The value of the bitcoin has skyrocketed amid a recent flood of capital into the virtual currency, but many are wondering whether its appreciation will hold strong or if it’s a speculation bubble that’s ready to burst.

Bitcoins exist only in a digital form and have become an increasingly popular form of direct online payment between two parties secured through encrypted networks. It has also gained wider recognition as an asset for trade and speculation.

Earlier this week, the value of a single bitcoin rose above $200 for the first time, a tenfold increase from its value of $20 at the beginning of the year. It peaked at a high of $266.

On Wednesday, however, the virtually currency’s value took a major dip, dropping to a low of $105 before settling at between $150 and $175.

Some view the price swing as a sign that bitcoin’s value has peaked and is beginning to decline, while others see it as a momentary blip in an otherwise upward trend.

Jered Kenna, CEO of the Tradehill Bitcoin exchange in San Francisco, told the International Business Times that bitcoin’s recent appreciation was being driven by an influx of capital from professional investors and currency traders.

“Before, you only had people that were only willing to spend $500 or so, but now you have people that are putting down [as much as] $1 million,” he said.

This indicates that more people are investing in bitcoin as an asset, driving its value up.

Unlike most government-backed currencies such as the U.S. dollar, there is a finite supply of bitcoins that exist in a market without any centralized regulating authority, making it subject to wide price fluctuations — much like a publicly traded stock.

Bitcoins are bought and traded on various online exchanges with transactions that are carried out directly between two parties through peer-to-peer networks.

In order to purchase bitcoins, a buyer must link their bank account to an exchange service to open up a virtual wallet where bitcoins can be stored online. Alternatively, bitcoins can be stored offline on portable harddrives to provide fruther security against hacking.

First introduced in 2009, there are about 11 million bitcoins now in online circulation. The global supply is set to increase gradually and cap at a firm 21 million by 2140.

Bitcoins are generated through a virtual “mining” process in which complex algorithms must be decoded within the peer-to-peer networks of the bitcoin market. These algorithms require vast amounts of computing power and time to solve and typically require groups of computers working together.

At the moment, it can take as long as three years to mine a mere 25 bitcoins, which at today’s rates would be worth less than $4,000. In other words, an individual would most likely spend more money to mine the bitcoins than they are worth. This approach is meant to space out circulation over time and prevent any one person from suddenly accumulating a trove of bitcoins before they’ve entered the market.

Scarcity is a major factor in the bitcoin’s value. People who have them tend to hold onto them with the expectation that they could appreciate and then be sold at a profit.

Of course, if there are no people willing to pay higher prices for bitcoins, then a bubble is revealed and begins to burst as more people try to sell off their bitcoins at falling prices.

“For sure, there will be a bubble, but it’s impossible to say if we’re in one right now,” Kenna said. “Some people are going to make a lot of money and some people are going to lose a lot of money.”

Kenna said that the bursting of a bitcoin bubble would be necessary to move it past its use as an asset and on to being an alternate means of paying for goods and services, as it was intended.

From there, Kenna envisions that Bitcoin would begin to have greater price stability and could potentially support its own form of a stock exchange.

Via International Business Times

This week the bitcoin exchange Tradehill launches dark liquidity, or dark pools, for client institutions and individuals that do not want to reveal their trading size and identity. In trading on dark pools, market participants have the ability to execute large block trades without adversely impacting the price in either direction.

Based in San Francisco, Tradehill Inc. has relaunched successfully as a business-to-business bitcoin exchange for institutional investors and individuals qualifying as accredited investors. The original Tradehill founded by CEO Jered Kenna in 2011 had operations in the U.S. and Chile and maintained a consistent second position in daily trading volume after Mt. Gox.

Offering both a transparent open order book and a dark order book, the Tradehill service Prime will be critical for both large investors on the buy side, such as funds and institutions, and commercial participants on the sell side, such as merchant processors and bitcoin mining operators.

As “liquidity” and “market impact” can be synonymous in many cases, the market impact, especially on price, is a key consideration for those larger institutions that are regularly shifting assets between financial markets. If a large trade is executed incorrectly, the market impact can be several percentage points in addition to the typical transaction costs of commission and/or spread.

“Whether you’re trying to sell a large amount of bitcoin above market, or trying to buy without losing your shirt to slippage, dark orders on the Prime platform provide an important tool for larger traders,” said Kenna.

In one week, over 100 new accredited investors signed up for Tradehill Prime. The company requires a $10,000 minimum initial deposit (in bitcoin equivalent or U.S. dollars) and dark orders will be priced in BTC, trading inmicro-lots of $1,000. New clients also receive a $75 account credit to test the integrated trading platform on the open order book.

Tradehill is a U.S-based exchange that falls within the definition of FinCEN’s regulations for virtual currency exchange operators. “Bitcoin’s primary use is value transmission and financial technology in the U.S. is a very regulated space,” according to Tradehill COO Ryan Singer. The company has anticipated this regulation and the recent guidance from FinCEN “really helps the startups in the space build a compliance game plan,” he added.

In offering dark pools of bitcoin liquidity within an exchange infrastructure, institutional clients gain the benefits of anonymity and non-display of orders but without losing any of the efficiencies associated with trading on an exchanges’ public order books. With bitcoin, it is difficult to gauge how much large-block trading occurs off a publicly visible exchange. By comparison, research firm Tabb Group estimates that off-exchange and dark pool trading in the U.S. equity markets accounted for 32% of trades in 2012.

Emma Quinn, AllianceBernstein’s Head of Asia Pacific Trading for equities,says ” We use dark pools to access liquidity for orders we would not normally place in the central limit order book. I think dark pools aid price discovery. There has to be post-trade transparency but once that happens you’ve actually got more transparency on a market than you normally would.”

MIT Professor of Finance Haoxiang Zhu agrees with that assessment writingthat “dark pools can improve price discovery in open exchanges.” He also said, “Adding a dark pool alongside an exchange tends to concentrate price-relevant information into the exchange and improve price discovery. Improved price discovery coincides with reduced exchange liquidity.”

This is precisely where the Bitcoin market needs to be heading and it is a necessary prerequisite for Bitcoin’s evolving role in global trade. Wholesale trading exchanges like Tradehill Prime represent an evolution from the floating-rate and fixed-rate retail exchanges. They can also be considered a precursor to bitcoin-based forex markets as well as more sophisticated derivatives markets for bitcoin futures and options.

Via Forbes