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Any idea why bitcoin prices have fallen so in September and October of 2011? It seems like back in August, one bitcoin cost about US$17, whereas in late October, it's just somewhat over US$2.

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Possible duplicate of bitcoin.stackexchange.com/questions/1613/… –  Thilo Oct 20 '11 at 1:12
    
@Thilo, I agree that this is a duplicate but since there is just one close-vote I won't close it just yet. People who want to keep it, please add a comment here explaining why you don't think that it should be closed. –  D.H. Oct 20 '11 at 18:57
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@D.H. I agree that these could be duplicates, but the other question seems to be more related to a manipulating bot while this is strictly about the price drop itself. –  nmat Oct 20 '11 at 20:12
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@nmat, Yes there is that slight difference. I suggest then that we keep both but that we edit the other one so that it's more clearly about just about the manipulating bot. Good? –  D.H. Oct 21 '11 at 7:04
    
Works for me @D.H.! –  Josh Oct 24 '11 at 19:50
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5 Answers

One thing a lot of people fail to notice is the decreasing volume at the exchanges. If we look at the USD volume - and not at the bitcoin volume, which is misleading because bitcoins are now worth much less - we can see a spike in June and a decrease afterwards:

Price Chart

The news reports in June attracted lots of people who were curious about bitcoin. A part of these people left and the market size is now coming back to April/May levels. As a consequence, there is much less money being traded. However, we still have 5 new coins being produced every minute and lots of miners who want their invested money back.
The current price is a natural consequence of high supply and low demand.

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People are not holding their bitcoins as long.

I've speculated elsewhere that this might have something to do with the hedging mechanism implemented by Silk Road.

We all want people to use bitcoins for transactions; unfortunately they only have value in proportion to the length of time for which people hold them. If everybody bought bitcoins (using fiat) the instant before they needed to use them to buy something with BTC and sold bitcoins (for fiat) the instant after they had sold something via BTC the demand for BTC at any given instant in time would be both (a) incredibly small and (b) very unstable, causing the price to crash and then fluctuate wildly (in percentage terms).

In one explanation, money has three roles: (1) store of value, (2) unit of account, and (3) mechanism for transmitting value. People talk a lot about promoting the "bitcoin economy" (#3) but unfortunately without enough people using it as a store of value (#1) the price will crash and then fluctuate wildly, causing it to no longer be viable as a mechanism for transmitting value (#3).

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Nice logic... +1'ed. I still think though that speculators that were in the game for short term profits were largely responsible for the movement over this period, so "Speculation" might be a more accurate answer to the question. Hopefully my answer will still be of value to some people anyway! –  Highly Irregular Oct 20 '11 at 8:45
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-1. Is there some reason you can't mention SilkRoad? Many users would not know what "certain taboo website" refers to. Silk Road is a reaility. While questions on SR are offtopic for this board it can be mentioned in an answer especially when it is a central part of your theory. –  DeathAndTaxes Oct 20 '11 at 14:06
    
+1 for the analysis. Please edit to include a reference to Silk Road (if that is what you mean) to avoid doubt. –  Gary Rowe Oct 21 '11 at 8:58
    
theUnhandledException, feel free to edit my answer. –  this_site_is_a_cesspool Oct 21 '11 at 20:29
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The answer to this other question summarises the factors that affect the price of bitcoins in a general sense. However, your question covers a specific period. According to Bitcoin Charts the price peaked at around US$30 around Jun 8th 2011, and was around the $17 mark in mid-July. It's certainly a substantial drop to now (Oct 20th) be under the $2.50 mark.

Speculators appear to be the primary driver for the peak at US$30. The purposes that bitcoins were created for are mainly for trade, but the growth in trade has been modest and couldn't explain the big spike in price prior to the peak. You could say that the underlying value of bitcoins as a currency (based on the number of people/retailers using it for trade) was exceeded and is resettling.

Though bitcoins are also intended to be useful as a store of value (which is why there will only ever be a limited number in circulation), most people probably don't have enough faith yet to put their life savings into Bitcoins, so I don't think that is affecting the price substantially.

The constant supply of 50 bitcoins per block to miners may help explain the steady decline since the peak, as many miners probably sell off their bitcoins regularly to pay for the investment in hardware. There have also been a couple of very large sell-offs of bitcoins on MtGox (9th Sep, 17th Oct in particular) which could potentially have been holdings of early adopters, or speculators that chose to reduce their investment.

As the price drops different factors come into play - less efficient mining hardware gets switched off, and perhaps increases the proportion of active miners who have faith in the future of bitcoins (and will hold on to them). If the price starts to trend upwards again, you might see speculation driving another high peak - this is normal for speculative markets and is likely to keep happening.

This question has some great comments on speculation.

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Unfortunately "using bitcoins for trade" does not lead people to hold bitcoins; they exchange them for fiat, send the BTC, then exchange them back for fiat. Net effect is that the number of BTC demanded at any instant in time is very, very small and very volatile. –  this_site_is_a_cesspool Oct 20 '11 at 4:29
    
You're right, but they do hold them for a short time. I wonder how long it will take until it become a major factor in the value? –  Highly Irregular Oct 20 '11 at 8:38
    
@eldentyrell the length of time a person keeps wealth in bitcoins is directly linked to the utility of the Bitcoin currency. Currently there are limited uses for Bitcoin and high volatility so people hold them for short periods of time. There are costs to doing that. Exchange fees can be 1% to 2% round trip and the fiat -> bitcoin -> fiat trip can be rather slow. There will need to be more utility in holding bitcoins longer such as more merchants accepting bitcoin for that to change. –  DeathAndTaxes Oct 20 '11 at 14:10
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Speculative Bubble.

Simple like this: this

I watch a lot of markets charts for years and the Bitcoin chart looks pretty normal to me. Oh, and the trend is continue going down right now.

And this blog have Bitcoin chart analysis that confirm what I am saying, just to give a second opinion. (I found this right now)

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There's no information here, especially not anything that's not already in one of the other answers. –  D.H. Oct 22 '11 at 5:55
    
I disagree. Lots of information here, and the answer is focused. One image worst million words. No problem. I respect others opinions. =) Anyway, I tryed to improve a little my answer. Thanks for the comment and votes. –  H_7 Oct 22 '11 at 12:57
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The BitCoin is made up currency and thus there is no trust in it. The value will bop up and down based on whims and popularity.

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Hello DarthDiggler and welcome to the StackExchange. Please try making your answers objective and related to the question asked. –  ThePiachu Oct 5 '12 at 10:09
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