Bitcoin's woes highlight its speculative vulnerabilities

7 February 2014 | Author: Kirsten Morel
Bitcoin banknote

Bitcoin's sudden plummet against the dollar has served to highlight the fragile nature of the electronic currency's value.

Just as people were beginning to believe that a period of stability was setting in given that for the best part of a month, Bitcoin's dollar value had remained just shy of $1000, Wednesday's news that Apple had removed the popular Bitcoin app, Blockchain, from the iOS App Store sent the cryptocurrency's value tumbling by about 15% to about $850. 

Yet again, jut as it seemed that the price had stabilised, more bad news sent the value falling by a further 15% or so to less than $700. This time the setback was caused by an announcement issued by the third largest (by volume) Bitcoin exchange, Mt Gox. 

Mt Gox has temporarily ceased Bitcoin withdrawals via Mt Gox wallets and most worryingly, the reasons for the cessation remain unclear, with Mt Gox referring only to "a temporary pause on all withdrawal requests to obtain a clear technical view of the current processes." It goes on to say that the next update will be on Monday 10th February, giving Mt Gox wallet holders an entire weekend to stew.

At the time of writing, the value on Mt Gox, which continues to offer trading services, had fallen to $690, meaning that Botcoin has tumbled approximately 30% in just two days and leaving those believeing stability had set in to question just where the currency will beheadng next.

It is far too early to begin thinking about the demise of Bitcoin, at £690 it still carries an impressive value but what these events do reinforce is the fact that as an incredibly new phenomenon, we still have much to learn about Bitcoin. Its value is essentially based on usage but these sharp declines suggest that what we are seeing is an investment dumping exercise rather than a decline in the number of transactions taking place.

This is an entirely rational investment response to the news that a major Bitcoin app, Blockchain, has been banished from an enormously popular store and that thousands of Bitcoin users can no longer withdraw from their Mt Gox wallets as both incidents serve to tighten the ability to use the coin. However it is the steepness of the declines that suggest investment is the cause as the number of daily transactions has remained steady in the 50,000 to 70,000 per day range.

If nothing else, these events remind us that Bitcoin is new and barely understood as a currency operating in the marketplace, it is far too early to believe we can fully understand its characteristics and it should be remembered that the extent of most people's interaction with Bitcoin is holding them in a wallet in the hope that they wil increase in value rather than using them for purchases. As such, Bitcoin will likely remain vulnerable to speculators for a long time to come.

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