Source: Bitcoincharts.com

The value of Bitcoin soared in early 2013 amid a torrent of media coverage, hitting an intraday record high of $266 in April. Some buyers were drawn by a mistrust of central banks they saw as fueling inflation; for them, Bitcoin, which has rigid limits on money supply written into its software, was a safer alternative.  Others liked its anonymity for online transactions, legal or not. But much of the surge was driven by newer investors with more traditional motivation — getting in on the ground floor of a product in demand. In July 2013, the Winklevoss twins of Facebook fame announced that they had bought 1 percent of the Bitcoin in existence and later filed to offer a Bitcoin ETF. Prominence also brought new problems, however. The largest Bitcoin exchange, Mt. Gox, located in Japan, was  the target of hacking attacks that drove the price down. In the summer of 2013, regulators began to take notice, raising thorny questions of oversight. Then on Oct. 2, Bitcoin prices plunged by a third after U.S. prosecutors announced the indictment of the operator of Silk Road, an anything-goes online market where drugs and other illicit goods were peddled for Bitcoin.

Although still small, Bitcoin raises questions about what the relationship between governments and money will be in an increasingly digital world. Money is based on trust, and Bitcoin proponents don’t trust fiat currency, the kind backed only by a government’s word. But while they may avoid inflation, its users are potentially vulnerable to hacking, and Bitcoin’s purchasing power swings with its price as pegged by currency markets. Governments could pay a price for Bitcoin’s rise, too. In October 2012, the European Central Bank released a report saying that central banks could become less influential if the public starts to doubt whether they control enough of the money supply to be effective. And it may be that Bitcoin users can’t disentangle themselves from governments entirely. Well before the Silk Road indictment, law enforcement officials complained about the growth of a currency they saw as used mainly to shield illegal transactions. In August 2013, the New York State attorney general subpoenaed 22 companies working in the field to see if they were following rules outlined in a U.S. Treasury Department  guidance document. The next week,  Germany declared that it was ready to recognize Bitcoin as legal private money so it could levy sales and capital gains taxes.  To some, the Silk  Road bust meant the beginning of the end for Bitcoin. To others, it was a necessary step for establishing Bitcoin as a legitimate currency, rather than a way around legal restraints.