Bitcoins Pose Major Threat to Central Banks

Last week we told you more about Bitcoins as they have swiftly taken the financial world by storm, becoming a popular and legitimate source of 'currency' for those who “need to transfer or launder their cash outside of the prying eyes of regulators,” according to CNN.

Today, data released from Mt. Gox, the world's largest Bitcoin exchange, shows just how dramatically Bitcoin use has risen in the past year...

The virtual online currency has strengthened from $5.88 all the way to an impressive $16.37, more than doubling in the past 12 months alone. 

As the demand for Bitcoins continues to rise, experts believe central banks are in trouble. People have begun to  stick it to the banks with Bitcoins.

From Bloomberg:

“I think the ECB obviously is concerned, and it’s not reputational,” said Steve Hanke, a professor at Johns Hopkins University in Baltimore who helped to establish new currency regimes in countries such as Argentina and Bulgaria. “I think it’s a competitive threat. Maybe virtual currencies will be so convenient that they will pose a threat because of their ease of use.”

Virtual currencies “could have a negative impact on the reputation of central banks” if their use grows considerably, the Frankfurt-based ECB said in its research paper. “This risk should be considered when assessing the overall risk situation of central banks.”

To look more closely at the value of a Bitcoin in U.S. dollars, take a look at Bloomberg's chart of the day, which shows the rise and fall of the world's largest online currency from 2011-2013.

One Bitcoin processing company, Bitpay Inc., recently accumulated $510,000 in an investment round. It also said the number of companies using its service had increased by nearly 50 percent since November; more than 2,000 now use Bitpay after the blog management firm known as WordPress.com said it would accept the digital currency.

Despite some volatility in Bitcoin prices last year, Bitcoin users and bloggers say that Bitcoin prices have remained remarkably stable in the past six weeks. If Bitcoins could be used for things like real commerce, demand would explode and give central banks a real run for their money.