Two 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.
Bitcoin was now at $218. How would I break it to the kids that private school was out? An hour later, that was the least of my worries: Bitcoin was under $200, and falling. Over the next few hours I watched my wealth disappear—$180, $175, $160. What was causing the crash? No one quite knew. Everywhere I looked for information—bitcoin discussion forums, IRC chat rooms, and trading sites—I found confusion. Everyone was wondering if we’d hit the peak; we’d all been hoping to sell to greater fools, but suddenly it seemed possible that maybe we, the folks who’d bought bitcoin at more than $100, were the greatest fools of all. (That’s certainly what Slate’s gleeful commenters argued.)
I didn’t think that was the case. I still don’t. Instead there were more basic problems hobbling the market. For one thing, nothing seemed to work: Sites like MtGox, the largest trading site, and Bitcoin Charts, the most prominent stats site, were offline or slow to respond for most of that terrible April day. Bitfloor, the site I’d used to buy my coins, was executing trades very slowly—and sometimes not at all. One problem was that all these sites were being overwhelmed by interest in bitcoin. On its blog, MtGox reported that 75,000 new accounts had been opened in just the first few days of April, and that, on April 10, it had seen three times as many trades as normal. The traffic caused MtGox’s trading system to “lag,” which created fear in the market, as the site semicoherently explained: “As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!”
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. And for the next week, bitcoin’s value dropped so low that, if I’d held on, I would indeed have been in bad shape. In the hours after the Boston marathon bombing, bitcoin hit a low of $50. Since then, it’s slowly clawed its way back. This week it has hit a high of $166, though as I write this, it’s hovering at around $134.
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.”
In other words, if you were hoping for me to lose all my money, you still might get your wish.