The value of bitcoin hits $1,000 - but will it plummet back to $0.01 before long?

The dramatically fluctuating price of bitcoin has led to wild speculation over its shifting value for the last couple of weeks.

The US Senate's Homeland Security and Banking Committee has been holding hearings over the last week to examine the behaviour of the bitcoin market, and its viability as a potential future competitor of traditional currency.

The extra attention has led to front-page coverage of bitcoin in the Wall Street Journal, among other prominent newspapers, and the resulting media hype has led to a rapid rise in bitcoin's value. The virtual currency stood at $200 [£124] at the end of October and at the time of writing stands at $897.50 (£550), after slumping slightly from its all-time high of $983.99 [£603] coupled with a number of rapid falls.

This, in terms of the market, means that it is experiencing a "bubble."

A market bubble occurs when the price of a commodity rises far above its objective value. A famous and often-cited example is the "tulip mania" of seventeenth-century Holland, in which 12-acre plots of land were allegedly bought with a single tulip bulb. Other bubbles have occurred in real estate, in debt, credit, "dot com" companies, and of course in multiple stock market bubbles that have been responsible for many of the largest crashes of the last century.

A search on Google Trends reveals the spiking interest in bitcoin over the last few months.

The exchange rate has been just as volatile. In fact, anyone who invested in bitcoin way back when its original price was $0.01, would have seen an average gain of 89,999 per cent over the last week.

This might sound good for early investors, but the mark of a viable currency is stability, not appreciation.

The volatility of the currency led Matthew O'Brien of The Atlantic to call bitcoin "the Segway of currency," describing it as "a Ponzi scheme libertarians use to make money off each other."

Whether your opinions are as strong as O'Brien's, it's hard to deny that bitcoin today looks more like an investment - if a lucrative one - than a solid form of currency.

In fact, researchers from the University of California-San Diego and George Mason University found that 64 per cent of all bitcoins are being hoarded in people's accounts, and have never been spent. Apparently, of those actually in circulation, a total of 60 per cent are spent on the online bitcoin gambling site Satoshi Dice.

So will bitcoin push its value up past $1,000?

Almost certainly, at some point. But don't be surprised if the online currency is valued back at its humble beginnings of $0.01 not too long after that.

Update: The value of bitcoin now rests at $975 after pushing up to an all-time high of $1,094 overnight.

Image: Flickr (antanacoins)