What Are Bitcoins, And Why Are They Suddenly Losing Value?

Photo (cc) by zcopley

If you haven’t heard of Bitcoins yet, you probably will soon. On Wednesday, their value dropped from a record-high $260 to $130 in just a few hours, according to The Guardian.

But that’s not bad if you bought them two months ago, when they were worth only $20.

Bitcoin is a digital currency that appeared in 2009, developed by an anonymous computer programmer as an open-source (free, nonproprietary) project. Now a lot of people are working to make the virtual money more secure through the Bitcoin Foundation. There have been hacking attempts on both the exchanges where bitcoins are traded, and on the virtual wallets where they are kept.

According to the Bitcoin website, more than 40,000 transactions were made per day in February, worth a total of more than $1 million. The total value of bitcoins in circulation at that point was above $300 million.

It’s harder to say what they’re really worth right now, because the past few days have been a wild ride. After falling to $130, their price went back up to $200, and back down to $160. After panicking users started selling off their Bitcoins, one of the largest exchanges, Mt. Gox, halted trading until Friday. The last price was $123.40.

Mt. Gox says it was “a victim of our own success” and unprepared for a sudden surge in interest. The site says it’s been getting 20,000 new users per day in the past couple weeks and that’s been slowing down its system performance, so it has to make upgrades.

The allure of the Bitcoin currency — aside from its (sometimes) skyrocketing value and novelty — is that it exists outside any central banking system. Transactions can be made instantly worldwide from a smartphone without additional fees or regulation.

But there are drawbacks. Aside from the price volatility and the risk of drawing hacker interest, there are no standard consumer protections. Transactions are irreversible, and it’s relatively difficult to stay anonymous or keep your balance a secret compared with traditional banking. Bitcoins also have a somewhat shady reputation because they’re used for illegal activities including drug deals and online gambling, according to The Guardian.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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