Here's my personal take on what the prices are dropping:
1.) Big corporations are adopting Bitcoin. Tigerdirect, Overstock, Paypal, and Microsoft now accepts Bitcoin. These companies are likely set up to automatically cash out in USD with prices set in USD to minimize risk. This means that when you purchase something with Bitcoin this creates sell pressure which helps drive the price of Bitcoin down.
3.) Speculation. People see the price going down, get scared and sell more. This is pretty much how bubbles pop, but it doesn't have to be because of a popping bubble.
3.) Government undervalue. Correct me if I am wrong, but it's my understanding that the Bitcoin sold in government auctions were recently sold below market prices. When a large number of anything - Bitcoin, Stock, whatever - is sold below it's previous value that becomes the new value.
Here's why I believe the prices will go back up:
1.) Microsoft example: When more people realize that it is more convenient to purchase Bitcoin than it is to purchase Microsoft points that is going to increase buy pressure. Think about how much people spend around the world on Microsoft points alone knowing that there is no way they can move that money elsewhere or even spend with Microsoft it if their accounts are suspended. This will inevitably create more buy pressure. At first this will result in more stable prices than dramatic increases (as has already started to happen), but as more people decide to hold Bitcoin like they hold available Microsoft points the buy pressure will begin to outpace the sell pressure which will drive prices steadily up, although I am confidant that the sell pressure balance will make this more gradual.
2.) Speculation. Even if all other factors leads to a gradual increase in prices there will be increased investments in Bitcoin as people begin to see the prices go up. This will create a new bubble which will drive prices higher. This is inevitable, but there is a serious danger in this. As mentioned in the previous example, average people will hold it more when prices are stable, but as prices go up they will notice that their buying power goes up with the Bitcoins they are holding to be spent. This is fine at first, but it will help to feed the bubble which will eventually pop and the moment prices go down again the average people will get scared and hold less of it which will cause the sell pressure from big companies like Microsoft to have an even larger impact helping the price to crash faster. The only thing that would buffer this is the fact that impulse buyers, seeing that their Bitcoin are worth a bit more, will think instead that the price of their games are now cheaper and will buy more which will slow the growth of the bubble which would in turn slow the shrinkage of the bubble.
Of course, this is primarily based on how economics work. Not specifically the economics of Bitcoin. It's relatively predictable, but outside factors could still harm it. For example, if people in Florida really do get convicted for selling Bitcoin without a license that will seriously hurt it's adoption. I don't believe it will stop though.
Another important factor to consider is the value of USD. People don't usually think about that, but if the price of Bitcoin goes up and the price of USD goes up faster it will look like the price of USD is going down. The fact that America classifies Bitcoin as a commodity means that the price of USD won't be directly impacted by exchanges to and from Bitcoin, but other markets can still impact it. Inflation, Deflation, and various global market conditions can easily cause Bitcoin to go down in one currency while going up in another. I strongly believe that the global market conditions impacting fiat currency is at least partly to blame for the current price drop, but that's a bit more complex. What I can say is that people have been making money investing in currencies since long before Bitcoin existed. Myself included.
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Personally, I am liking the lower prices. It's giving me better returns on mining investments since people with higher electricity costs are taking their units offline
Although, when prices are lower I find myself less likely to sell because I am confident that it will go back up so I guess I am at least partly relying on speculation.
