text: It's shaping up to be a pretty ugly day for Bitcoin. 
   
   After soaring past $250 earlier, it's tumbled all the way down to current levels around $150. 
   
   Bitcoin is now 44 percent off its intraday high of $266. 
   
   At its low of the day ($105), it had lost 61 percent of its value from the peak. 
   
   The chart below shows Bitcoin prices from April 9 through today. 
   
   bitcoin.clarkmoody.com 
   
   The virtual currency briefly staged a sizeable comeback this afternoon before getting slammed again. 
   
   The biggest question everyone has had about Bitcoin in recent weeks - aside from how it works - is whether or not it's in a bubble. 
   
   After all, the virtual currency has seen a remarkable rise since January, when it was trading below $15. 
   
   Already this afternoon, since the plunge began, we've seen some interesting defenses of the virtual currency popping up on the Internet. 
   
   A Reddit user posted a graphic showing the Spartans' shields from the movie 300 redesigned as Bitcoins with the word HOLD! across the top. 
   
   Another Reddit user sought to use technical analysis to explain away today's move. 
   
   However, episodes like today's highlight the biggest problem with Bitcoin: confidence. ||||| Courtesy of Casascius/Wikimedia Commons 
   
   Update, 3:13 p.m.: The bitcoin market is extremely volatile today, with the price ranging from a low of $120 to a high of $266. You can see the latest prices at the top of the page here. 
   
   Let me begin this column with a lengthy disclosure. One morning last week, I stopped at my bank, filled out a withdrawal slip for $1,027.51, and walked away with an envelope full of cash. The odd amount was deliberate; I had been instructed by LocalTill to be exact in everything I did. What’s LocalTill? Don’t bother Googling it—its shady-looking website offers only murky details, explaining that the firm is a way for “merchants to accept secure transactions when selling goods online.” It’s something like PayPal, except LocalTill isn’t tied to your bank account or credit card, and instead deals only in cash. This makes its transactions less traceable, less regulated, and, as I would soon experience, more final. 
   
   Next, per LocalTill’s instructions, I drove to a local Bank of America branch and asked for an out-of-state wire transfer slip. I scrawled out LocalTill’s New York bank account number and handed my wad of cash to the teller. This was a dizzying moment: I’ve been on the Internet forever and have been well-schooled in frauds that begin with the instruction, “First, wire your money to an out-of-state account …” Yet here I was doing exactly that. If LocalTill was a scam, I’d have no recourse. So why was I willing to take such a risk? 
   
   Bitcoin, of course. Bitcoin is a “digital currency” invented in 2009 by a cryptographic expert who went by the pseudonym Satoshi Nakamoto, but whose true identity remains unknown. It exists only in computers, minted at a regular rate by a network of machines around the world, and its value isn’t regulated by any government. The currency, like its creator, clings to the shadows. Bitcoins are like cash in that they aren’t tied to your identity, and transactions made with bitcoins are irreversible and untraceable. But they’re like credit cards in that they aren’t physical. In the past, if I wanted to pay you for certain unmentionable services rendered, I’d have to get a fancy briefcase, fill it with bills, then take a long, dangerous trip with my stash. Bitcoin allows me to transfer money to you online, instantly, for free. As a result, it’s perfect for the black market—a couple of years ago, it became a media sensation when Gawker reported on its use as the central currency on Silk Road, a site that sold virtually any drug in the world. Lately bitcoin has also been hailed as an emerging global safe haven, a place for nervous Europeans and panicky gold-bug types to store their wealth away from the prying reach of financial regulators. 
   
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   I’m not very panicky about the world’s currencies, nor am I looking to buy drugs online. Indeed, I don’t care at all for bitcoin as a currency. Instead, I wanted to buy bitcoins as pure, shameless speculation. I wanted a chance to ride a rocket ship. Partly due to its growing legitimacy as a currency but mainly because of speculators like me, the value of bitcoin is entering a bubble phase—its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace. In 2011, back when Gawker reported on Silk Road, you could buy a bitcoin for about $9. Since then the price has seen terrific fluctuations, but it has generally gone up. At the start of this year, each bitcoin was worth about $20. From there the chart turns into a hockey stick—by March, bitcoins hit $40, and within a month they’d doubled again. 
   
   Courtesy Bitcoincharts.com. 
   
   Three weeks ago, I began hearing about bitcoin everywhere I turned. One afternoon I had lunch with a partner at Andreessen Horowitz, the large Silicon Valley venture firm, who told me that he’d been fielding pitch after pitch for start-ups that offered bitcoin-related services. After lunch, I got an email from David Barrett, the CEO of the fantastic expense-reporting start-up Expensify. Barrett wanted to let me know that his firm would soon let people submit expenses and get paid by their employers in bitcoins. He explained that the feature wasn’t a gimmick. Bitcoin would be helpful for people who regularly submitted expenses internationally; other services—like PayPal—charge hefty fees for moving money overseas, but with bitcoin people could send money for free. 
   
   I made a mental note to start looking into a story about bitcoin’s apparent rise to legitimacy. But before I could get started, bitcoin took over the media. Henry Blodget was calling bitcoin "the perfect asset bubble." Felix Salmon published a lengthy treatise on why the bubble was sure to burst. The New Yorker spoke to some of bitcoins' leading boosters about the future of the currency. Meanwhile the price just kept going up: Early last week the value of bitcoins soared past $100 each. This week, it went past $200. If you want a bitcoin today, it will cost you about $235, and if you wait till tomorrow, it will be more. 
   
   Hence, my disclosure. No one is quite sure why the price of bitcoins has spiked so quickly, but one of the leading theories is that it’s been hit by what Quartz’s Zach Seward calls a “demand crisis.” The world’s supply of bitcoins is essentially fixed, but because people in the media keep talking about it, demand keeps rising. This leads to higher prices—and as prices go up, people who currently hold bitcoins develop greater and greater expectations for the currency. This causes bitcoin holders to hoard their stash, which further reduces supply, which in turn boosts the price and sparks yet more media attention—and the cycle continues until the bubble pops. 
   
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   Thus, by writing about bitcoin, I’m serving, in some small way, to raise its price. And as of last week, that benefits me directly. Thankfully, my wire transfer to LocalTill went through; after taking its $21.51 processing fee, the firm transferred my $1,000 to Bitfloor, one of the many online bitcoin exchanges where people trade bitcoins for cash. I immediately put in a purchase order, and within seconds the deal was done. I was the proud owner of 7.23883 bitcoins, which I’d purchased for about $138 each. If I sold my coins now, my original $1,000 investment would be worth $1,700—not a bad return in less than a week’s time. 
   
   But I’m not selling just yet. I agree with Blodget and Salmon that the bitcoin market is a bubble; at some point, as in all bubbles, prices will stop rising and they’ll likely plummet, and a lot of people will lose a lot of real and imagined money. But that’s pretty much all anyone can say about the market with any certainty. When the bubble will burst, at what price and for what reason, is completely unpredictable. And until then, while prices are going up, you could make a lot of real money from this digital funny money. 
   
   My own guess is that the bubble’s popping isn’t imminent, and I think that when prices do fall, they’ll land somewhere higher than the $138 I paid for my bitcoins. I’m certain that I’ll be able to double my investment, and I might even hold out to triple it. (After that I’ll get shakier about keeping bitcoins.) Why do I think prices will get that high? Because at the moment, it’s a logistical nightmare to turn dollars into coins. You’ve got to take several leaps of faith, trusting sites that look like they were put together by teenagers. I initially tried to buy coins using MtGox, the largest trader, but the cash-processing service it uses refused to accept deposits greater than $500. What’s more, last week, shortly after bitcoins hit $142, MtGox was hit by a denial-of-service attack that took it offline for several hours. The site I used, Bitfloor, is hardly any safer. Last fall it was hit by an epic hack that resulted in the theft of 24,000 coins, at the time worth $250,000—and worth, amazingly, $5.6 million today.* (Bitfloor now claims to store most of its customers’ coins in machines that aren’t connected to the Internet, and it uses two-factor authentication to protect its users’ accounts.) 
   
   At the moment, the shadiness of the bitcoin market dissuades mainstream investors. And—as we saw in the housing and dot-com bubbles—it’s when the masses get involved that bubbles really take off. Over the next few months, I expect that we’ll see better, more secure services for transferring dollars into bitcoin exchange systems. You’ll be able to send money to sites like MtGox instantly from your bank account. At that point—when ordinary people can order up bitcoins as easily as they bought shares of Pets.com back in 1999—the real money will pour into the bitcoin economy, and that’s when prices will begin to get really crazy. 
   
   That’s just a theory. It could be a stupid one; bitcoin could collapse tomorrow. And remember, I’ve got a conflict of interest here—if this piece gets you interested in bitcoin, I get richer. Still, though, one week into my bitcoin trade, I’m very, very pleased with myself. ||||| A financial network is a technological platform that people build businesses on top of. And the traditional banking and credit card networks are closed platforms. If you want to build an e-commerce site, a payment network like Paypal, or any other service that deals in dollars, you need to convince incumbent financial institutions to do business with you. Getting such a partnership is difficult and involves a lot of red tape. 
   
   There's a good reason for the high barrier to entry: electronic transactions in the conventional banking system are generally reversible. If someone makes a fraudulent charge to your credit card, you can dispute the transaction and in most cases the bank or the merchant, not the customer, will cover the cost. That's convenient for consumers, but it requires the financial system to be a fairly close-knit web of trust. Allowing a new member into the club creates risks for everyone else. So the incumbents are understandably reluctant to deal with anyone who isn't well-known and well-capitalized. 
   
   Bitcoin is different. Because transactions are authenticated cryptographically and cannot be reversed, there's no need to restrict access to the network. There's no risk to accepting payments from complete strangers. That means people don't need anyone's permission or trust to go into business as a Bitcoin-based merchant or financial intermediary. Accepting Bitcoins also allows merchants to avoid much of the administrative overhead, like dealing with chargebacks, that come with a conventional merchant account. 
   
   Of course, what looks like a plus for merchants can look more like a minus for consumers. Consumers generally like the conventional banking system's strong consumer protections. We like the fact that we're not on the hook for fraudulent banking transactions, and that the FDIC will make us whole if the bank holding our money goes bottom-up. 
   
   And Bitcoin looks inferior to the conventional banking system in other ways too. Visa and Mastercard are accepted at millions of locations around the world. Only a handful of merchants accept Bitcoins. Conventional banks have elaborate websites with features like direct deposite of paychecks and automatic bill-paying. Dealing with Bitcoin is too intimidating for all but a tiny minority of tech-savvy enthusiasts. 
   
   If you've read Clay Christensen's The Innovator's Dilemma, the last three paragraphs should ring a bell. The book's argument helps to explain why a seemingly inferior payment network like Bitcoin has generated so much excitement. 
   
   The term Christensen coined, "disruptive innovation," has become so overused as to become a cliche. But he gave it a fairly precise meaning with a lot of explanatory power. A disruptive technology is one that's simpler and cheaper than what's already on the market. Often, disruptive technologies are also inferior to what's already on the market. They tend to be dismissed as impractical toys by industry incumbents. 
   
   The PC is a classic example of a disruptive innovation. The first PCs were much less capable than mini-computers and mainframes that were already on the market at the time. They had less powerful hardware and software and little if any customer support. And if you'd asked a hobbyist circa 1978 what PCs were good for, he probably wouldn't have had a good answer. 
   
   But the low cost and simplicity of PCs meant that a lot more people could play around with them. One of those tinkerers, Dan Bricklin, invented the spreadsheet, the PC's first "killer app." And over time, people gradually figured out how to use these cheap, simple computers to perform functions that had previously required a computer that cost ten times as much. Most "servers" today are just souped-up PCs, and they're orders of magnitude cheaper than computers that existed before 1975. 
   
   The Bitcoin economy today looks a lot like the PC market circa 1978. Most people today look at Bitcoin and see an impractical curiosity. They're happy with the banking services they've already got and can't imagine why anyone would want to use an alternative currency that's much less widely accepted and offers many fewer consumer protections. 
   
   But a minority of nerds are playing around with it. Interesting applications keep popping up. There are Bitcoin-based banks, casinos, drug emporia, derivatives markets, retailers, and much more. Many of the new applications seem weird or marginal, and most of them probably won't amount to anything. But one of them might prove to be Bitcoin's Visicalc. 
   
   When people dismiss Bitcoins because they can't think of how they'd use it, they're missing the fact that Bitcoin is a platform, not a product in its own right. When ordinary users started buying computers, it wasn't because they thought it would be cool to own a computer. They did it because they wanted to do spreadsheets or word processing or email. Similarly, ordinary users aren't going to start using Bitcoins just because it's a cool technology. If normal users start using Bitcoin, it will be because they're interested in gambling, or cheap international money transfers, or some other applications that hasn't been invented yet. And Bitcoin's intermediary-free architecture means that many more people can try their hand at building the platform's killer app. 
   
   Disclosure: I own some bitcoins. ||||| The price of the electronic currency Bitcoin continues to soar. 
   
   Six weeks ago, Bitcoin was trading at $35. Since then, the price has continued to surge to new highs. Just this morning, Bitcoin blasted through $250. 
   
   As is always the case with such price moves, observers have been dismissing Bitcoin as a "bubble" since long before prices even hit $35. 
   
   And the observers may well be right. 
   
   Bitcoin may be a bubble. 
   
   Someday, Bitcoin prices may come crashing down, causing the suckers who own them then to lose their shirts. 
   
   But, in the meantime, those who are speculating in Bitcoin are just laughing at all the people who are dismissing Bitcoin as a bubble. These speculators have made 7X their money in six weeks, which is a return that more than justifies the risk they took of potentially losing everything. (As long as the chance of each outcome is roughly the same, downside of 100% and upside of 600% is a great bet.) 
   
   Like the assets at the center of most powerful asset bubbles, Bitcoin has sound theoretical underpinnings. The world can benefit from a convenient global electronic currency that is not subject to the whims and political incentives of governments trying to get themselves reelected. 
   
   Importantly, Bitcoin also has a small and (at least theoretically) finite supply. So the more demand for Bitcoins increases, the more the price of Bitcoins should rise. 
   
   Of course, as in any bubble, the more Bitcoin prices rise, the more demand there will be for Bitcoins. Bitcoin buyers may tell themselves stories about how they are buying a "store of value" in an inflationary world, how Bitcoin is a "good investment," and so forth, but these stories will seem much less compelling if Bitcoin prices suddenly drop, say, 75%. 
   
   If Bitcoin prices crash, all the folks who now think Bitcoin is a "good investment" will suddenly start crying bloody murder that they were tricked into buying something with no inherent value. And they will want to jettison their Bitcoins at any price someone will pay for them. 
   
   (This is just the way bubble psychology works. Sorry about that.) 
   
   In the meantime, though, Bitcoin prices could rise another 2X. Or 10X. Or 100X. 
   
   Why? 
   
   Because there's really just no way to figure out what a "fair price" for Bitcoin is. There's is theoretically a finite supply of it. And there is theoretically nearly unlimited demand for it. So there's no theoretical reason why Bitcoins can't eventually trade for $500, or $2,500, or $25,000. Or even $250,000. 
   
   And that means that brass-balled speculators will likely continue to plow into Bitcoin, as long as think it will continue to appeal to new speculators who haven't yet entered the game. 
   
   But! 
   
   Because Bitcoins have no inherent value (only the value that they can be exchanged for, which is determined in large part by speculators), Bitcoin prices could crash permanently at any time. 
   
   So it's worth thinking about what might cause Bitcoin prices to come crashing down. 
   
   Here are some things: 
   
   A sating of demand. At some point, everyone who could ever learn about or use Bitcoin will know about it, and many of them will own it. Given the lack of awareness about Bitcoin among the general population, as well as the complexity and "friction" involved in owning Bitcoin, we are a long way from this point. 
   
   At some point, everyone who could ever learn about or use Bitcoin will know about it, and many of them will own it. Given the lack of awareness about Bitcoin among the general population, as well as the complexity and "friction" involved in owning Bitcoin, we are a long way from this point. A drop in the price of Bitcoin (for whatever reason). Another thing that could cause demand for Bitcoin to drop is a Bitcoin price crash. If Bitcoin prices crash, many of those who already own them will not want to own them anymore--and they'll jettison them. This will cause a further price crash, which will further reduce demand. Etc. 
   
   Another thing that could cause demand for Bitcoin to drop is a Bitcoin price crash. If Bitcoin prices crash, many of those who already own them will not want to own them anymore--and they'll jettison them. This will cause a further price crash, which will further reduce demand. Etc. A Bitcoin counterfeiting or hacking or theft scare. Bitcoin aficionados will smugly tell you that Bitcoin "can't be counterfeited." Please. Anything can be counterfeited. To counterfeit something, you don't have to create the actual thing. You just have to create something that fools other people into thinking you have the actual thing. If there's a computer system out there that can't be hacked or fooled by a very clever hacker, I haven't seen it yet. Meanwhile, even if the Bitcoins themselves can't be faked, the systems that account for them can certainly be hacked. This has already happened. And if someone figures out a way to steal or delete or otherwise destroy all your Bitcoins, you will be much less likely to invest in them. 
   
   Bitcoin aficionados will smugly tell you that Bitcoin "can't be counterfeited." Please. Anything can be counterfeited. To counterfeit something, you don't have to create the actual thing. You just have to create something that fools other people into thinking you have the actual thing. If there's a computer system out there that can't be hacked or fooled by a very clever hacker, I haven't seen it yet. Meanwhile, even if the Bitcoins themselves can't be faked, the systems that account for them can certainly be hacked. This has already happened. And if someone figures out a way to steal or delete or otherwise destroy all your Bitcoins, you will be much less likely to invest in them. A government crackdown on Bitcoins. If Bitcoin gains general acceptance, governments may begin to frown on it. After all, general acceptance of Bitcoin would usurp the governments' sole authority to create legal money. Governments don't like having their authority usurped. So they may begin to enact laws that prohibit the use of Bitcoin. 
   
   If Bitcoin gains general acceptance, governments may begin to frown on it. After all, general acceptance of Bitcoin would usurp the governments' sole authority to create legal money. Governments don't like having their authority usurped. So they may begin to enact laws that prohibit the use of Bitcoin. An increase in the supply of Bitcoins. Bitcoin aficionados will also proudly assert that only a certain number of Bitcoins will ever exist (21 million, if memory serves) and that no more can be created. Again, keep dreaming. The supply of Bitcoins as currently defined may, in fact, be limited. But there's nothing stopping the folks who created Bitcoin (or anyone else) from creating a new equivalent or better Bitcoin. Aside from the fact that Bitcoin appears to be well designed, there is nothing special about it. 
   
   Bitcoin aficionados will also proudly assert that only a certain number of Bitcoins will ever exist (21 million, if memory serves) and that no more can be created. Again, keep dreaming. The supply of Bitcoins as currently defined may, in fact, be limited. But there's nothing stopping the folks who created Bitcoin (or anyone else) from creating a new equivalent or better Bitcoin. Aside from the fact that Bitcoin appears to be well designed, there is nothing special about it. A better Bitcoin (or even just another Bitcoin). This is a very real risk, one that Bitcoin enthusiasts don't spend enough time worrying about. Again, there is nothing special about Bitcoin. Although awareness of it is growing, it's still complicated and hard to use. And monetary philosophers are already pointing out that the "finite supply" of Bitcoins may, in fact, be too small, limiting their usefulness. So if Bitcoin can gain traction, then so can any other electronic currency. And if another electronic currency begins to displace Bitcoin, the "finite supply" argument will go out the window. There might soon be a nearly unlimited amount of a better Bitcoin. 
   
   All of these factors--and many others--could cause Bitcoin prices to crash. 
   
   Bitcoin speculators would do well to remember that. 
   
   SEE ALSO: I'm Raising My Bitcoin Price Target To $400 
   
   Get the latest Bitcoin price here.
target: – The price of Bitcoins is skyrocketing at a head-turning rate—they're currently worth more than $200 each, up from $90 when we wrote this piece on the phenomenon two weeks ago—which has everyone wondering: Is this a bubble? And should you buy anyway in the likely event that it is? Here's what people are saying: Farhad Manjoo at Slate gives a first-hand account of the confusing and frankly downright shady process for buying the coins. "You've got to take several leaps of faith, trusting sites that look like they were put together by teenagers," he writes. But that's why he thinks this bubble still has legs. Bubbles, he theorizes, take off when mainstream buyers get involved. Once better Bitcoin sites appear, the masses will arrive, and "prices will begin to get really crazy." Speculators "are just laughing at all the people who are dismissing Bitcoin as a bubble," writes Henry Blodget at Business Insider. Because the most you can lose on Bitcoins is 100% of your money—and you stand to make much more than 100% back. Like, say, 600% (which investors have made in the last six weeks). That said, lots of things could obliterate the market, like hacking, or a government crackdown. Timothy Lee at Forbes thinks Bitcoins are a bonafide disruptive technology. "The Bitcoin economy today looks a lot like the PC market circa 1978," he observes. "Most people today look at Bitcoin and see an impractical curiosity." But Bitcoin isn't a product, it's a platform, and one with lots of room to grow. But Kurt Eichenwald at Vanity Fair is far, far less convinced, calling the system "very cool. But also very foolish." Bitcoins aren't a currency anymore—currencies are based on "a rational expectation of relatively stable valuation," and Bitcoin prices are anything but stable or rational. "In essence, the market is a fantasy," based on speculators and investors. And when they stop buying, who will replace them? "My bet? No one." It's worth noting that the price took a really nasty hit today, falling 24% from its intra-day high of $266.