Bitcoin Bubble Burst? An Insider's Explanation For The Currency's Fluctuating Value

Bitcoin, a digital, peer-to-peer currency that operates independent of central banks and international borders, has been all over the financial and technology headlines this month -- mostly having to do with its drastically gyrating price. Bitcoin surpassed the $200 mark for the first time on Tuesday, eventually reaching $240 just five days after it was worth $150, and only two months after it was worth $20.

The Bitcoin hit $266 Wednesday, but suddenly took a dive, crashing down to as low as $156. At the time of writing, the value has climbed back up to $190.

Why the massive fluctuation? Erik Vorhees, a Bitcoin enthusiast that has worked with a Bitcoin-based startup since 2011, took to Reddit – where he is a well-known contributor – to offer an explanation.

Not only are online merchants now accepting Bitcoin, but venture capital is moving into it. The economic crises in Cyprus and Spain have fed interest in an independent currency, and libertarians in America see it as an option for “hard money.” Three weeks ago, a ruling clarified that Bitcoin is legal, assuaging fears that the U.S. government will shut it down. There are also people buying bitcoins with the hope that the price will continue to rise and they can get rich quick.

Vorhees says all of these factors together – not to mention the press attention they have received – are contributing to the meteoric rise of Bitcoin. However, Vorhees warns that even a Bitcoin insider like himself cannot predict how the value will change.

"Guessing short-term price movements is a fool’s game,” Vorhees wrote on Reddit. “My advce … don’t obsess over the fluctuating price on any given day. The market will figure out the value of these conis, and there ain’t a damn thing anyone can do to prevent this from playing out.”

In a Skype interview with Buzzfeed, Vorhees followed up by saying that he assumes the price will drop precipitously at some point, but that he sees Bitcoin as “the most important project on the planet,” due to its independence from any government or bank.

“There is no other project that I’m aware of which has such potential to help so many human lives and improve the prospects for humanity,” he said.

While Vorhees wouldn’t disclose how much he has profited from Bitcoin, others have certainly made riches. A Reddit user under the screen name “Bitcoinbillionaire” gave out the currency via Reddit’s “Bitcointip” system. The first tip alone was worth an estimated $4,680.

After 11 tips, Bitcoinbillionaire gave out about $13,627.70, according to Business Insider’s calculations.

The tipping spree ended after one user started begging for coin. Bitcoinbillionaire signed off with a Ron Paul quote, showing the popularity Bitcoin has among libertarians.

Is Bitcoin the future of currency, or just another fad? Watching its sudden leaps and dives today, it seems Vorhees is right – the future of Bitcoin may be impossible to predict.