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Did a bitcoin bubble just burst?

Bitcoin and the future of money
Bitcoin and the future of money 03:55

Bitcoin and other so-called cryptocurrencies have plunged in value in recent weeks, prompting some observers to wonder whether that's a sign of a market bubble bursting.

Prices for bitcoin, recently changed hands at $2282, a decline of about 12 percent over the past month. Rival ethereum has fared worse, plunging 47 percent during that same period to $191.92 even when this week's gains are included. The third-largest cryptocurrency, called ripple, has slumped nearly 25 percent over the past month, rebounding from earlier losses. Ripple, however, is priced at about 19 cents, so small price swings can have dramatic impacts.

Even with the recent drop, bitcoin prices have surged more than 130 percent this year. Still, given how unpredictable the market has proven to be, potential users may be leery about embracing the digital currency, said Wolf Richter, a financial blogger who edits the Wolf Street site. He expects bitcon, which was $10 in 2013, to continue falling.

"Given the volatility, bitcoin is not a usable currency," Richter wrote in an email. "And given transaction costs, it's a very expensive form of payment. And it takes a long time to process a transaction. So unless you're trying to hide your identity, it doesn't make economic sense to pay with bitcoin."

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The bitcoin market has already crashed three times between 2011 and 2014, plunging more than 50 percent on each occasion. Prices tumbled earlier this year after the U.S. Securities and Exchange Commission rejected plans by twin-brother entrepreneurs Tyler and Cameron Winklevoss to offer a bitcoin exchange-traded fund (ETF). By comparison, the S&P 500 index, the broad stock market barometer most closely followed by professional money managers, has gained "only" 9 percent this year.

Richter and Tone Vays, a derivatives trader and consultant who hosts a podcast on the digital currency, differ on the question of whether the market for bitcoin is in a bubble. According to Richter, it's bound to crash "someday," though he declined to provide a forecast. Vays' view is that the cryptocurrency market isn't in a bubble because prices have only tripled in price at the peak as opposed to prior bubbles when markets surged between 10 and 100 times.

One reason bitcoin prices have pulled back lately concerns debates over what code will be used to increase the number of transactions that can be done on the currency's network, according to Vays.

"The bitcoin ecosystem has been debating for a year on how best to scale bitcoin," Vays wrote in an email. "This should all be resolved by end of August, but it's hard to say if it will end with a good ending, or we end up with two coins both claiming to be the real bitcoin."

For bitcoin's rivals, however, the situation is different, especially with those who have crowd-funded new offerings through what's known as internal coin offerings (ICOs). Ethereum, which began this year priced at $8.17, has gained more than 2,600 percent. Ripple has skyrocketed more than 326,000 percent from less than half a penny to about 20 cents during that same time.

"A token like ethereum has gone up 10 times faster than bitcoin, and it's fueling an ICO bubble no different then the dot-com IPOs of the late 90s," Vays said. "It's possible that this bubble has popped with ethereum never reaching above $400 again, and many of the ICOs,  which on paper made hundreds of millions on their token sales, may find their tokens to worthless in the near future."

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