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Bitcoin implodes, falls more than ninety percent from June peak, Ars Technica

Policy / Civilization & Discontents

Bitcoin, the world's very first peer-to-peer digital currency, has had a wild year …

by Timothy B. Lee – Oct Legal, two thousand eleven Four:45 pm UTC

Bitcoin, the world’s very first peer-to-peer digital currency, fell below $Three on Monday. That represents a ninety percent fall since the currency hit its peak in early June.

Supporters argue that Bitcoin has fundamental advantages over conventional currencies. The system is designed to transfer funds without a central authority, freeing Bitcoin users from bank fees and government regulations. The Bitcoin protocol offers sturdy anonymity, and the protocol ensures that there will never be more than twenty one million Bitcoins in existence, which supporters have argued would give the currency a stable value.

Unluckily, the currency’s value hasn’t proven stable in practice. Several flaps of media coverage inbetween April and June shoved the currency’s value up from less than $1 to more than $30. Soon after it reached a peak, the currency had a series of PR disasters. One Bitcoin user claimed that a half-million dollars worth of Bitcoins were stolen from his PC; he may have fallen victim to Bitcoin-stealing malware. A few days later, the most popular Bitcoin exchange was hacked, forcing a multiday suspension of trading and generating another wave of bad press.

Trading resumed in late June at around $17, and the currency’s value has been steadily declining ever since. In August, one of the most popular Bitcoin “banks” claimed it had been hacked, and had lost hundreds of thousands of dollars worth of Bitcoins, triggering a fall in value to under $7. Bitcoin fell below $Five in September, and it is now worth less than $Trio.

So is Bitcoin fated? The value of Bitcoins is (like any fiat currency) ultimately driven by supply and request. With dollars, the supply is managed by the Federal Reserve, and the request is driven by the size of the US economy. The supply of Bitcoins grows automatically, asymptotically approaching twenty one million, and the request for Bitcoins is driven by the volume of Bitcoin-denominated transactions.

And that’s Bitcoin’s fundamental challenge: as far as we can tell, the volume of Bitcoin-denominated transactions is lil’. True, there are a few hundred merchants who say they accept Bitcoin, but most of them emerge to be puny concerns, and almost all of them also accept dollars, euros, or another national currency. They may do only a petite fraction of their business in Bitcoins.

And that’s not surprising. While Bitcoin doesn’t have any formal transaction fees, transacting in Bitcoins carries risks that dealing in dollars or euros does not. If users store Bitcoins on their PCs, there’s a risk that malware will build up access to their wallets and steal their funds. Conversely, if they put their Bitcoins in an “e-wallet” service online like MyBitcoin, there’s a risk that that service will have a security breach, or that the owners of the service will themselves turn out to be crooks.

There are also risks due to volatility. For example, Bitcoins lost about fifteen percent of their value on Monday inbetween 8am and noon on the East Coast. Someone who bought Bitcoins on Monday morning expecting to spend them on Monday afternoon might find that Bitcoin-denominated prices had all of a sudden risen by fifteen percent. The two percent transaction fee on credit cards might seem downright reasonable in comparison.

The current value of Bitcoin—just under $Three—is still significantly above the April price of around $1. It’s theoretically possible that the volume of Bitcoin commerce will grow enough to halt the slide in the currency’s value. But the value of a currency is built on its reputation, and five months of bad news and depreciation have done serious harm. Indeed, the mood on Bitcoin forums has turned grim, with Bitcoin fans providing one another pep talks and debating how low the price can fall before the currency is proclaimed dead. It’ll be difficult to pull out of that kind of tailspin.

Bitcoin implodes, falls more than ninety percent from June peak, Ars Technica

Policy / Civilization & Discontents

Bitcoin, the world's very first peer-to-peer digital currency, has had a wild year …

by Timothy B. Lee – Oct Legal, two thousand eleven Four:45 pm UTC

Bitcoin, the world’s very first peer-to-peer digital currency, fell below $Trio on Monday. That represents a ninety percent fall since the currency hit its peak in early June.

Supporters argue that Bitcoin has fundamental advantages over conventional currencies. The system is designed to transfer funds without a central authority, freeing Bitcoin users from bank fees and government regulations. The Bitcoin protocol offers sturdy anonymity, and the protocol ensures that there will never be more than twenty one million Bitcoins in existence, which supporters have argued would give the currency a stable value.

Unluckily, the currency’s value hasn’t proven stable in practice. Several flaps of media coverage inbetween April and June shoved the currency’s value up from less than $1 to more than $30. Soon after it reached a peak, the currency had a series of PR disasters. One Bitcoin user claimed that a half-million dollars worth of Bitcoins were stolen from his PC; he may have fallen victim to Bitcoin-stealing malware. A few days later, the most popular Bitcoin exchange was hacked, forcing a multiday suspension of trading and generating another wave of bad press.

Trading resumed in late June at around $17, and the currency’s value has been steadily declining ever since. In August, one of the most popular Bitcoin “banks” claimed it had been hacked, and had lost hundreds of thousands of dollars worth of Bitcoins, triggering a fall in value to under $7. Bitcoin fell below $Five in September, and it is now worth less than $Three.

So is Bitcoin fated? The value of Bitcoins is (like any fiat currency) ultimately driven by supply and request. With dollars, the supply is managed by the Federal Reserve, and the request is driven by the size of the US economy. The supply of Bitcoins grows automatically, asymptotically approaching twenty one million, and the request for Bitcoins is driven by the volume of Bitcoin-denominated transactions.

And that’s Bitcoin’s fundamental challenge: as far as we can tell, the volume of Bitcoin-denominated transactions is little. True, there are a few hundred merchants who say they accept Bitcoin, but most of them show up to be puny concerns, and almost all of them also accept dollars, euros, or another national currency. They may do only a puny fraction of their business in Bitcoins.

And that’s not surprising. While Bitcoin doesn’t have any formal transaction fees, transacting in Bitcoins carries risks that dealing in dollars or euros does not. If users store Bitcoins on their PCs, there’s a risk that malware will build up access to their wallets and steal their funds. Conversely, if they put their Bitcoins in an “e-wallet” service online like MyBitcoin, there’s a risk that that service will have a security breach, or that the owners of the service will themselves turn out to be crooks.

There are also risks due to volatility. For example, Bitcoins lost about fifteen percent of their value on Monday inbetween 8am and noon on the East Coast. Someone who bought Bitcoins on Monday morning expecting to spend them on Monday afternoon might find that Bitcoin-denominated prices had abruptly risen by fifteen percent. The two percent transaction fee on credit cards might seem downright reasonable in comparison.

The current value of Bitcoin—just under $Trio—is still significantly above the April price of around $1. It’s theoretically possible that the volume of Bitcoin commerce will grow enough to halt the slide in the currency’s value. But the value of a currency is built on its reputation, and five months of bad news and depreciation have done serious harm. Indeed, the mood on Bitcoin forums has turned grim, with Bitcoin fans providing one another pep talks and debating how low the price can fall before the currency is proclaimed dead. It’ll be difficult to pull out of that kind of tailspin.

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