It has been a wild few weeks for the Internet-based currency Bitcoin, culminating with problems at the currency’s largest exchange which led to a massive selloff over the weekend. These foreseeable issues with a unregulated exchange system didn’t deter some investors from buying the currency at its high, but they may be left holding a near-worthless currency, at least compared to the value a few days ago.
Bitcoins are simply an form of currency that has no backing from any government, and is thusly free from manipulation by a central bank. People generate the currency by solving complex computer problems, which keep the flow of the currency into the world at a steady pace. There are currently only a few million Bitcoins in circulation, with a maximum of 21 million available in a few years, according to the algorithm that controls how the currency is generated.
The Bitcoin has been an interesting experiment for the past year or so, but things got serious earlier this summer. A wave of interest in the currency, sparked largely by the currency’s acceptance in online black markets, jumped the price from a few pennies to over $30 in a matter of weeks. While this jump seemed like good news and validation for the currency, those types of prices bring attention that an unregulated currency, being traded on unprotected exchanges, can’t handle.
These problems led directly to exchange issues this weekend, as MTGOX, the largest of the Bitcoin exchanges, has an admin’s account compromised and a list of their entire user base was circulated on the web. This caused a massive selloff of the currency, with the price dropping from $17 to pennies in a matter of hours.
This type of problem was neither surprising, nor unpredictable, and shows that while government-backed currency may have its problems, some regulation is required when dealing with financial matters. Unregulated markets are prone to selloffs and quick value changes as their is no way to stabilize the currency in the midst of the crisis.
According to the MTGOX website, the problem has been located and fixed. All exchanges during the crash will be rolled back, meaning it is like they never happened, and the Bitcoin will magically be worth $17.50 again. So much for an absence of currency manipulation. Don’t expect it to stay at those levels for very long.
This incident only compounds on the problems the Bitcoin has had over the past few days, with a $500,000 theft deriving from the unsecure nature of how the currency is stored on computers, and a trojan that seeks to steal the currency right off your computer.
Maybe someday in the future a large enough body can create a secure Internet currency with their assurances that they won’t manipulate the price. The Bitcoin has been a nice idea, and will still be around in a deflated state for some time, but security and market regulation are required for any currency that wants to be taken seriously.