If you’re a Bitcoin investor, then you’ve probably been experiencing a pretty wild ride.

While the name has attracted all sorts of attention – both positive and negative – there’s no questioning its volatility. Prices in Bitcoins have plummeted and soared to extraordinary lows and highs – sometimes on the same day.

Even in the past 24 hours, Bitcoin values have risen above $US700 after comments made by US Federal Reserve Chairman Ben Bernanke about the future of virtual currencies. These types of currencies may have long-term promise, he says.

Bitcoin’s goal – to get rid of our wallets – is becoming more of a reality everyday. Though cash is still used for the majority of transactions, most consumers are used to dealing with a virtual wallet of some kind, usually inputting credit card details into a website.

So the concept of a completely virtual currency isn’t far removed from several systems already available, including PayPal. Practically, the idea of paying for goods virtually is just one step ahead of what most people already do. But the actual implementation of such a currency has proven challenging.

Although Bitcoin has reached its highest valuation recently, and seems to keep getting higher, actual penetration is still low. Retailers haven’t adopted Bitcoin as quickly as the currency’s advocates would like – so what’s going on?

Is virtual currency a complete dud? Or has Bitcoin just peaked too early, the leader of an eventual game-changing shift which simply hasn’t reached its maturation point yet?

Some of the recent trends

Bitcoin’s premise is simple. The currency is made via a digital algorithm which appeared online in 2008. (The algorithm’s creator posted it online – alongside a lengthy thesis – and then disappeared). The algorithm allows users to create new coins by ‘mining’, or processing a huge amount of calculations through a computer.

Bitcoin retains its value by producing coin at an decelerated rate over time. The more Bitcoins produced, the longer it takes to create them, thus increasing their value. Production will cease when the total number of Bitcoins hits a certain number.

Most activity has been contained among speculators rather than people who use Bitcoins for purchasing goods and services, partly due to the shortage of retailers and businesses which actually accept them. However, there are some. A restaurant in New York started accepting Bitcoins in 2011 – and others followed shortly afterwards. Smaller online retailers looking to differentiate themselves have done the same.

The money’s flowing through…

More activity has occurred within the Bitcoin space to generate some serious investment. The Winklevoss brothers, most well-known for their part in founding Facebook, have invested over $US1 million.

In late October, a group of investors including venture capital firm Accel Partners invested $9 million into Circle, an online financial services group designed to make it easier for retailers and other businesses to adopt virtual currencies as payment methods.

Other investments include Coinbase, which has raised $US5 million, and BitPay, which has earned $US2.5 million.

Such investments suggest serious movement in the virtual currency space. But is Bitcoin that currency? If not, will a similar venture emerge to take its place, or will the virtual money simply remain a failed experiment?

There are plenty of concerns as to whether Bitcoin is viable as a legitimate, mainstream currency. After the FBI shut down Silk Road, a famous black market website which favoured Bitcoins, the value of the currency plummeted. Several ‘raids’ by the FBI have confiscated more Bitcoins. Other fluctuations have made investors nervous. Values have also fallen following hacking attacks on Bitcoin exchanges – and several of those exchanges have ceased running altogether.

Completely separate from the discussion of legitimacy, there is genuine concern Bitcoin is experiencing a bubble. Recent data shows the value of the ‘coins’ themselves are becoming disconnected from transaction volumes. Of course, this could only serve as evidence the appetite for a digital currency has continued to grow.

Is a virtual currency even viable?

Given these problems, it seems natural to conclude a virtual currency has limited potential. However, the adoption of virtual dollars carries a significant number of benefits for businesses, especially in the retail sector:

  • Privacy – One of the biggest motivations behind the consumer take-up of Bitcoin is the currency’s treatment of privacy. Bitcoins are operated behind an element of anonymity – an increasingly alluring prospect as governments and social networks begin to clamp down on access to private information. Retailers wanting to stand out from others by promoting a completely private mode of transaction could do so by adopting virtual currencies in the future.
  • Regulatory issues – Current financial systems require an intense amount of scrutiny. For retailers, the benefit of using a virtual currency is attractive due to the minimal amount of regulatory practice required. However, it’s worth considering many of the problems associated with Bitcoin have occurred precisely because of the lack of regulatory oversight.
  • Overheads – Processing credit card payments incurs a significant amount of cost. Virtual currencies – at least for now – avoid this requirement. Using this type of virtual currency reduces the overall cost base for the business.

Will Bitcoin be the next big thing?

The amount of volatility within the Bitcoin space and the fluctuations in value suggest – at this point – the currency isn’t ready for mainstream adoption.

But the huge amount of investment suggests there is at least significant interest in the concept of digital currencies.

Whether or not Bitcoin is the ultimate pioneer for future digital economies, the space is ripe for growth – and serious investment suggests the retail industry should prepare itself for the possibility of dealing in virtual currency.