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Dramatic Changes in Bitcoin Price Affect Liquidity

Yesterday was an extremely positive day for Bitcoin. Senator Tom Carper held a Senate Committee hearing to discuss the legal and business implications of Bitcoin’s ever-growing popularity.

Overall, the tone of the session was one of open-mindedness and desire to learn more about the digital currency. The representatives from FinCEN and the Attorney General explicitly stated that digital currency, in and of itself, is not illegal.

Related: Read our full summary of the Senate Committee hearing on Bitcoin

In response, Bitcoin’s price skyrocketed to over $900, a new all-time high. Bitcoin donned the front page of the Wall Street Journal this morning, was discussed on NPR, and made its way into every mainstream media outlet.

Then, the problems started. With increased interest and positive sentiment in Bitcoin came increased trading volume, and many trading platforms just could not handle the demand. And in response, the price of Bitcoin dropped back down to $500.

Liquidity Issues at Exchanges

Coinbase, a US-based startup, suddenly announced that it was hitting its normal buy limits and warned users that, while they could place orders, these orders would not be priced for up to 5 days. At Coinbase, investors cannot buy Bitcoin reliably. Note that Coinbase is not technically an exchange, but because of its ease-of-use and trustworthiness, many investors go to Coinbase to buy Bitcoin.

Mt.Gox, a Japan-based exchange, continues to have USD withdrawal liquidity issues. At Mt.Gox, investors cannot sell Bitcoin reliably.

Bitstamp, a Slovenia-based exchange, was hit with a DDOS (denial of service) attack this morning and went down just when the price dropped and investors wanted to buy.

Coinsetter, a relatively new trading platform, does not yet allow wire transfers from US customers and has trade minimums of 1 BTC.

Related: Coinsetter Launches US-Based Bitcoin Forex Trading Platform

These liquidity issues are a symptom of the reality that it is still early days for Bitcoin and demand is growing incredibly fast. But the problems these exchanges have experienced also highlight the risk in being a currency speculator in Bitcoin. You may be able to buy low or sell high, but perhaps not both on the same day.

Note: Other exchanges exist that were not profiled, namely BTC China (now the largest Bitcoin exchange in the world), BTC-e, and others. Read our comparison of exchanges and Bitcoin wallets to learn more.

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Bitcoin Breaks $270 in Historic Climb

Today marks a new all-time high for the digital currency Bitcoin. For the first time ever, Bitcoin was traded at $270 on Japan-based exchange Mt.Gox. On Coinbase, the price of Bitcoin was just below $270.

With nearly 12 million bitcoins in circulation, Bitcoin now has more than a $3 billion market capitalization

Here are the charts showing the historic climb of Bitcoin.

Mt. Gox chart from Bitcoin Charts

Coinbase chart from Coinbase

Looking Back at the Last Peak

The last time Bitcoin reached prices this high was in April 2013. The currency reached $266 and then crashed dramatically.

Read: Did the Bitcoin Bubble Burst Already? (April 12, 2013)

This time, there seems to be more stability around this climb. Increased adoption and trading volume in China has contributed to the price climb.

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This question originally appeared on Quora, and was answered by Will O’Brien, owner of On Bitcoin.

Q: Which site is best for keeping a cloud bitcoin account? Specifically I want to: 1) keep my balance secure, and 2) change in and out of USD easily.

Sadly, the answer is none of them at this time. But there are some exciting new companies on the horizon.

First, some background. You can hold your Bitcoins in a wallet (cloud or desktop), at an exchange, or in cold storage. Each has its own profile for security and liquidity.

Security: There is a trade-off. Wallets and exchanges that are easier to use are often less secure. This is not a rule, just the current state of affairs. The biggest risk to Bitcoin is theft. If someone gets your private key, you will be robbed. See Bitcoin Theft: Mt. Gox Attack Pillages Investor’s Bitcoin Account as an example of how a Java chat applet was used to pillage a Mt.Gox user’s account.

Liquidity: Many exchanges have difficult account creation (to ensure security) and a prolonged wait to exchange to/from BTC, both as a hedge on currency volatility and because other institutions have delays, e.g., bank transfers. There is also regulatory risk and perceived regulatory risk. For example, Tradehill recently suspended its exchange due to regulatory concerns, Mt.Gox froze USD withdrawals, and Dwolla cut off Bitcoin users.

The general rules of thumb for both security and liquidity are:

1. Never keep a large amount of money in an single Bitcoin wallet. Some Bitcoiners would say a single wallet should be used only once and not hold more money than you would be comfortable losing in a theft.
2. If you are amassing BTC as an investment rather than day trading or buying and spending, consider cold storage.
3. Keep on top of your account security like you would at your bank. There will be new Bitcoin wallet services that do everything for you that BofA does today, but those are in the future, not the present.
4. Keep on top of your service provider. If they get impacted by regulation or attacks, so will you.

With that in mind, below are the major players to consider.

Coinbase - SF-based Bitcoin wallet startup
Pros:

• Probably the most user-friendly site available. It’s a simple, intuitive, web interface for buying and selling.
• Uses ACH transfer for buying/selling from USD.
• Real-time charts and exchange rates.
• VC-backed and reputable amongst the competition.
• Android app and iPhone app available.

Cons:

• Account setup is not trivial. Requires adding a bank account, verifying phone number, installing 2-factor authentication, etc.
• Transaction delays: BTC-to-BTC transactions take 1 hour to clear. BTC-to-USD and USD-to-BTC transaction take days.

Bitcoin Block Explorer – Blockchain.info - web and mobile Bitcoin wallet
Pros:

• iPhone app!
• You can buy BTC with SMS payments.

Cons:

• Very techie user interface, not intuitive.
• No services. Very basic buy/sell functionality.

Mt.Gox - Japan-based Bitcoin exchange
Pros:

• In the early days, Mt.Gox had a large amount of volume and liquidity.
• Still considered a leading exchange.

Cons:

• Instability: USD withdrawals were frozen (source: Mt. Gox Halts US Dollar Withdrawals at Bitcoin Exchange).
• Attacks: DDOS attack on Mt.Gox (source: Bitcoin Exchange Mt. Gox DDoS Attack: It’s Been an Epic Few Days).
• Regulatory risk and policy changes (source: Mt. Gox Forces Users to Verify Accounts After Government Crackdown).
• Account setup very challenging: need to upload scan of driver’s license or passport, and utility bill for proof of address. Then setup security center (Yubikeys or Software Authenticators). And more.
• Not based in US.

CampBX Bitcoin Trading Platform - US-based Bitcoin trading platform
Pros:

• Reviewed as better than Mt.Gox.
• Based in USA.

Cons:

• Delays in initial trading after placing funds.
• May be impacted by Dwolla decision to cut off Bitcoin exchanges.

BitGo - Startup with promise of most secure wallet (note: this is a relatively new startup with interesting technology that is coming to market soon)
Pros:

• Innovative security implementation enables most secure wallet.
• User-friendly site, easy to execute transactions.
• Best account creation flow.

Cons:

• New to market.

Companies no longer providing Bitcoin liquidity:

• Dwolla – online payment platform (source: Payment Network Dwolla Cuts Off Bitcoin Users)
• Tradehill – high-end trading platform (source: Bitcoin Exchange Tradehill Suspends Trading Due to Regulation Concerns)

Companies not profiled in this answer:

• BTC-e – Bulgarian cryptocurrency exchange
• CoinMkt – Relatively new exchange with thousands of trades
• OKPay.com – low-cost money transfers
• BitStamp – exchange based in Slovenia
• BitInstant – Winklevoss-backed startup Bitcoin exchange (site is currently down)
• Desktop Bitcoin wallets – e.g., Bitcoin-Qt, Armory, etc.
• In-person trading platforms – find somebody nearby to trade, e.g., LocalBitcoins.com, TradeBitcoin.com

CC image by by 401(K) 2013

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“We’re excited to announce our iOS app is now available on the App Store!” — Coinbase team

If there was one major critique of Bitcoin wallet provider Coinbase, it was the lack of an iPhone app. The company did have an Android app, but nothing on iPhone.

To the delight of its userbase, Coinbase today announced the availability of the Coinbase iPhone app in a blog post. Now users can buy, sell, and send Bitcoin on iOS, Android, and the web.

This is a big step forward for Bitcoin payments accessibility. Prior to the launch of the Coinbase iPhone app, iOS users had limited options for mobile payments, with most using a relatively challenging app from Blockchain.info.

Link: Get the Coinbase iPhone App

Security

Some users might be worried about security. What happens if your phone gets stolen?

Coinbase says they have you covered. “To protect your Coinbase account you can set a pin code in the app, and even remotely disable access if you phone is ever lost or stolen.”

Apple and Bitcoin

Apple continues to have an arms-length relationship with Bitcoin. In the Blockchain.info app, for example, restrictions from Apple led to the exclusion of bitcoin wallet functionaility in the latest version.

It looks like Coinbase has received the green light from Apple to have a fully-featured app. Great news for the App Store overall.

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BitDazzle is the latest Bitcoin marketplace to come online, targeting small business owners

Already with 1,000 merchants on board, BitDazzle using Bitcoin as a draw to compete with other online marketplaces like Etsy and eBay. When users pay with credit cards, transaction fees can be 3% to 5% of the sale. But with Bitcoin, fees are low or non-existent, and there are no risks of chargebacks.

BitDazzle plans to take a flat 1% on Bitcoin purchases, but also supports PayPal and credit cards.

BitDazzle was created by venture-backed startup Cashie Commerce and has partnered with Coinbase as its Bitcoin payment processor, using the Coinbase API. Cashie Commerce CEO Hieu Bui said he expects Coinbase to promote the new marketplace to its 300,000 users. Coinbase expressed their excitement in a blog post.

Overall, BitDazzle hopes to grow the Bitcoin transaction economy and raise further awareness for the currency. “We’re trying to make Bitcoin more mainstream, and one of the ways to do that is to have more products and merchants who are mainstream,” Bui said in an interview with Xconomy.

Related: Startup Profile: Coingig Launches the eBay Marketplace for Bitcoin

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