Bitcoin Exchanges to Pop Up

This Wednesday, the virtual currency Bitcoin lost about 60 percent of its value. Today it was down even more.

Mt. Gox, Bitcoin’s biggest exchange, explained that the near-catastrophe was due to surprisingly increased demand placing undue stress on technical systems, thus leading to mass sell-offs.

However, that isn’t doing much to placate worried investors and champions of Bitcoin, since just last Thursday, Bitcoin lost some 20 percent of its value as well. Mt. Gox blamed that one on a distributed denial-of-service (DDoS) attack on its systems. Wednesday, Bitcoin closed at $105, down from $266 at its highest. Today it was pricing in around $84.

All this recent uncertainty has added imperatives to the search for a more robust, reliable exchange for Bitcoin. From Mt. Gox’s press release:

“People started to panic, started to sell bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!”

At the same time, Mt. Gox claims that it remains the biggest exchange, handling over 80 percent of all Bitcoin-USD trades. It also reports that some 60,000 new accounts were opened in March, and that so far in April, that’s gone up to 75,000.

Nearly 20,000 new accounts are being created per day. And the exchange experiences daily turnover to the tune of $30 million or thereabouts. That’s pretty substantial. Investors and users seem to be coming to an agreement on one thing at least: Mt. Gox as the sole exchange for Bitcoin may be a risk that’s not worth taking. There’s a lot at stake, and an exchange that could establish its superior reliability may see Mt. Gox suffering a mass exodus.

The Mt. Gox team has stated that it is working to upgrade its infrastructure dramatically both in order to capably handle the influx of demand and to stave off future repetitions of the recent crashes. More updates are expected from the team over the next few weeks.

Why Bitcoin?

So why the sudden craze over Bitcoin, anyway?

Just over the past month alone, Bitcoin prices have gone up more than 400 percent. A mix of factors have come together to propagate mass interest in the new currency.

First of all, Bitcoin is a virtual currency. It means that users can exchange online “credits” for real-world goods and services. Bitcoins aren’t overseen by any central bank. Rather, they are ‘mined’ by computers when they complete certain complex virtual algorithms.

As for why the interest in Bitcoin has surged recently, consider that distrust in fiat currencies has been growing worldwide—largely as a consequence of widespread economic instability. Consider also the chaos going on in Cyprus right now. And then there’s the fact that gold has been fluctuating on the market, its traditional safe-haven role notwithstanding.

Analysts, however, aren’t quite so sanguine about Bitcoin. One camp believes it could be a real solution to worldwide currency problems. But the other believes it may be little more than a long-drawn Ponzi scheme.

There are other real problems, though. Quite apart from spikes in customer demand that lay Mt. Gox’s infrastructure low, and quite apart from hacker attacks, this relatively unregulated market is bound to come out with regulatory rules soon enough. That, as always, will have a suppressing effect on trade volumes.

Alternative Exchanges

But there are alternatives to Mt. Gox even now. Tradehill, for example, is an American Bitcoin exchange. The company recently underwent a comprehensive image makeover and rebranding in an effort to portray itself as more “professional.”

Some 50 Bitcoin exchanges exist today, with Mt. Gox the undisputed leader in terms of visibility and trade volume. As Bitcoin’s popularity explodes worldwide, more and more countries will see their own exchanges pop up, often with many exchanges coming from the same country.

But centralization, or the lack thereof, may become a real problem and lead to a very chaotic state of things.

With the recent bank raids in Cyprus, interest in a virtual currency untied to any fiat currencies has grown sharply. Trade volumes for Bitcoin are bound to grow in the near future, and Mt. Gox may be proving unabl to handle such volumes.

Perhaps an erosion of its near-monopoly status would be a good thing for the currency at large, as multiple exchanges can share the trading load.

But should you invest in Bitcoin just yet? Gold continues to be a safe-haven bet. It has proven itself over and over. But don’t ignore Bitcoin. It hasn’t quite proven itself yet, but it is certainly making a lot of noise.

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