There is one theory that no one here has mentioned yet: that Mt. Gox was responsible for Bitcoin's meteroic rise in price, and now that Mt. Gox has fallen, the price has been deflating.
There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200 spike.
It's interesting that the price has fallen since then, and continues to fall. Either everyone is simultaneously becoming wary of Bitcoin, or there are other forces at work.
The other possibility is that since coin is concentrated into the hands of a few, those few can tank the price if they feel like bailing out.
Also, it's probably a good thing that the price has been correcting itself. It's still dangerous to its users, so until the fundamental problems are fixed, it probably shouldn't be priced too highly. I've written about why it's dangerous to its users here: https://news.ycombinator.com/item?id=7521906
>There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200
This is one of those moments when I feel like I'm missing something obvious (or a key piece of info), but wouldn't the fact that Mt Gox had gone fractional mean that they had created a lot of artificial supply that should have put downward pressure on the price? Further, wouldn't that pressure be somewhat proportional to the upward pressure he created with the buy activity, given that he was trying to make those fractions whole again?
Edit: It just seems that there had to be some outside demand that subsequently dried up. Otherwise, we would expect to see at least a gradual, steady decline in price as he created more and more artificial supply. I suppose that could have then been folllwed by the dramatic rise if he was in too big a hurry in his recovery buying, but again, there seems to be some actual demand that went missing at some point.
>Further, wouldn't that pressure be somewhat proportional to the upward pressure he created with the buy activity, given that he was trying to make those fractions whole again?
Yeah, it would be, if all players in the market knew how many bitcoins (including the marginal bitcoins "created" by gox) were in circulation. /and/ if the value of all bitcoin was fixed over the time period.
I don't follow it closely like you but I'd look at the chart relative to the US IRS ruling. Prior to that BitCoin had a lot of potential as a currency and financial asset. That ruling really knee capped the currency potential and thus limited the upside.
I don't really think the IRS ruling had anything to do with it. Whether it's legally property or currency, people will be able to continue using bitcoin as they always have. The only thing that changes is what they report on their tax forms at the end of the year.
I really don't think speculators were thinking that far ahead -- herd mentality is a way more believable explanation, there are hundreds of examples going back to http://en.wikipedia.org/wiki/Tulip_mania
As a group, speculators still need to have some underlying theory for why the vehicle they're speculating on is valuable. Almost by definition, a bubble popping is when speculators collectively recognize that theory didn't pan out.
For BTC, probably the most likely theory is, "Bitcoin will become valuable as a currency." The world's biggest economies officially deciding that it is not a currency under their laws dealt a crippling blow to that theory.
IMO, what makes it a 'bubble' is that the speculators don't care about the underlying theory, they're just jumping on the bandwagon because it keeps going up. Which is why it crashes so suddenly as soon as forward momentum slows down.
As someone who holds Bitcoin this is the one thing that has concerned me the most. Mt. Gox has seemed incredible shady. What if they have been manipulating the market all along?
There's been a lot of speculation that they have been manipulating it, all the way since the rise from $10-something to $250+ last year. If you watched the public trading, it seemed like Mt. Gox was intentionally blocking 'sell' orders, refusing to sell bitcoins at market price and instead waiting until someone placed an order for slightly more money.
I forget what the other 'evidences' were but it seemed like they were trying very hard to drive the price up. And they would frequently shut down altogether if the price started to dive.
Most people who were paying attention considered Mt. Gox toxic and avoided them as much as possible since the $250 peak-then-crash of last year. It wasn't just the can't-really-prove-it suspicions, but also things like a trading engine lag of 4 hours.
Recently, a lot of the price fluctuation seems attributable to what Mt. Gox has been doing. When the price at Mt. Gox fell to $100, imagine how easy it would be for Mt. Gox admins to buy btc from their customers and then sell at bitstamp/coinbase for a giant return. Rinse and repeat. Only Mt. Gox should have been affected, but all of bitcoin tanked, suggesting that maybe Mt. Gox was actually doing a lot of selling.
None of this is proof. I have no proof more solid than what I stated. But I'm fairly convinced that Mt. Gox has intentionally and successfully tampered with the price of Bitcoin for the past year or more.
Mt. Gox was "fractional" (as in actual holdings versus expected holdings), but you are correct that it is not accurate to describe it as a "fractional reserve" banking operation.
There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200 spike.
It's interesting that the price has fallen since then, and continues to fall. Either everyone is simultaneously becoming wary of Bitcoin, or there are other forces at work.
The other possibility is that since coin is concentrated into the hands of a few, those few can tank the price if they feel like bailing out.
Also, it's probably a good thing that the price has been correcting itself. It's still dangerous to its users, so until the fundamental problems are fixed, it probably shouldn't be priced too highly. I've written about why it's dangerous to its users here: https://news.ycombinator.com/item?id=7521906