Saturday, April 27, 2013

I Survived the Bitcoin Bubble

By Farhad Manjoo

wo weeks ago, I was racked with indecision, my life at a crossroads: Gulfstream or Learjet? Bugatti Veyron or that new Tesla Model S? Should I summer on Nantucket or the Vineyard? Against all wisdom, I had invested $1,000 in bitcoin, the crazy cryptocurrency whose value had been skyrocketing since the start of the year. After jumping through many hoops to get my cash to a shady-looking bitcoin exchange site, I’d purchased 7 bitcoins for $138 each. Within a few days, the value of bitcoins had shot up past $200, and there was no end in sight.

Well, OK, there was an end in sight. I knew that the bitcoin craze would surely hit a wall someday, leaving a lot of investing noobs in tears. But I was counting on the greater fool theory—by the time the value of bitcoin began to plummet, I’d have already sold my shares to some other idiot looking for a quick path to riches. “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 wrote. “I’m certain that I’ll be able to double my investment, and I might even hold out to triple it.”

Why was I so sure that bitcoins would march steadily higher? Because it was still too logistically difficult to turn dollars into bitcoins, which meant that mainstream investors hadn’t yet joined the party. Once that happened, I reasoned, the value of bitcoins would really start to spike—and that’s when I’d jump ship. Fortunately, I hedged my prediction—though to be honest I thought this sentence was unnecessary: “That’s just a theory. It could be a stupid one; bitcoin could collapse tomorrow.”

My piece was posted on Tuesday, April 9. That day, bitcoins shot up to $239 each. April 10 began promisingly, with shares hitting $266 early in the morning. I made a mental note to call Bill Gates to let him know that, while I appreciated his dedication, I wasn’t yet sure whether I’d be taking his pledge to give away most of my wealth to philanthropy. (“Now, Bill, I understand that bed nets are really helpful for preventing malaria,” I’d explain, “but has anyone asked those people if they wouldn’t rather see me buy an island?”)

Then, just before noon, while writing up a help-wanted ad for a butler, I spotted a strange Business Insider headline on Twitter: “Bitcoin Is Crashing.” At first, I thought it was a mistake, that Business Insider had simply misspelled “reaching new heights.” But when I checked the bitcoin charts, my heart began to sink.[...]

Sometime that afternoon, the bottom began to fall out of the market. Within a 10-minute period, as I watched trades being executed on Bitfloor, prices crashed from around $170 all the way down to $110. They rebounded later, and then began plummeting again. My heart was pounding. My future was crumbling. I really, really didn’t want to sell—I suspected the volatility was just a short-term thing, and that prices would soon begin to climb. On the other hand, I didn’t want to lose my shirt. I’d invested $1,000 in bitcoin, and given the apparent fragility of every site handling my money, there seemed to be a real possibility that I could lose it all. I put in a sell order during one of the bitcoin upswings. A few minutes later, to my relief, my order went through—I’d sold all my coins for an average of $163 each. I’d put $1027.50 into bitcoin (including the service fee I had to pay to transfer money to a trading site) and now I had $1,179 in my account. In a week’s time, I’d made $152, a 15 percent return.
So, not a terrible outcome—my bitcoin misadventure could’ve had a much worse outcome. Though they insisted it was nothing personal, a lot of commenters on my original piece said they were hoping I’d lose all my money.

[...]As every investor knows, you can make yourself crazy looking at the day-to-day fluctuations of any market. If I had the stomach for the volatility—or the willpower not to monitor the fluctuations every few minutes—I would have bought bitcoins at $50. I still put stock in my larger theory: Once the sites that manage bitcoin become easier to use, more people will buy the currency and bitcoin will take off. There are some genuine uses for it as a currency—there are plenty of people who want to transfer money anonymously, over long distances, for free. Bitcoin is the best way to do that right now. And because there are a limited number of bitcoins, as demand increases their value relative to the dollar will increase as well—settling in at somewhere over $200, I’d guess.

But I’m out of the game. It’s too risky, too gut-wrenching, too sketchy. Case in point: When I went to Bitfloor to withdraw my winnings the other day, I was presented with this lovely message: “I am sorry to announce that due to circumstances outside of our control BitFloor must cease all trading operations indefinitely.” It added that “we will be working with all clients to ensure that everyone receives their funds. Please be patient as we process your request.” A couple of days later, the site posted a follow-up message explaining that it “cannot provide an estimate as to when all transactions will be processed.” Then, a day later, Bitfloor said that its bank had issued a check for all funds, and that the site is now waiting for the check to clear in order to process people’s withdrawal requests. “The ETA for receiving the check is around 10 days. Until then, we will be unable to make any further payouts. We are exploring various options for returning your funds.”

Read the full story here.


  1. Yes. As the law in the US is some nebulous concept that the government bends to its will, one of the things I find truly striking the opinions coming out of the US that consider that bitcoin is in a bubble because it has shot up in relation to the dollar (as though there is no other currency or commodity in the world they could use to convert with bitcoin!?!).

    How daft can you be? It's like in Argentina where the government tries to control the rate in which it converts against external currency or even Zimbabwe where inflation effectively destroyed people's belief in the use of the Zimbabwe dollar. What firms and individuals should be doing is converting their dollars to valuable commodities (i.e. gold, silver, platinum, etc) and then convert their commodities into bitcoin. What matters is not bitcoin's convertibility against gold or silver. (It won't be very difficult to determine what is the implied rate BTC/USD). It is that which will drive a business' decision to accept payment in bitcoin. If you want to see what that looks like, see this

  2. The guy that wrote that article sounds like an idiot. He gets in at $138 and expects a big win? By the time he got it it was already up 300% in about a month or three weeks. Sounds like he's a noob.

    Again, idiots can lose money investing in anything. Stop your hatred of bitcoins. You seem to be arguing against a very small group of idiots that think BTC is as good as gold. That is not the majority of your readers or the majority of BTC users (at least the ones that heard of it before 2 months ago) and the article you posted was less than worthy to be on this blog.

  3. i too carried out the same experiment and along the same time line as you

    but i hardly find $1000 a "gut-wrenching" experience

    actually, where before i was rather ambivalent i now find that i both way more educated about it and that i feel more positively about it

    some part of me thinks that a system of money that more closely approximates the cash based history of our species yet leverages the best of modern technology has got to be better than the incredibly dishonest and complex systems we mostly have to use

    the idea that someone who happily carried out criminal acts in his youth might one day soon have control over most of the worlds monetary transactions (for a hefty profit) and will happily divulge your transaction history to people like those who staged the illegal Iraq war fills me with dread

    i do not hold up much hope for bitcoin but i'd be happy to see it grow to at least be a commonly accepted alternative to whatever else is out there