Digital Deflation

How an online currency stacks up to the dollar

By Stephen Gandel Monday, July 11, 2011

    • 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 5¢ vs. the euro this year. So much for virtual-currency experiments and the quest to replace the greenback.