This may sound dumb, but I'm fairly new to Bitcoins, and I'm just wondering why the value fluctuates so much, I remember just a while ago it was at $6/BTC. I'm not complaining about it, I'm just curious.
All commodities and foreign currencies have fluctuations in price. Here's soybean oil. To a pension fund, for instance, that volatility might be no better than Bitcoin's is!
Bitcoin's fluctuations are much more dramatic than other commodities for a number of reasons.
For once, the traditional financial ecosystem has kept their distance. While individual traders speculate on bitcoins, there are likely no pension funds invested in Bitcoins.
So of course, with mostly short term speculation you'll see wide swings in the exchange rate.
Then you have factors like counterparty risk. Leaving bitcoins on an exchange is a risky proposition, as those who lost bitcoins at BitFloor this week learned.
So even when the exchange rate spikes, the sellers willing to sell at that price aren't in a position to do so. If they weren't aware of the price increase, they might have missed the spike. Or even someone watching might send more coins to the exchange on to be too late and the price drops down. The same problem occurs for the fiat side -- moving funds from a bank or other method are not immediate. That's one reason why weekend dips are so brutal when they happen because there aren't enough fiat dollars around to buy up the low priced coins until the bank wires resume during the week.
Also, there are few financial derivatives available ... such as a method to short bitcoin. This is starting to change -- there are now CALL and PUT options at MPEx. There are futures contracts at ICBit.se (again, ... counterparty risk exists, etc.).
Just like there are parties that would like to see precious metals have price instability to keep it from being used as a currency, there are likely parties that would like to see Bitcoin have price instability for the same reason. That's why there might be buying spurts that seem crazy -- definite money losers, and they do lose money, but again that probably wasn't the reason the trading occurred. (just because you are paranoid doesn't mean they aren't out trying to get you.
)
Then consider the situation where a thief gets ahold of tens of thousands of coins and liquidates them -- the market may not be in a buying mood -- and the price goes splat.
So exchange rate risk is inherent in commodities and bitcoin's unique situation amplifies these. Particularly because some see the potential and will buy at any price.
It may take years for this all to mature to levels closer to other commodities.
