Bitcoin is the currency of anarchists. There is no centralised control, and it’s anonymous. Governments don’t like that of course, as it’s almost impossible to tax or trace.

Bitcoin is still highly experimental and the huge instability in the market is proof of this. It’s still a small market and a few large trades can significantly impact the price.

After an initial surge in popularity, what the community calls the great bitcoin bubble of 2011, it suffered a series of setbacks. It’s largest exchange, mtGox was hacked along with many others and large amounts of the currency were lost or stolen.

Unlike regular money, you can’t simply print more bitcoins to replace any lost. There is a finite amount of bitcoins ($21M) and when a digital wallet is lost or destroyed, those “bits” are lost irrevocably. The inability to print more is something supporters cite as another of its virtues, in a world where bailouts and fractional reserve banking are rampant.

Then, eBay/PayPal dropped support for the mtGox exchange, crippling the already dubious “liquidity” of the currency. Unlike a “fiat” currency it has no real world backing, like gold to notes once were. Detractors say this is what will see bitcoin fail, even though our current financial systems are built of similarly foundations of faith.

And yet, here we are in mid-2012 and bitcoin value is rising. The markets have stabilised. Why?

Here I’ve overlaid the Google traffic volume for the search term “bitcoin” from Jan 2011 to now, with the mtGox value of BTC to USD. Very obviously, global search interest is a predictive indicator for the value of BTC. More so than the Dow Jones or USD value itself. They are highly correlated, and yet more recently the value appears to be rising despite no correlation in search traffic.

They say the only thing that defines language is usage. If enough people use a word, it eventually becomes part of the lexicon. So too with bitcoin, usage has ensured it’s survival.

As long as there are people willing to trade real money for bitcoins, it will thrive. And the “liquidity” of the market has become black market contraband. In German POW camps cigarettes quickly become currency, which is something all modern prisons can relate to. When Australia was colonised, Rum was currency, for a time.

Bitcoin solved a problem for drug dealers and black markets – taxation and accountability. Rather than walk away from the currency after the crash of 2011, the buyers and sellers in these markets continue to trade. Real world money, continues to be poured into, and out of the bit coin market and the markets are growing.

At the end of the day, bitcoin is built on the thin air of a simple idea. Unfortunately for the government, it’s very hard to kill an idea.