I am fascinated by Bitcoin and would love to see it be a success. But Tyler Cowen has a quote that reflects some of my concerns about it:
…bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.
Bitcoin is in the midst of an enormous price bubble, with increases in value of as much as 50% over just a few days. This is astounding volatility for even a commodity, much less a currency.
Cowen said something at the end of the post, almost as a throw-away, that got my attention: "There is, by the way, no current way to short Bitcoin." The reason this caught my eye is that I have argued a long time that short selling is an important mechanism to reduce market volatility.
Every time we get to a market bubble or problem, insiders always start arguing against short selling saying it makes volatility worse and undermines markets. But what they are really saying is that they like volatility so long as it is up. They had no problem with the bubble that propelled their securities up, they just don't want them to come back down to Earth.
In certain bubbles, when interest in a certain asset class gets really frothy, anyone who is skeptical of the asset and its new high values will sell and get out. This means that as the bubble grows, all the skeptics are long gone from the market. No longer owning the asset, these skeptics have no further "vote" or influence on the price. Short selling is a way for skeptics to continue to influence the price and asset values. To this extent, I think it tends to limit the peak of bubbles, just as bottom-fishers limit the debt of troughs.
Bitcoin would likely benefit from skeptics having some sort of influence on bitcoin values. But without a way to short, Bitcoin values are driven solely by wacky anarcho-capitalists (e.g. people like me) and people fearful of Cyprus style depositor losses. Essentially all the true believers are bidding against themselves.