Bitcoin Bubble Burst: Is this the end?

Bitcoin, a decentralized, Virtual currency which received a lot of public attention lately, has witnessed a sharp fall in its value from over $250 earlier this week to around $120 on Wednesday and $90 on Friday. The currency has seen a loss of almost $ 160 per Bitcoin. There have been fears between its heavy investors that the bubble has finally burst.

Launched in 2009, Bitcoin is a virtual currency that is being used in mainstream in increasing numbers over the last few months. From selling an art to building assets, Bitcoin has been proved as a very effective and strong ‘virtual money’ to buy anything over the internet. There are several online platforms that buy and sell Bitcoins against real money, most famous being mtgox.com.

Recent Fluctuations

Bitcoin since 2013 has fluctuated from $7 in January to a jaw dropping value of over $250 in April i.e an average rise of $80 per month. However, its continuous fall in value after Wednesday, has made many of its heavy investors believe that the bubble has finally burst and the currency will end up being nothing very soon. Following graph shows how sharply Bitcoin increased in its value in 2013 before its this week’s drop.


Bitcoin-The Trust Factor

With a non-stop increase in internet penetration in last few years, several internet communities over the years have started circulating their own form of virtual currencies in order to buy and sell products. However, these virtual currencies pose risks for their users, especially when there is no regulatory body to handle its price value and circulation- Just like Bitcoin.

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There is a very thin line between virtual currency and electronic money. Electronic money is any legal money issued by a central government affiliated body but stored electronically. Unlike Electronic form of money, Virtual currencies aren’t issued on receipt of funds and do not provide any monetary value to its holder and thus can go zero in value at any time. There always is a huge risk factor in investing in these virtual currency.

Decentralised form of money

A key feature of Bitcoin trading is that it is decentralized, which means that the deal/trading takes place between the two parties, without any involvement of third party. This has resulted into almost no control of any government over its conversion rate.

So who decides Bitcoin’s market rate?

Generally the control of a virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will. As mentioned earlier, the circulation of Bitcoins is based on a peer-to-peer(P2P) network and does not have any central authority in charge of the money supply, its value is determined by the currency’s supply and demand in the market.

Pump and Dump- a possible reason for its failure

It is very much possible that a group of ‘pump and dump style’ game players have caused this recent fluctuation; i.e a group of people has artificially increased the price of Bitcoin in last few months by buying too many bitcoins in bulk and have finally sold it when they predicted that the currency cannot go up any further, resulting a sharp decrease in the the price of Bitcoin.

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In June 2011, following a cyber-attack because of Bitcoins, attracted a lot of criticism against the currency, which resulted to knock its value directly from  USD 17.50 to USD 0.01 in few seconds of time, as people started selling their Bitcoins quickly right after the incident. With this recent sharp fall, chances are that a similar event could also take place now leaving those who are investing heavily in, standing alone on a very rough road.

If Bitcoin does become a real currency, can it be backed by real things like goods, gold, banks, etc? Will there be future institutions to empower liquidity of bitcoin? Can it be controlled mutually along with other global currency?

For the widely undiscovered animal called world wide web, nothing can truly be called impossible. However the day bitcoin takes shape of real currency it may not be as cool as it is today, and the world might wonder if we needed yet another currency at all. Possibilities are that bitcoin can become universal currency of globe, but whose GDP shall contribute to its strength?

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