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April 12, 2013 7:41 pm
Adherents of the virtual currency Bitcoin are picking up the pieces after their holdings collapsed in price, and vowing to continue growing the Bitcoin economy despite the volatility and illiquidity bedevilling activity.
The price of a single Bitcoin peaked at $266 on Wednesday, double its price a week earlier, and then slumped to a low of $54 on Friday. That takes it back to its level before a surge in internet and media interest that began in late March.
The price collapse hit not just speculators but also merchants who sold goods or services for Bitcoin at the peak.
Tony Gallippi, founder of Bitpay, which processes transactions for merchants, said about half his customers keep their income in Bitcoins, rather than immediately cashing out, and so would have lost money on transactions. Bitpay’s 5,000 merchants include gold and silver exhanges, electronics businesses and even a car dealer.
“The problem is that people are trying transactions that are bigger than Bitcoin can handle,” Mr Gallippi said of the price volatility. “Long term, the price will rise to reflect the size of trades that people want to do with it.”
Bitcoin was created four years ago by an unknown computer scientist and the limited stock of “coins” grows according to a predetermined algorithm. The value of the total stock of coins peaked at $2.6bn and has fallen to below $1bn.
Untethered to any real asset, the price is determined only by trading on exchanges around the world, the largest of which, Mt Gox, was out of action because of technical problems for most of Thursday, a development that further exacerbated the sell-off.
Bitcoin halved in value on other exchanges after Mt Gox posted a message on its website saying: “Orders will not be accepted for the moment as we need to upgrade our database to accommodate the trading volume.”
The question now is whether merchants and Bitcoin users abandon the nascent economy because of the volatility.
Jon Matonis, secretary of the Bitcoin Foundation, which guards the open-source software behind the currency, said derivative products and hedging tools will be needed to stabilise the Bitcoin economy and to improve price discovery and the liquidity of exchanges where Bitcoin can be swapped for real-world currency.
“The amount that is traded on the various exchanges doesn’t represent a lot of the Bitcoins outstanding,” Mr Matonis said. “Even a 1 Bitcoin trade can move the price.”
Jennifer Longson, whose Cups and Cakes Bakery in San Francisco boasted of being the first cupcake shop to accept Bitcoins last October, is sticking by the currency. It represents a tiny proportion of her business - she makes Bitcoin sales at a rate of four a week, usually to “tech-oriented guys in their 20s and 30s” – and she has never cashed in the Bitcoins.
“I am definitely still up on the deal,” she said, “but I don’t consider that as part of my income because it is so volatile.”
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