The bubble bursts on e-currency Bitcoin

Apr 13, 2013 by Anne Renaut
Many saw it coming, but that didn't stop the Bitcoin bubble from bursting: after rising to dizzying heights, the digital currency suffered its first true crash this week. File picture for illustration only shows a user connecting to the internet

Many saw it coming, but that didn't stop the Bitcoin bubble from bursting: after rising to dizzying heights, the digital currency suffered its first true crash this week.

The price of the virtual "geek" currency had soared through the stratosphere in recent weeks, trading for a high of $266 on Wednesday—only to come hurtling back to Earth in just three days.

By Friday, a single was worth just $54, according to the Mt. Gox platform, which manages 80 percent of the Bitcoin transactions and had to briefly shut down trading Thursday.

"There was a LOT of short-term speculation happening" from people who wanted to earn a buck from the soaring prices and cash out before the fall, Bitcoin Foundation chief scientist Gavin Andresen told AFP.

"Wild price swings are not good for Bitcoin."

But Andresen predicted the crash would not spell the end of the Internet-era currency, which was created in 2009 in the wake of the by an anonymous programmer who wanted a currency independent of any central bank or .

"We believe that as the value of Bitcoin grows, and the infrastructure around it grows and matures, the price relative to other currencies will get more stable," he said.

"That will take a few years," he cautioned, "and I expect continued chaos and drama in the meantime."

Some analysts have said the of Bitcoin might have been fueled by Cypriots and Russians seeking to invest their euros elsewhere during Cyprus's .

But economics professor Steve Hanke of Johns Hopkins University said the Bitcoin under pressure from investors, most of whom are American.

Either way, he said, Bitcoin remains "a very uncertain, speculative venture," because it is not backed by a commodity.

As far back as August 2011, James Surowiecki was pointing to the risks of investing in Bitcoin, in a Massachusetts Institute of Technology review.

"With ordinary currencies, there is a limit to how far down the spiral can go, since people still need to eat, pay their bills," and otherwise spend money, Surowiecki explained.

"But these things aren't true of Bitcoins: you can get along perfectly well without ever spending them."

The system is also very complex.

A form of "e-money," Bitcoin is made of strings of dazzlingly complex code created by raw computing power—a process called "mining" that can in theory be carried out by anyone with a computer.

The software is written in such a way that it becomes increasingly difficult to generate new Bitcoins, with the number in circulation designed to eventually top out at 21 million.

Once mined, Bitcoins are stored on a user's hard drive in a virtual wallet, and can be sent directly to another person, bypassing banks and remaining largely anonymous.

In addition to the risks, made evident this week after the crash, this "high degree of anonymity" could lead Bitcoin to become a "monetary alternative for drug dealing and money laundering," warned the European Central Bank, in a report published in October.

The central bank also highlighted the risk of a so-called Ponzi scheme, in which early investors earn returns paid by the later investors. Indeed, Bitcoin users can only cash out their money if other people want to buy their Bitcoins.

Also worrying, the central bank noted, is that the virtual currency has been vulnerable to cyber attacks, including in June 2011, when hackers targeted virtual wallets and wiped some people's accounts clean.

But that risk has failed to sway many.

For one, Hanke was not entirely convinced by the European Central Bank's critiques. "If private money starts to become a threat for governments, they come up with many reasons why this is a bad idea," he said.

And the currency appeared to have at least two high-level champions: the Winklevoss brothers, known in part for accusing Facebook founder Mark Zuckerberg of having stolen the idea for the social network from them.

On Thursday, they told The New York Times that they had bought $11 million worth of Bitcoins—that value assessed before the crash—praising it as a mathematical system "free of politics and human error."

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User comments : 13

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nesch
3 / 5 (2) Apr 13, 2013
What is the value of "strings of dazzlingly complex code"?
markttt
1 / 5 (5) Apr 13, 2013
If you still wanna buy Bitcoins in the UK, directly without intermediators on ebay or other middle men (with huge fees) is difficult, I made this guide with an easy process:

howtogetbitcoinsuk.blogspot.co.uk
kochevnik
2 / 5 (8) Apr 13, 2013
"Wild price swings are not good for Bitcoin."
Actually they are necessary. A 62% retracement is normal in currency markets. Not bad at all given bitcoin lacks a futures market and is small enough to be cornered by any billionaire. As the bitcoin market grows these early pains will subside

The currency markets grow to a size that ensures no one entity can control it
kochevnik
2 / 5 (8) Apr 13, 2013
What is the value of "strings of dazzlingly complex code"?

Depends whose DNA it is
ValeriaT
1.5 / 5 (8) Apr 13, 2013
Either way, he said, Bitcoin remains "a very uncertain, speculative venture," because it is not backed by a commodity.
This is the problem of contemporary dollars too - they're backed by USA debts, not by actual value. And the dollars can be printed easily to compensate their instability.
sstritt
2 / 5 (12) Apr 13, 2013
Bitcoin remains "a very uncertain, speculative venture," because it is not backed by a commodity.

LMAO! and the US$ is?
ryggesogn2
2.2 / 5 (13) Apr 13, 2013
This is the problem of contemporary dollars too - they're backed by USA debts, not by actual value.

No, they are backed by faith.

VendicarE
3 / 5 (2) Apr 13, 2013
"LMAO! and the US$ is?" - sstritt

Remarkably stable, and not collapsing as the Libertarian Economists have claimed for the last 30 years that it would do.

Eventually they will be correct, but it will be a result of their own incompetence.

Just like a broken watch is correct twice a day.
VendicarE
5 / 5 (1) Apr 13, 2013
As is all debt.

"No, they are backed by faith." - RyggTard

Even gold is losing it's value.
Doug_Huffman
1.5 / 5 (8) Apr 13, 2013
- they're backed by USA debts, not by actual value.
No, they are backed by faith.
I think the association of faith and debt is accurate. If no debt in dollars existed then no one would hesitate to change to a more stable/useful sovereign currency?

Manipulation of a virtual currency market is of, should be of, no more concern than manipulation of a sovereign currency.
Lurker2358
1 / 5 (6) Apr 13, 2013
Even gold is losing it's value.


Gold is traditionally over-valued anyway. Before it's properties in regards to technology were discovered, it was objectively just about as worthless as any other rock. It's price is mostly based on an irrational obsession with shiny trinkets.

The real value in light of emerging technologies or future technologies is yet to be seen.
ryggesogn2
2.3 / 5 (12) Apr 13, 2013
It's price is mostly based on an irrational obsession with shiny trinkets.

Not really.
It's intrinsic value of scarcity, color, malleability, and durability (doesn't corrode) make it a good store of value.
But again, value is in the eye of the beholder.
I notice that the customers on Pawn Stars want money for their stuff they think has value. The buyer values the stuff in units of money based upon what he thinks he an sell the stuff for and make a profit of money.
Money facilitates the sale of stuff people want to buy.
grondilu
4 / 5 (1) Apr 14, 2013
This is the problem of contemporary dollars too - they're backed by USA debts, not by actual value.

No, they are backed by faith.

True. Isn't it written "In God we trust" on it?