Why didn’t Bitcoin users freak out in May?

May 31, 2013

May should have been a harrowing month to be a Bitcoin investor. To recap:

  • On May 2, one of the best-funded Bitcoin start-ups, Coinlab, sued the world's largest Bitcoin exchange, Mt. Gox, for breach of contract. The contract gave Coinlab the right to handle Mt. Gox's exchange operations in North America, but Coinlab said Mt. Gox hadn't transferred control as promised.
  • The Bitcoin exchange Bitfloor closed in mid-April. In early May, customers were still complaining that they hadn't gotten their money back.
  • On May 6, the head of the Commodity Futures Trading Commission told Reuters that "we could regulate [Bitcoin trading] if we wanted."
  • On May 14, the federal government seized funds controlled by Mt. Gox because the Japanese company had allegedly failed to comply with U.S. money-laundering laws.
  • On May 28, the federal government announced it had shut down the Costa Rican payment company Liberty Reserve. While LR did not deal in Bitcoins, the move was widely discussed in the Bitcoin community. LR had been a popular mechanism for sending dollars to Mt. Gox in order to trade them for Bitcoins. Moreover, the logic of the government's indictment suggested that Bitcoin itself might be vulnerable to similar legal action.

So, yeah, not a great month to be a Bitcoin investor. Yet relative to the wild swings seen in April and the first few days of May, the price of Bitcoins has been surprisingly steady over the last four weeks, rising from about $120 on May 6 to about $130 on Friday:

Chart courtesy of Bitcoincharts.com.
Chart courtesy of Bitcoincharts.com.

Bitcoin is still more volatile than conventional assets like gold or the dollar. The May 14 Bitcoin seizure, for example, caused the currency to briefly lose about 10 percent of its value (the price bounced back a few hours later). But that's nothing compared to the 80 percent fall the currency saw in April, or the torrid appreciation that occurred earlier in the year.

So what's going on? One factor is that those who were easily spooked by bad news would have already sold their Bitcoin holdings during April's roller coaster ride. That shakeout means that today most Bitcoins are held by people who believe the currency's value will rise over the long term.

Also, some of May's news stories were not as bad for the long-term future of Bitcoin as they appeared at first glance. Right now, Mt. Gox plays a central role in the Bitcoin economy. But the long-term success of Bitcoin doesn't depend on Mt. Gox. If the firm is toppled by lawsuits, federal raids, or bureaucratic incompetence, other exchanges will rise up to take its place.

And perhaps Bitcoin users got some good news in May, too. Federal authorities have gone out of their way to emphasize that their beef is with specific firms that fail to comply with the law, not with the Bitcoin economy as a whole.

"Today’s action does not mean that we are trying to eliminate virtual currencies and their providers," said Treasury Undersecretary David Cohen during his Tuesday comments on the Liberty Reserve raid. That may be a sign that the feds will allow the broader Bitcoin economy to prosper even as they deal harshly with specific Bitcoin firms that don't color inside the lines.

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Brad Plumer · May 31, 2013