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    Theories on a Bitcoin Crash

    Written by

    Adam Clark Estes

    Nothing lasts forever. Image via Flickr/zcopley

    After peaking at $266, bitcoin took a tumble on Wednesday afternoon. A big tumble. At the time of this writing, one bitcoin was worth $201 $193 $187 $156… you get the point. Obviously, everybody's freaking out. Don't go jumping off of buildings just yet, though. The end is far from near.

    Bitcoin is crashing, and that's a bummer, especially for all of the people who decided to buy when it was hovering around $250 not long before the bottom fell out. That doesn't mean that the market won't catch the currency before it's beyond repair. In fact, this might even be a good thing for bitcoin. A recovery after the rocky afternoon would prove to investors how resilient bitcoin is. It has to recover first, though.

    The crash is not a good thing for bitcoin, but it's also not the end of the world. (Image via Clark Moody)

    But before getting into speculation about how and why bitcoin can recover, let's talk about what's causing the crash. It'll be hard to tell for sure so soon after impact, but I'll do my best to help you parse through the many theories already hitting the web.

    Reason 1: People Stopped Talking About Bitcoin

    This is only sort of true. Based on Google Trends data, there was a significant drop in online conversation about bitcoin over the course of the past week. This is after three straight months of conversation volume increasing. A commonly held theory for why bitcoin's value spiked during this same time period is that the increased chatter boosted demand, and since the supply of the currency is fixed, the price would rise accordingly. Just because people started talking less about bitcoin (again, according to Google) doesn't necessarily mean they started wanting it less, though.

    Reason 2: The Bitcoin Billionaire Got a Little Too Spendy

    Just a few hours before the crash started, we learned about the Bitcoin Billionaire. This otherwise anonymous Reddit user, for some reason, had started giving bitcoin away to random Redditors. I'm not talking one or two bitcoin, either. By one count, he'd given away over $13,000 of the stuff. Motherboard's Alec Liu compiled his own list of scenarios that would prompt a bitcoin crash, and one of them was a similar event. If one wealthy bitcoin owner suddenly spends his whole loot, the market would be flooded in the open-source currency, and prices would crash. While it's possible that the bitcoin billionaire gave away a lot more bitcoin than was immediately apparent, he almost definitely didn't give away enough to throw the market off its axis.

    Reason 3: Somebody Hacked the Platform

    This sort of thing has happened before—several times. All bitcoin transactions depend on a small number of sites like Mt.Gox, where people exchange the currency, and Instawallet, where people store the currency. So when there's an outage at any one of them, the market freaks out. Only a week ago, hackers hit both Mt.Gox and Instawallet with a DDoS attack that took the sites offline for a while. The exchange rate tumbled for a little while, but when the sites recovered, so did the prices. There were reports of outages at Mt.Gox during Wednesday's crash, but it'll take a little time before we figure out if hackers had anything to do with it.

    Reason 4: The Government Intervened

    Conspiracy theorists have long warned that if bitcoin got too big, some government entity would intervene and put a stop to it. Because bitcoin is anonymous and independent, it's a playground for drug dealers and money launders and other undesireables. Plus, since fiat currencies like the dollar are based on trust, the success of bitcoin might highlight the shortcomings of the existing system, leading to even more doubt about the dollar (or euro or yen or whatever) and consequences elsewhere in the market. It feels pretty unlikely that the Man had anything to do with Wednesday's woes, though.

    Reason 5: The System Is Broken

    Not trying to be a hater, but a crash is a great way to point out shortcomings in financial systems. Look at 1929, for instance. And even though the bitcoin fanboys won't like to admit it, there are some things wrong with how the currency works. That's a whole other worm hole, though.

    In this case, it's rather obvious that the crash could've at least been contained if there had been a failsafe in place. Stock markets, for example, halt trading if a stock starts to nosedive to prevent widespread panic. Mt.Gox does not. 

    Think of it all as a learning experience. (Image via Flickr / zcopley)

    Those are just a few possible explanations. Here are a few more. But if you really want to know what's happening with bitcoin, sit tight. The fact of the matter is that the currency is so new and, well, different that nobody really knows what's going on or what will happen next. It's been a wild ride so far—you would've been laughed out of the room if you'd said that bitcoin would become a billion market in three months time, but it did!—and it's far from over.

    Whatever happens next will depend on the market. There's still a lot of bitcoin to be mined between now and 2040 when the system maxes out at 21 million units. The recent spike in interest and value of the currency is already sending venture capitalist dollars to startups doing bitcoin-related work and more vendors are adopting the payment method every day. Hell, there's even a bitcoin ATM.

    So bitcoin's not going away. In the time it took me to write this, the price of a bitcoin has dropped another $30 or so, but it's still trading at arond $130. That's half what it was at the peak on Wednesday morning but it's also significantly higher than it was a couple of weeks ago. And this is almost certainly not the last time we'll see the young, fragile but endlessly fascinating bitcoin market hemorrhage. Eventually, though, it'll level off for good, and then we can go read even more think pieces on what it all means. 

    Update (12 hours later): Indeed, Bitcoin did bounce back, ending the day around the $200 mark. Quartz's Zach Seward offers a little more calming talk about why the wavering is not such a big deal.

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