Bitcoin: A carefully designed bubble or a legit currency?

Abstract

The Bitcoin system started its service in 2009 as an experimental electronic cash and payment system; designed to operate without banks as trusted central authorities. This disintermediation allows for reduced transaction costs and full control over all payments. Economic censorship by the trusted party, as it happened in 2010 with donations to Wikileaks, would not be possible. Since its initial days Bitcoin has seen an extraordinary growth in transaction volume, market price and public attention. But so far the question if Bitcoin can mature into a generally accepted medium of exchange remains to be answered. One function of a medium of exchange is that the medium is circulating in the economy to provide liquidity to the markets. The Bitcoin system is frequently quoted to be subject to hoarding and the loss of significant amounts of bitcoins due to the loss of the private keys that are required to claim those balances. Much of the cash created during the early experimental phase of the Bitcoin system may have been removed permanently from circulation, further reducing the fixed maximum amount of 21 million bitcoins that will ever be created.