What is the *real* price of Bitcoin?

Bitcoin, the world’s largest ‘virtual’ currency has been getting an increasing amount of media attention in the past year. Thousands of individuals and businesses are rushing in to try and take advantage of the new opportunities created by Bitcoin’s unique appeal. In recent days, the value of Bitcoin has begun soaring again, making the global value of all Bitcoins in existence to be in excess of $4billion US.

Bitcoin can be bought/sold on a variety of exchanges online, or ‘mined’ using computer hardware designed to process Bitcoin transactions and discover new Bitcoin. In just two months the approximate fiat currency value of Bitcoin has more than doubled from $150 to approximately $350 today.

However, due its decentralised nature, the true price of buying and selling your Bitcoins may vary greatly. There are many online exchanges matching buyers and sellers of Bitcoin, however I have discovered that prices may vary by more than 10% between different sites.

MT.Gox is (or was) the largest Bitcoin exchange. The current price they are quoting for *selling* bitcoin is $395. Another large exchange, BTC-e is quoting just $359 … a large discrepancy.

So what is going on? Well it seems most exchanges have issues. Some are insecure and have been hacked. MT.Gox’s problem is that you cannot withdraw fiat currency – i.e. real cash – from their exchange (unless you are willing to wait 3+ months) … therefore people get desperate, buy bitcoin and transfer to another exchange to liquidate (losing a lot of money in the process). This lack of true liquidity will be part of the reason Bitcoin’s price is so volatile and diverse. Another issue is the spread between a buy price and a sell price … this is a function of the cost of trading which is too high presently.

It is obvious that the Bitcoin economy has some maturing to do. Several more well-funded startups are setting up exchanges which may help with the liquidity problems. They are badly needed!

Until it is easy for both businesses and consumers to get their hands on Bitcoin, and until they can put their virtual currency to good use (e.g. pay bills, buy things online, etc.) then the currency will always be seen as something very niche and perhaps a little dodgy. However *if* Bitcoin continues its momentum and does indeed go mainstream then the value could in theory reach 1000x what it is today.

Personally I am keen for Bitcoin to succeed, as currently all online transactions can potentially be subject to a chargeback … losing the vendor money and encouraging fraud.