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The 500% Bitcoin Rally of March 2013

In April 2013, Bitcoin, the Internet currency, first made headlines in the mainstream media during a 500% rally which saw the Bitcoin price rise from $50 to $266 in 4 weeks. This article provides a short summary of the build up to the price hike, and the events that followed.

The rally which started in mid-March 2013 did not come completely out of the blue, the price had already been rising since January of that year when the price was only $11 per Bitcoin. The April rally coincided with the Cyprus Banking Crisis, an event which shocked many Europeans because it demonstrated for the first time that people who deposit money with their banks may not get all of it back. The banking crisis started when the island’s leaders were told that the Emergency Liquidity Assistance, ELA, would be cut unless the demands of the creditors were met. To stop bank customers withdrawing their savings the banks were closed for 2 weeks. An agreement was reached and as part of the deal some banks were able to raid the savings of their customers in order to survive. This process became known as a ‘bail-in’. Bank depositors lost up to 40% of any uninsured deposits.

The incident highlighted the benefits of owning Bitcoins. Bitcoins have many current and future commercial applications, but perhaps the most obvious and simplest way they can be used is as a currency, a currency that is outside of the banking system, one that would allow people to carry on transacting with each other regardless of the problems facing the banking system. As news of the Bitcoin rally spread, technically savvy investors who had spent time doing their research and understood the full implications of these 21 million units of new innovation began registering on a little known website called MT.GOX based in Japan in order to buy them. By April 10, as the Bitcoin price reached $266 on strong demand, the website servers could not cope with the amount of traffic and as a result it suspended operations. At the time MT.GOX was essentially the only place to buy and sell Bitcoins, responsible for over 90% of all trades. When the website went down, all buying and selling came to a halt, and as expected the price declined dramatically to a low of $30 dollars the next day. This was of course not a problem to do with Bitcoins themselves but the website where Bitcoins were traded. In the following days and weeks new websites in different parts of the world opened to facilitate Bitcoin trades and in less than a few months the Bitcoin price had recovered and pushed past $266.

The rally was clear evidence of what overwhelming demand can do to an asset of limited supply. Whilst many people had thought that the rally was part of a speculative bubble, the price continued to rise towards the end of the year and Bitcoins went from being a little known online curiosity to being accepted by global investors, academics, corporations and governments as having real commercial value and something worth investing their time and money into.

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