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.