Bulls and bears: Why is the price of bitcoin falling?
CoinDesk examines what’s behind the decline in the bitcoin price witnessed over the past six weeks.
UPDATED: 21:34 (BST) July 5, 2013
The price of bitcoin has taken a tumble since this article was first published.
As predicted by many, the value increased after Mt. Gox announced USD withdrawals had resumed, but it has since decreased to, at the time of writing, $68.75.
I spoke to a bitcoin investor, who didn't want to be named, and here's what he had to say:
"I have no explanation other than people are scared. They have seen it drop from $30 to $3 before and might be worried that it will again.
"Bitcoin tends to have huge swings, both up and down. For me, this is a huge buying opportunity. My faith in the long-term potential is as high as ever. But who knows. It might go to $30 before it goes back."
The price of bitcoin has increased slightly since Mt. Gox announced withdrawals had resumed, however, it's still way off the highs of around $260 reached in early April or even the $135 reached in May.
But what’s behind the decline witnessed over the past six weeks? The prevailing view seems to be … a combination of factors. Let's take a look at what some of those involved in the space think.
Alistair Cotton, corporate dealer at Currencies Direct, said he thinks the recent fall in the price of bitcoin is due to the digital currency becoming more mainstream and, therefore, "coming further into the gaze of regulators".
It's widely believed that the recent involvement of regulators, especially in the US, has made some investors rather jittery and led to an increase of sellers, causing the price of bitcoin to fall.
Mr Cotton thinks digital currency will eventually need to be regulated for it to have a long-term future, but he admitted many bitcoiners would disagree. He said:
Bitcoin entrepreneur and investor Jérémie Dubois-Lacoste believes the media is partly to blame for the price decrease. He claims it was media hype that caused droves of people to invest in February and March, when prices were around $30.
"Many of them did not dig into the fundamentals of bitcoin. They were hooked-up by a plethora of mainstream media articles and were barely interested in short-term financial profit.
"These people might have lost confidence, but, for me, their confidence was never really placed in bitcoin success in the first place, and the lack of bitcoin-related articles in mainstream media after those two months just drove them to sell," he explained.
Others point the finger at the increase in negative bitcoin stories that focus on the darker side of the currency – for example its use in the purchase of drugs and pornography. Some of those wishing not to be associated with either of these things have decided to sell up and move away from the bitcoin table.
One commonly-cited explanation for the price of bitcoin rocketing earlier in the year was the crisis in Cyprus, which caused people to lose faith in their central currencies and turn, instead, to bitcoin.
The Eurozone crisis is far from over, but faith seems to have been (marginally) restored in fiat, which could explain a loss of interest in bitcoin. Dubois-Lacoste expects the European economy to take another dive in the not-so-distant future, though. He said:
With the uncertain future of the euro, bitcoin might still have the opportunity to increase its stance as a trusted currency in Europe.
A young currency like bitcoin depends largely on trust. If people don't trust the currency, they won't want to use it, which causes its value to fall.
Bitcoin trader and internet entrepreneur Markus Menno Jong said the recent problems experienced by Mt. Gox could be responsible for a number of people's loss of trust in bitcoin.
"The fact that US dollar withdrawals from Mt. Gox were not possible and that there is a lot of uncertainty in the market about the future of exchanges like Mt. Gox, due to interference by regulators, is part of the reason why the price of bitcoin has decreased," he said.
Not only did Mt. Gox recently put a hold on US dollar withdrawals for two weeks, it also suffered downtime issues caused by a system error. Add to this its registration with FinCEN as a money services business and what was once viewed as the biggest player in the bitcoin world is now being lambasted for being the greatest confidence killer in the space.
The domino effect
Vladimir Marchenko, CTO of BTC Global, suggested that although Mt. Gox is partially to blame for the decreasing price of bitcoin, the main wedge of responsibility lies at the door of an entirely different beast: the domino effect of fear. He said:
This is a sentiment supported by Michael Parsons of BitcoinByte.com: "Buyers are afraid of a further drop in prices so want to 'cash out' some or all of their profits before the price falls further. As more sellers cash out, and with not enough willing buyers, the price drops. It's almost a self-fulfilling prophecy."
A ray of hope
The price of bitcoin may not be as impressive as it once was, but speaking to a number of people involved in the space, it seems they are largely confident the currency will recover and then go from strength to strength. It's difficult to tell, though, whether this is merely biased foresight of those involved in the ecosystem.
I'll leave you with a particularly optimistic outlook from Marchenko of BTC Global: "I believe that bitcoin is grossly undervalued. I also believe that we have rapidly improving fundamentals and continuing growth of the bitcoin ecosystem.
"I expect the price to hit four-digit numbers by the end of 2013 or in 2014, with further exponential growth continuing in coming years. This is great time for large players with long time investment horizons to enter the market."
See the current live bitcoin price now.
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