Bitcoin, the virtual currency that started as a proof of concept among cryptanalysis buffs and is now garnering attention from institutional investors, crashed today, losing about a third of its value in just a few minutes. You can see the drop in the graph below from MT. Gox, one of Bitcoin’s main exchanges (15 minutes along the x-axis, measured in USD).
This crash comes at the end of an incredible rally (graph below, 24 hours along the x-axis), and highlights the biggest concern that many people have about investing in Bitcoins: it’s an unregulated asset with some peculiar characteristics, and its price is being driven almost entirely by speculation. The end result is extreme volatility like we’re seeing today.
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Divergent opinions contribute to volatility
While you can buy some things with Bitcoins, it’s certainly not a currency in the normal sense of the word. You can’t take it to a shop and spend it, and even most online vendors aren’t interested in the stuff. Most of the time you have to exchange it for a traditional currency as an intermediate step. What’s tempting about the currency is that its supply grows at a fixed rate, and as long as interest grows faster than the currency itself, it will be a deflationary currency – you gain value by holding onto it (unless it crashes, of course). Nobel Prize-winning economist Paul Krugman has compared Bitcoins to pyramid schemes, but the US government is showing official interest in Bitcoins, undoubtedly part of the recent rally.
Bitcoin investors: hang on for a wild ride
But Bitcoins, by design, can’t really be regulated. It’s entirely possible that someone with a stash of Bitcoins started buying during the recent hearings to push prices up and then unloaded them for a quick profit. Since the currency is untraceable, there’s no way of knowing what market shenanigans have or will take place, giving individual investors another reason to be careful. It’s also nearly impossible to reclaim your money if hackers manage to steal it from your Bitcoin wallet, as inputs.io found out when someone managed to steal 4,100 bitcoins from them, worth $1.2 million at the time of the theft.
Bitcoins have already started to recover, and they could soon pass the $900 mark again, which only proves that anyone investing in them should be prepared for a wild ride.