According to Mt Gox, too much demand led to the temporary price crash
The value of Bitcoin, the virtual currency secured by complex encryption algorithms, dropped sharply on Wednesday after reaching an all-time high of $266 just hours before.
The exact cause of the price crash is not known. Some have blamed it on a theoretical DDoS attack on Mt Gox, the biggest Bitcoin currency exchange in operation. However, Mt Gox itself says the slowdown and eventual crash of its servers was caused by incredible demand for bitcoins.
As a result, the virtual currency had around $160 wiped off its value, trading as low as $105. It has somewhat recovered since, and is currently at around $162 per Bitcoin.
Bitcoin (BTC) is a digital crypto currency based on an open-source, peer-to-peer Internet protocol. First introduced in 2009 by an anonymous developer known under the alias ‘Satoshi Nakamoto’, it was traditionally used among those interested in keeping their transactions secret. However, recently, a number of major online businesses have started to accept BTC as a form of payment, improving its reputation.
At the start of the year, Bitcoin was trading at around $20. The increased media exposure fuelled rapid growth in February and March, and by April, as the price surged past $100, even the staunchest critics of the decentralised currency had to acknowledge its impact.
Some analysts have warned of a Bitcoin ‘bubble’, claiming sooner or later the market will correct itself.
As investors get excited by the rising price of BTC, many buy more, sending the price even higher. In the end, the price either stabilises, or crashes, so the theory goes.
However, Mt Gox said the recent drop in price is not a sign of any problems with the design of the currency, but the result of too much interest in Bitcoin.
According to a post on Facebook, the “astonishing” number of accounts opened in the past few days slowed the trading platform to a crawl, confusing some users and triggering a “panic sale”. The frenzy slowed the platform even further, to the point where administrators had to shut it down.
Mt Gox said there was no way it could anticipate the influx of would-be traders, claiming there were 75,000 new accounts open in the first few days of April, as opposed to 60,000 for the whole of March.
“We will continue to release several updates today and in the coming few days to improve our system overall performance. Also please note that we may have to close the exchange for two hours in the next 12 to 24 hours to add several new servers to our system,” said Mt Gox on Thursday morning.
Some analysts have previously suggested the recent spike in Bitcoin value was caused by the Cypriot banking crisis, which sent investors looking for somewhere to place their money unaffected by politics, and where it cannot be seized or frozen.
The fear of the predicted crash doesn’t scare Bitcoin enthusiasts. “The whole idea of a currency that increases in value is so foreign to us, so it is exciting to be a part of this movement. We accept dollars and then we just can’t wait to get rid of them, because we know that tomorrow those dollars are going to be worth less. So we have to get them into some vehicle that is not going to be worth less, to protect ourselves,” CEO of CBT Nuggets Dan Charbonneau told TechWeekEurope in March.
In contrast, bitcoins can be stored for long periods of time, and for some, they hold more potential to multiply savings than any bank account or stock portfolio.
Doubts remain as to how mainstream this technology can get. For example, Bitcoin has clear issues with taxation – since transactions are not regulated or tracked, they cannot be taxed by the government. Yet many are trading them in for real money, which could land them in trouble with HMRC or whatever tax regulator watches over them.
Bitcoin value has always been unstable. In the past, it has been influenced by DDoS attacks, hackers, and glitches. However, until the day the faith in decentralised currency disappears completely, Bitcoin investors are likely to continue reaping rewards.
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