LONDON – It’s a promising form of electronic cash free from central bankers and beloved by hackers. It – Bitcoin – may also be in deep trouble, registering catastrophic losses that have sent speculators scrambling.
Although the cybercurrency has existed for years as a kind of Internet oddity, a perfect storm of developments has brought it to the cusp of mainstream use.
As currency crises in Europe piqued investors’ interest, a growing number of businesses announced they were accepting bitcoins for an ever-wider range of goods and services. The value of a single bitcoin began racing upward amid growing media attention, smashing past the $100 mark last week before more than doubling again in just a few days.
Then came the crash.
The price of Bitcoin has imploded, falling from $266 on Wednesday to roughly $55 on Thursday. The best-known bitcoin exchange, the Tokyo-based Mt. Gox, has suspended trading for what it described as a 12-hour “market cooldown.”
Nicholas Colas, chief market strategist for the ConvergEx Group, said it was a “great question” whether the currency could survive the wrenching up-and-down.
“At this point I would say yes, since it has before,” Colas wrote in an email. But he noted that, unlike previous oscillations, Thursday’s collapse was taking place in the full glare of international media attention.
“A lot more people know about Bitcoin than during the prior problems,” he said.
To its supporters, Bitcoin has enormous promise.
They describe it as the foundation stone of a Utopian economy: no borders, no change fees, no closing hours, and no one to tell you what you can and can’t do with your money.
Some of that promise is being delivered: When Bitcoin first got its start in 2009, the currency could buy almost nothing. Now, there’s almost nothing that bitcoins can’t buy.
From hard drugs to hard currency, songs to survival gear, cars to consumer goods, retailers are rushing to welcome the virtual currency whose unofficial symbol is a dollar-like, double-barred B.
Just days ago the total value of bitcoins in circulation hit $2 billion, up from a tiny fraction of that last year. But late Wednesday, Bitcoin collapsed, shedding roughly 75 per cent of its value in a series of stop-and-start crashes that left many enthusiasts anxious and many skeptics saying “I told you so.”
“Trading tulips in real time,” is how longtime UBS stockbroker Art Cashin described Bitcoin’s vertiginous rise, comparing it to the now-unfathomable craze that saw 17th-century Dutch speculators trade spectacular sums of money for a single flower bulb.
“It is rare that we get to see a bubble-like phenomenon trade tick for tick in real time,” he said in a note to clients.
Colas seemed to reject the idea that the suspension of trading at Mt. Gox was a sign that Bitcoin was coming apart at the seams.
“For the average user, losing Mt. Gox for 12 hours is like going to an ATM and finding that it is out of money,” he said.
But he prefaced the statement by noting that bitcoins suffered from the same weakness of any other form of money. If people increasingly believe they’re not worth anything, then they’re not worth anything – no matter how clever the currency’s design is.
“The future of bitcoin is, like all currencies, going to come down to trust,” he said.
One Bitcoin supporter with a unique perspective on the boom-turned-to-bust might be Mike Caldwell, a 35-year-old software engineer based in suburban Utah. Caldwell mints physical versions of bitcoins at his residence, cranking out thousands of homemade tokens with codes protected by tamper-proof holographic seals – a retro-futuristic kind of prepaid cash.
His coins are stamped with the words “Vires in Numeris” – Latin for “Strength in Numbers.”
Some may wonder whether Caldwell’s coins will one day be among the few physical reminders of an expensive fad that evaporated into the ether.
When asked, Caldwell acknowledged that bitcoin might be in for a bumpy ride. But he drew the analogy between the peer-to-peer currency enthusiasts who hope to shake the finance world in the next decade with the generation of peer-to-peer movie swappers who challenged the entertainment industry’s business model in the 2000s.
“Movie pirates always win the long game against Hollywood,” he said. “Bitcoin works the same way.