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View the article online at http://citywire.co.uk/wealth-manager/article/a723379

Bitcoin halves in value as China gets cold feet on the currency

by James Phillipps on Dec 09, 2013 at 07:01

Bitcoin halves in value as China gets cold feet on the currency

Any investors looking to gatecrash the Bitcoin party got badly stung last week as the virtual currency lost more than half of its value in trading over Thursday and Friday.

Bitcoins have barely been out of the news in recent months with its status as legal tender being queried in a number of countries and confirmed in others resulting in a rollercoaster ride for holders of the currency.

China became the latest to focus in on Bitcoin last week after its central bank stopped short of banning it but warned against it being viewed as legal tender, prompting Chinese online retail giant Baidu to promptly stop accepting them.

The value of Bitcoin increased more than hundredfold in the first 11 months of 2013, albeit with extreme volatility. The question of the legitimacy of the currency has been a key theme this year with both the US and Germany eventually declaring it so, although other countries have yet to come down on the side of the currency.

In a headline-grabbing move, the world’s first Bitcoin ATM was opened in Canada in November, prompting a spike up in value which helped push the currency’s value over $1,200 and higher than the price of gold briefly. However, this was just as swiftly undone by the newsflow from China which served to highlight its volatility.  

Bitcoin’s value slumped to just under $600 in intraday trading on Friday, but is now listed on exchange Mt. Gox as $724. The crash is one of a series of sharp drawdowns suffered by investors this year, which investors have seemingly been willing to large ignore given the powers of recovery the currency has displayed. Indeed, its value halved back in April, which was variously blamed on delays in trading on exchanges and one user of social media site Reddit giving away around $13,000 of Bitcoin online.

Despite this, the currency has gradually edged towards the mainstream and Bank of America Merrill Lynch (BoAML) initiated analyst coverage of the currency last week, setting a price target of $1,300 from the $1,052 it was trading at, at the time. On the face of it, this looks to be the classic case of an institution moving into a bubble late and proclaiming more upside when others are jumping ship. BoAML has not exactly demonstrated it has anymore understanding of the price movements of this fledgling currency than anyone else.

Whether Bitcoin can display yet another bounceback remains to be seen but anyone trying to second guess the currency’s future direction will need a strong constitution because volatility seems to be the only real certainty.   

10 comments so far. Why not have your say?

Philip Milton

Dec 09, 2013 at 09:41

Falls to bits in fact....

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Anonymous 1 needed this 'off the record'

Dec 09, 2013 at 09:57

"On the face of it, this looks to be the classic case of an institution moving into a bubble late and proclaiming more upside when others are jumping ship"

Said the pot to the kettle Citywire!

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Keith Cobby

Dec 09, 2013 at 10:06

The Chinese have done the world a favour here by deflating this nonsense.

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Anonymous 1 needed this 'off the record'

Dec 09, 2013 at 10:15

It may well turn out to be nonsense Keith but then again you probably thought the internet was nonsense when it was first created…..same with email, twitter, Facebook etc. Bitcoin has the potential to go to $0 but it also has the potential the be an ideal currency

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Neil Telford.

Dec 09, 2013 at 11:12

Bitcoin and other crypto-currencies will be here to stay. This isn't nonsense, as most of the currencies we use now are just fiat money (i.e. backed by nothing and are legal tender just because the state says so). As a concept, a decentralised currency under no state control actually makes a lot of sense. No government can inflate or devalue such a currency in order to get themselves out of a hole.

It's getting difficult to actually mine for Bitcoins at the moment. The trick will be to try and guess which other cypto-currency will become the silver to Bitcoin's gold...

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Keith Cobby

Dec 09, 2013 at 11:17

There are a few of us who can see that the emperor has no clothes.

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Anonymous 1 needed this 'off the record'

Dec 09, 2013 at 11:23

No actually there are lots of you, you're not contrarian suggesting it's a bubble. There's a pretty good chance it will be a bubble and you will be very proud of yourself and will consequently bore your friends at dinner parties about what smart bubble spotter you are…..then again, you might be wrong.

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Philip Milton

Dec 09, 2013 at 11:37

Bitcoin or not, as a currency (and all cyber currencies) it will still have to feature in the Big Mac index so its feet will ultimately be kept firmly on the ground. It is not a scare commodity like gold or whatever which can be used as currencies but also still have fundamental underlying value beneath them) but 'just' a currency.

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Anonymous 1 needed this 'off the record'

Dec 09, 2013 at 11:50

Well intrinsic value is very subjective. You could own a diamond encrusted Bugatti Veyron but if no-one is willing to buy it from you then you could argue against it having any intrinsic value. Most objects, tangible or not, are only worth what people are willing to pay for them.

Bitcoin is theoretically scarce in that only a finite amount will be created and they are divisible to a high degree. This is not an argument for or against Bitcoin as I don't own any personally but I think to dimiss them as just a fad or a bubble is naive….not to mention somewhat ironic when we are arguing about this on something as intangible as the internet!

Technology and humanity moves on, we have to at least be open to new ideas.

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Neil Telford.

Dec 09, 2013 at 12:24

Actually, it seems lots of people are talking about crypto-currencies at the moment without fully understanding how they work.

@Philip - you say Bitcoin is not like gold because of the scarcity value. Actually, there will only be a finite number of bitcoins ever issued. They are minted in blocks of 25, and the number issued roughly halves each year until it dwindles to nothing. Unlike governments that can turn on the printing presses (in a metaphorical sense).

It's no more or no less rational than pegging a value to Gold or those bits of paper you carry around in your wallet.

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