Why Has Bitcoin Plunged By 50% in 2014?

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Since the beginning of the year, the price of a single bitcoin has fallen by more than half, from about $750 to the current price of around $360. In fact, in the past two months alone, the price of a bitcoin has plunged by more than $200.

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Why has this happened? If anything, it would seem like the opposite path would be more likely. After all, more retailers than ever are accepting bitcoins, major players in the venture capital industry are throwing money into bitcoin-based businesses, and more of the public is becoming aware of the digital currency.

So, why has bitcoin plunged? And should people who own bitcoins be worried?

The current state of bitcoin
It used to be very tough to find a mainstream retailer who accepted bitcoin, but this is no longer the case. Among the household names that accept bitcoin directly or are planning to in the near future are Overstock.com, Dell, DISH Network, Newegg.com, eBay (and PayPal), and Virgin Galactic, just to name a few.

And through digital gift-card store Gyft, you can now use bitcoins to shop at major retailers such as Best Buy, CVS, Amazon.com, Target, and Whole Foods.

In January, Overstock became the first major retailer to accept the digital currency, and had processed $1.6 million in purchases before the end of May. And, at that time, Overstock's CEO said that while bitcoin is a tiny part of the business, it was growing by 25% per month.

More recently, Overstock opened up bitcoin acceptance to more than 100 countries worldwide, and the company is now reporting about $15,000 in bitcoin transactions per day (a rate of about $5.5 million per year). Naturally, once Overstock started the trend and proved there was actually some money to be made, other retailers decided that they wanted a piece of the action as well.

Tough to buy for many people
Because the acceptance of bitcoin by retailers has become so much more widespread, it is actually easier to spend bitcoin right now than it is to acquire it.

There are two basic ways to get bitcoin. You can "mine" for it, which involves investing in expensive and sophisticated computer equipment and is literally becoming more difficult and less profitable by the day. Or you can purchase bitcoins on an exchange like Coinbase with money from your checking or savings account. As of yet, there is no mainstream way to acquire bitcoin using a credit card or with cash.

And, in perhaps the biggest development of all, eBay's PayPal announced that it would start allowing transactions in bitcoins.

This could potentially be huge, not only for the acceptance of the currency for goods and services, but it could kick-start the mainstream adoption of the digital currency. Once PayPal's 152 million account holders can deal in bitcoins just as easily as they can in U.S. dollars, it could really give the bitcoin economy a boost. The full bitcoin integration likely won't happen for some time, but it's definitely a step in the right direction.

However, until this happens, the market definitely favors selling, rather than buying bitcoins.

Widespread retail acceptance is bad for the price of bitcoin
And here's the main point: When retailers accept bitcoin, it's generally because they want to attract a larger customer base and want to minimize their transaction costs. It is not because they like bitcoin as a currency, or have any interest in keeping bitcoin on their balance sheets.

On the contrary, when you buy a product in bitcoin, the retailer usually immediately sells the bitcoin, converting it to U.S. dollars. This creates tremendous selling pressure in the bitcoin market, and has probably played a very big role in the price drop.

Cause for concern, or just natural "growing pains"?
If anything, I believe that the price drop and selling pressure created by the surge of retailers who accept bitcoin will emphasize the need for a more practical, user-friendly way for the average person to buy bitcoins. Sure, some bitcoin ATMs and things of that nature have sprung up, but aren't widespread or well-understood by the public.

The recent decline is simply a necessary and healthy part of the growth of the bitcoin ecosystem. And once consumers are able to adopt it as quickly as retailers have been, the selling pressure on the currency will subside.

So, to answer my original question: This is not a cause for panic. However, it is reasonable to expect some volatility along the way as the bitcoin relationship between retailer and consumer evolves over the next few years.

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The article Why Has Bitcoin Plunged By 50% in 2014? originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Matthew Frankel owns shares of eBay and Whole Foods Market. The Motley Fool recommends Amazon.com, CVS Health, eBay, and Whole Foods Market. The Motley Fool owns shares of Amazon.com, eBay, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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