Bitcoin price volatility sparks fear of crash

The price of bitcoin fell nearly 20 per cent this weekend to its lowest level of the year, prompting worries of a crash.

“As the price is going down, some of us are under immense psychological stress,” one user posted on Reddit on Sunday. “Please share how you cope with it.”

On Sunday afternoon, bitcoin was trading at about $300, up from a low of $286, according to CoinDesk, a virtual currency website. Some contend that bitcoin’s price is irrelevant and that it does not reflect the virtual currency’s true value.

Bitcoin is still most popular among speculators and technology enthusiasts and has yet to find a general use that will push it into the mainstream and help stabilize its price, they say.

Bitcoin’s recent price decline can appear jarring, but it is nothing new. Indeed, some say the wild price swings have hindered its widespread adoption. Since it was introduced in 2009 by an anonymous programmer, or group of programmers, bitcoin has fluctuated unpredictably in price. After reaching its peak of about $1,150 late last year, the price has been in a prolonged slide. In August, a flash crash briefly set the currency world on edge, as the price dipped on one exchange to just over $300 from nearly $500.

Bitcoin ended that day down about 12 per cent. "For anyone complaining about the current price of bitcoin, remember it has more than doubled over the last 12 months," Roger Ver, a bitcoin enthusiast and investor, said in a Twitter message Sunday.

But even those most confident in bitcoin are having trouble explaining the recent decline. One reason for the drop could be uncertainty over potential regulations.

In July, New York became the first state to propose regulations for bitcoin companies. The comment period for the regulations, which were introduced by the Department of Financial Services, is set to end Oct. 21.

Bitcoin has attracted the attention of a number of other regulatory agencies in the United States, including the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Internal Revenue Service. The increase in the number of merchants now accepting bitcoin could also be affecting the price. These merchants, including Overstock and Dell, use third-party payment processors like Coinbase to immediately convert Bitcoin to dollars. This means there are more bitcoins in circulation, which could be helping to drive down the price. Some say that the market has been distracted with other events, including the Alibaba Group's initial public offering and the recent surge in the US dollar.

Against this backdrop, there have been questions about whether bitcoin can become more than a commodity. For that to happen, however, developers must find a way to harness its underlying technology to enable tasks that were previously difficult, expensive or impossible. These include cross-border transfers like remittances, which, under the current financial system, can be subject to high fees and long delays. Once bitcoin finds a general use, the price is likely to stabilise, they say.

"Right now, bitcoin is in this transition stage where it's a commodity trying to become a currency," said Rafael Corrales, a partner at the venture capital firm Charles River Ventures, who has followed bitcoin. "When bitcoin becomes a currency, it realizes its potential."

New York Times