Bitcoin Goes Haywire : Planet Money Why is the exchange rate between the dollar and a virtual currency bouncing around so much?

Bitcoin Goes Haywire

Bitcoin is a "virtual currency"-- a form of money that you can use to buy stuff online. It's not backed by any government. (For a fuller explanation, see these bitcoin stories from SmartMoney, The Economist and Slate.)

We're working on a bitcoin podcast, but I wanted to post something now, because the exchange rate between dollars and bitcoins has been going haywire lately.

If you bought bitcoins a couple weeks ago and sold them last week, you would have tripled your money. If you bought bitcoins at the beginning of the year and sold them last week, you would have had a tenfold gain.

Here's a chart:

Why is this happening?

There was this Gawker story a few weeks ago, about how you could use bitcoins to buy drugs online. Maybe that increased demand.

Then last week, a couple U.S. Senators wrote to the DEA and the justice department, complaining about the drug sales, and specifically mentioning that the "only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins."

That might have reduced demand. But the letter came out on Monday, and the bitcoin exchange rate rose through the week, then fell sharply on Friday. So.

Planet Money Questions of the Day

1. What's behind these swings in the bitcoin exchange rate?

2. Anybody out there use bitcoins regularly? Do the big exchange-rate swings make this difficult?