The total value of outstanding bitcoins surpassed $2 billion today, another milestone for the experiment in decentralized currency that was worth $1 billion just 11 days ago. It’s up about 1,300% since the beginning of the year.
So how high can this go? Well, first we have to know what’s driving the current surge, and my best explanation, as I’ve detailed before, is that bitcoin is going through a “demand crisis” or “deflationary spiral.” To put it simply, demand for bitcoins on the open market is going up, but the supply is also falling, which leads to wild deflation. That’s great if you’re investing in bitcoin as though it were a commodity, but not so great if you want to use it like an actual currency, that is, to buy and sell things.
Bitcoin is, in fact, deflationary by design: Only 21 million bitcoins can ever be minted, and the rate at which they are created slows over time. In December, for instance, the number of bitcoins created every 10 minutes dropped to 25, from 50, though the recent rise in value has more than made up for it.
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