Digital Deflation

How an online currency stacks up to the dollar

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Since the financial crisis, many economists have been calling for the creation of a new global reserve currency to replace the dollar. To gauge how such a system might work, some have been tracking the progress of Bitcoin, a virtual currency, which makes it possible to buy and sell online anonymously. Bitcoins were devised in 2009 by pseudonymous programmer Satoshi Nakamoto and have gained a following among techies. For economists, the lure is that the tender is not run by a government or central bank. No quantitative easing here. The number of Bitcoins increases at a constant rate, much as legendary economist Milton Friedman prescribed for a stable currency.

But in mid-June, Bitcoin took a hit. The virtual currency plunged in value after a hacker nearly stole $9 million of the digital money. The exchange rate had reached $30 per Bitcoin, up from $5 earlier in the year. After the hack, the value dove to a penny but has rebounded to $16. The dollar, on the other hand, despite the tsunami in Japan, unrest in the Middle East and continued high unemployment, has dropped just 5ยข vs. the euro this year. So much for virtual-currency experiments and the quest to replace the greenback.