The Rise of Bitcoin
The rise of technology has allowed for many dynamic innovations in the business world, one of the most recent being Bitcoin. Bitcoin, which was created by a group of hackers, is the newest way of transferring funds to an entirely digital currency. Unlike standard currency, Bitcoin has no host country and can be purchased or sold against any major global currency. With the currency being solely online, there are no physical coins or bills; instead all dollars are stored in a broad set of online exchanges. Since its creation in 2009, Bitcoin has taken the form of many uses, including an avenue to store value, purchase goods online as well as invest. The use of Bitcoin has become under fire recently as many have used it in the purchase of illicit goods as tracking dealers is very difficult as the market is unregulated. Alone, the demand for Bitcoin has exploded in the past year, rising over 400% vs the USD. Everything was good until last week when an Asian Bitcoin server was the victim of an attack, creating a wave of fear across the virtual currency world.
As fear of a collapse of Cyprus widen many have looked to an alternate currency which is safe from the collapse of nations, providing the utmost security. Many who thought they had outrun these risks investing in Bitcoin where proved wrong last week as the currency fell over 60%. The fall was so extreme at one point the world largest Bitcoin exchange had to be halted (stopped trading) for in excess of 8 hours because of increased dangerous volatility. Such duration of a halt is unheard of in the exchange world where the NYSE saw one of its longest halts last week last for over 3 hours. This has led many to wonder, is the Bitcoin bubble over and have investors saturated the market? This may be possibly the case as at one point 260 Bitcoin = 1 USD. With the value being this high it blocked the entry of many individual investors, only allowing institutions who could afford to enter the market. With such institutions being the greatest players in Bitcoin, the increased volatility only comes naturally as size traded increases to into the $100,000.
Besides the institutional capitulation, many are now asking what caused the sudden crash. The most logical and believed by the media is the simple idea of fear of the true value of the Bitcoin, with a few orders being excluded following the hacking, leading to a notation that the currency does not have the value it is priced at. One of the more radical theories behind the cause is the fear and problems virtual currency would cause to the federal banking systems. Some believe that the crash was brought along by federal banks in the attempt to devalue the currency, eliminating its attractiveness. With the outflow of funds from Bitcoin, the S&P hit new all time highs as many believe money is flowing from Bitcoins back into the US market where it is then again being invested.
Bitcoin has since rebounded from its lows and is now trading in the upper $90’s with spreads at times being in excess of $1.