Up to the second week of February 2013 bitcoin had done something very few prognosticators had predicted: it went flat. Well, flat by the standards of a virtual currency at least. It was still incredibly volatile, but basically stayed within the $600-700 BTC range for the first five weeks of the year, a far cry from its ten-fold increase and subsequent crash that marked the November-December 2013 period.
But the week leading into Valentine’s Day has seen bitcoin return to its shaky roots. The first indication there was no “new normal” came when exchange Mt. Gox halted withdrawals amid fears of a good old-fashioned bank run. Mt. Gox blamed their problems on a flaw in the bitcoin protocol which allowed users to double-withdraw funds. The results were immediately felt by the market, with bitcoin shedding over a quarter of its value in 24 hours.
While the evangelists over at popular bitcoin gathering site r/Bitcoin tried their best to put a positive spin on things, while decrying Mt. Gox CEO Mark Karpeles, the price continued to plummet. It became clear that the flaw – called “transactional malleability” – extended beyond the Mt. Gox exchange, with the more popular trading site Bitstamp halting withdrawals as well, sparking minor panics in overinvested day traders.
On the morning of Valentine’s Day, the price fall was checked as Bitstamp reinstated withdrawals. The price climbed to an all-time monthly high, notching a nearly 20 percent gain in a day. But the whipsaw can’t just be attributed to a flaw in bitcoin. Really, the culprit is probably attributable to that inevitable facet of any free market: the speculator.
In this case, the speculators in question are arbitrage traders, or those looking to exploit inefficiency in a market. As bitcoin lacks a central bank, it also lacks a fixed, agreed-upon price. Every bitcoin exchange can find the relative price of bitcoin to be wildly different.
The price listed on Mt. Gox and competing exchanges like Bitstamp and BTC-e had reached as high as 26 percent at times leading up to the Valentine’s Day whipsaw. In short, the perfect opportunity for arbitrage day traders playing the exchanges, assuming they played the day right.
While transaction malleability certainly played a factor in the newest round of volatility, the most likely culprit is more cybertraders trying to make a quick bitcoin. Of course, this kind of speculating could be smoothed out considerably with a regulated exchange. But for many of bitcoin’s libertarian-minded adherents, this runs completely counter to the allure of the currency. And so the speculators will continue to do what they do, and the currency will continue to resembles less a currency in price, and more a red-hot, albeit extremely unreliable, tech commodity.
BY 12 PM PCT bitcoin was trading at $444 USD on Mt. Gox and $666 USD on Coinbase.