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article imageOp-Ed: Bitcoin bubble bursts — $266 to $40 in a day

By Paul Wallis     Apr 12, 2013 in Business
Sydney - The Bitcoin speculative bubble has hit the skids, hard. The price crashed after a ridiculous amount of upvaluing by the market. It was always going to happen, and the result is a massive hit.
Sydney Morning Herald
The value of a single Bitcoin began racing upward amid growing media attention, smashing past the $US100 mark last week before more than doubling again in just a few days.
Then came the crash.
The price of Bitcoin has imploded, falling from around $US266 on Wednesday to just above $US40 on Thursday, according to bitcoincharts.com, which tracks trades across the internet. The best-known exchange, Tokyo-based Mt. Gox, has suspended trading.
"People started to panic, started to sell bitcoin in mass [panic sale] resulting in an increase of trade that ultimately froze the trade engine," Mt. Gox said in a statement.
Mt. Gox, the major site for Bitcoins, has since denied and “seemed to imply” that it was on the receiving end of a major DDOS (denial of service saturation) attack. The site was down, and up again. It’s currently online.
The problem was that the Bitcoin market was built for speculation. It was traded like a commodity. I did some research and did a blog on it last month and casually mentioned the “Bitcoin bubble” analogy. Bitcoin is a very interesting idea, and it does have a niche in the currency market, preferably as a hedge, if it’s able to function rationally.
The sad thing is that a good idea has been left begging as a result of a pretty cynical exercise in profiteering.
The prognosis is pretty much up in the air:
Nicholas Colas, chief market strategist for the ConvergEx Group, said it was a "great question" whether the currency could survive the wrenching ups and downs.
"At this point I would say yes, since it has before," Colas said. But he noted that, unlike previous oscillations, Thursday's collapse was taking place in the full glare of international media attention.
The scare will do some good in getting people a lot more cautious about speculating and sudden rises may be a good warning to get out. That said, the damage to Bitcoin holders who bought in above $40 is pretty grim. Volumes of trade were high, and a lot of money was getting thrown around.
The less appealing side of Bitcoin, the drug sales, may also have left a taste in the mouths of people who don’t like losing money, particularly on that sort of scale. It’s ironic to think that sellers would probably be safer in a legal market. Buyers, who pay ridiculous prices for things made in bathtubs, weren’t safe to start with.
Also on the scale of losers are the legitimate retailers and Bitcoin-based auction sites. Cost vs. returns isn’t going to be looking good. Holding Bitcoins and hoping they go back up to cover costs is one option. Taking the losses would probably be pretty tough for most.
Meanwhile back at the idea-
Bitcoins are a good idea, in essence. They’re able to function independently as a currency, while holding multiple values as a hedge. (The trouble with hedging on other markets is that like short selling, you can take an unintentional bath if you get the hedge mix wrong.)
Bitcoins are unique in that they can function as a “global currency”, in a sense that other currencies and mediums of exchange can’t. They’re independent of the pitfalls of the world’s soggy, saturation level liquidity currencies and price structures in economies. In a practical sense, if the price of a Bitcoin is rational, they’re a good working option.
This suspension of trading also leaves Bitcoin owners in a holding pattern that looks pretty thankless in the short term.
Watch how this plays out. This is economic history in the making. Bitcoin may come and go, but it’s a new frontier for trade, so it’s going to be a formative part of the future.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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