Fear, Uncertainty and Doubt Causes Confusion in Bitcoin Markets
If you were to check the average heart rate on a reader of the Bitcoin Markets forum last night, it might just be higher than that of Felix Baumgartner when he jumped out of a balloon 24.2 miles above the surface of the earth and became the first sky diver to break the sound barrier.
The price swiftly dropped nearly $200 last night on heavy trading volume.
Mt.Gox is Failing
Mt.Gox in January 2013 was the darling of Bitcoin. It was the exchange of choice.
In April 2013, Mt.Gox was hit with denial of service attacks. “It’s been an epic few days on Bitcoin,” said Mt.Gox, “with prices going up as high as $142 per BTC. We all hope that this is just the beginning!”
$142? Everyone wishes they could buy Bitcoin at $142 today, as the price has been sitting over $800 for the last few weeks.
Just two months later, Mt.Gox halted USD withdrawals, causing a new panic. The exchange reported, “Over the past weeks Mt. Gox has experienced rising volumes of deposits and withdrawals from established and upcoming markets interested in Bitcoin. This increased volume has made it difficult for our bank to process the transactions smoothly and within a timely manner, which has created unnecessary delays for our global customers.”
After these missteps, Bitcoin investors moved on to new exchanges. First Bitstamp and BTC-e, and later Chinese investors came in droves to BTC China. But BTC China’s glory was short lived when its payment processors were shut down by the People’s Bank of China.
So, for the last few months, the metric of choice has been the spread between Mt.Gox and Bitstamp. Historically, in peaceful times, the spread has been as high as $200. Tonight, suddenly, the spread dropped to $30.
With this sudden spread contraction, the price of Bitcoin dropped quickly down to $625.
Why? Because Mt.Gox is failing. The spread is a leading indicator that the exchange’s days of glory are numbered. And sure enough, Mt.Gox announced tonight that it is pausing Bitcoin withdrawals, effectively eliminating liquidity.
The other factor hitting the Bitcoin markets is a collective reaction to popular mobile Bitcoin wallet Blockchain.info being pulled from iOS by Apple.
Blockchain.info didn’t take this lying down. Instead, the company published a blog post called Blockchain’s Response to Apple.
“On Wednesday February 5th, Apple attempted to strike a devastating blow to the bitcoin ecosystem on iOS by removing “Blockchain”, the last remaining bitcoin wallet app, from the App Store,” wrote Blockchain.info.
Blockchain continued to criticize Apple for being anti-competitive and practicing censorship.
“By removing the blockchain app, the only bitcoin wallet application on the App store, Apple has eliminated competition using their monopolistic position in the market in a heavy handed manner,” wrote Blockchain.info. The company created an online petition that has gathered nearly 5,000 signatures.
There were dozens of articles that piled on this news, positioning this issue as a Bitcoin v. Apple deathmatch. One Bitcoiner even shot his iPhone with a rifle out of protest.
Unfortunately, this broad overreaction by Bitcoin enthusiasts is not likely to produce results. Apple, simply put, has terms of service against other forms of transactions occurring in-app, Bitcoin included. Bitcoin company Coinbase launched an iPhone app which was subsequently pulled from the App Store for the same reasons.
Bitcoin Bounces Back
Despite this overnight panic, the price of Bitcoin has recovered about half of its losses, as it always does. It was inevitable that Mt.Gox’s leadership position would be taken over by new exchanges. And it was inevitable that Blockchain.info’s iPhone app would be removed due to policy violations.
Why are we surprised?