Bitcoin is a virtual currency most widely used by crooks and geeks. However, with the global turmoil of central banks printing money and the resulting risk of hyperinflation, this novice currency is seeing some traction among the mainstream—not just in counter-cultures.

This sharp (often called “parabolic”) rise in demand for Bitcoins has raised serious questions about a possible bubble created through a sudden surge in demand for Bitcoins.

After surging from $ 13.5 to $ 100 in 3 months, there has been a lot of discussion whether this is a bubble or not.

Here is my take:

There are currently 170k Bicoin users out there (me excluded).

The total Bitcoins out there are now valued to $ 10.1 Billion, which is comparable to the value of Coca-Cola Enterprise Inc. (NYSE:CCE). Bitcoins’ liquidity is much lower than CCE. The average USD exchange trade volume is only around $ 6.5 Million a day for Bitcoins whereas CCE has an average transaction volume of $100 Million per day.

However, this is not a 100% fair comparison as this would be similar to comparing the exchange rates of the US dollar against the gold standard.

What makes Bitcoin interesting is the viral increase in people willing to speculate on its future value.

In the last year the number of Bitcoin users has grown 359%, and as the participation increases, the number of products and services will increase.

One can clearly see this from the number of transactions, which has grown by 833%.

Indirectly, this will stabilize the Bitcoin economy, as the prices over a broader range of products will eventually make the exchange rate stickier.

Does this necessarily mean that the Bitcoins are a valid investment vehicle?

The answer is an emphatic “No,” because the infancy of this currency makes this a highly volatile (risky) investment, prone to dramatic ups and downs.

In August 2012 the value of Bitcoins dropped 33% in a week. That is just one example of why I personally would never invest in Bitcoins, due to its volatility and seeming bubble of speculation surrounding it.

What does this Bitcoin bubble effect do?

Even though Bitcoins generate about 50,000 transactions daily, no one has Bitcoin-denominated salaries, borrows money in Bitcoins, or pays Bitcoin-denominated rent every month. So the rapidly rising value of Bitcoin isn’t going to cause the kind of economic dislocations that dollar deflation would cause.

What does Bitcoin do for the overall economy?

As of 2012, monthly sales were estimated to be slightly over 1.2 million US dollars (USD), which corresponded to approximately 92,000 USD per month in commissions for underground (illegal) trafficked sites that deal exclusively in Bitcoins such as the Silk Road. However, if you can get to the point where you can track down Silk Road (their URL address changes often, apparently in an effort to thwart the authorities), looking at the products available on this site, you will see that 90% of their transaction volume supports drug trafficking. One of the major selling points for using Bitcoins as a currency is that each Bitcoin is untraceable and anonymous. This in particular has made Bitcoins a haven for criminals to conduct transactions and launder money.

Would I ever use Bicoins?

I tried to figure our what I could actually purchase with these Bitcoins, and I was honestly surprised at all the things you actually can buy (legally, that is!).

Here is a list of interesting things I found that you can receive in exchange for Bitcoins:

If there were more regulations imposed on linking a Bitcoin with identity safeguards and trackers, we might accept Bitcoins for our premium services. But one thing is certain: Bitcoins are a new phenomenon, and they will likely be on everyone’s radar for the next year or so.