretch with 1,522 transactions for a total number of 52,365.22 Bitcoins. At $700—the price when that block was found—that represents US$36.7 million in transactions in 40 minutes. An hour later, block #270363 saw roughly the same transaction value in just 20 minutes.
My (semi-educated) guess is that those were mainly trades, rather than the purchase of goods and services, but the point is that there is a lot of money changing hands in Bitcoin today.