Bitcoin is a currency, like the U.S. dollar or the European Union’s Euro. You can use Bitcoin to buy or sell goods, buy other currencies, or pay for legal (and, yes, non-legal) services.
Like all currencies, Bitcoin increases and decrease in value by the second based on supply and demand, among other things. Bitcoin, however, isn’t tied to any single government, country, or union. Since it’s a decentralized virtual cryptocurrency, its value is automatically regulated by all other Bitcoin users, therefore tamper-proof and impossible to counterfeit.
Due to its relatively new adoption (it launched a little over four years ago) and decentralized nature, Bitcoin is significantly more volatile than most other currencies. It can rapidly increase or decrease at any time due to a variety of factors. For instance, if a country passes new laws that make Bitcoin use easier within their borders, Bitcoin’s demand would increase, as would its value. If a popular online storefront that only takes Bitcoin were to suddenly close, the currency’s value would certainly take a dip.
Last week was no exception. After an SEC ruling against a new way to invest in Bitcoin, the currency’s value took a turn for the worse. Yet no one expected it to lose $300 in value in minutes.
The Winklevoss Twins (yes, the villains from The Social Network), recently tried to create a Bitcoin ETF.
If you want to buy bitcoins, you have to go through a specialized bitcoin exchange. (You could also mine them yourself, which requires using expensive specialized computers.) Cameron and Tyler Winklevoss, two famous Bitcoin investors, were in the process of creating a Bitcoin-based exchange-traded fund. This would let anyone easily invest in Bitcoin by buying stock in the ETF through their broker or brokerage, avoiding Bitcoin exchanges in the process. The fund would then mimic Bitcoin’s price actions. For example, if Bitcoin went up by 1%, the ETF would go up by 1%, too.
Unfortunately, the Securities and Exchange Commission denied their proposal.
The United States government treats Bitcoin in a weird way. In the past, they treated it as property. Currently, they’re torn between recognizing it as an unauthorized currency or an asset that must be taxed. The SEC, however, believes that Bitcoin is not heavily regulated and can be defrauded or manipulated. While Bitcoin is arguably tamper-proof and tightly regulated by all Bitcoin users, they’re often traded in unregulated marketplaces. That is why the SEC denied the Winklevoss’ proposal to create the ETF.
Since the SEC made it clear that they believe Bitcoin is not a viable currency, Bitcoin became less in demand and lost hundreds in value.
If the SEC passed the ETF, it would create more demand for Bitcoin, and the price of a bitcoin would rise. Many Bitcoin investors were looking forward to this, some investing more into the currency to capitalize on its potential rise. When they realized this wasn’t going to happen, they opted to sell off their bitcoins. This caused the currency to drop by $300 in value to around $900 per bitcoin.
Bitcoin’s price went back up, but this could happen again.
Investors eventually realized that the currency isn’t going anywhere and people could still buy bitcoins elsewhere. This led the currency to go back up in price, where it is currently valued at $1247.12 per bitcoin. Yet since Bitcoin’s price can go up and down this rapidly based on simple decisions, you can certainly expect it to decrease by this much again…if not more.
Should you invest in Bitcoin? If you buy bitcoins, you’re buying into a relatively new currency. Bitcoin can increase or decrease by a few hundred dollars at any time for any number of reasons. Sure, you have the potential to quickly make money. You also have the potential to quickly lose money. If you want to see what Bitcoin is all about, be sure to check out our guide on the cryptocurrency, and always do your research before you invest in anything.