One of the things I love (and hate) the most about Bitcoin is that it has put a lot of wealth into the hands of people who haven’t the faintest idea of how to manage it. The result is a bunch of people, often children, sitting at home playing the role of daytrader. The market has tightened up a lot over the past year, and these types of people are getting flushed out, but today’s events show that they still command significant power over the market.

Bitcoin is down $130 over the past 24 hours, currently sitting at $520 on BTC-e. What caused this momentous drop? All other news aside, it seems that the exchanges are following the heavy downward trend set by Mt Gox. Now, this would imply that Mt Gox is trading the same sorts of things that the other exchanges are trading, when of course we know this not to be the case. When you trade on Gox, you’re not trading real bitcoins or real dollars. You’re trading IOUs. IOUs that will likely never be fulfilled.

You may recall that for the past several months, BTC on Gox has been trading $100-200 higher than all the other exchanges. This was because Gox had their main bank accounts seized, and people were unable to get USD out of the exchange. People were willing to pay a premium to exchange their gox dollars, which they could not withdraw, for gox bitcoins, which they could withdraw.

Now that Gox is likely insolvent in Bitcoin as well, you have the same thing happening, but in reverse. People are dumping gox bitcoin at a deep discount for gox dollars. It’s a gamble that Gox will be fulfilling USD withdrawals before BTC withdrawals.

Again, let me emphasize that these are not real dollars or real bitcoins, and as such their pricing is meaningless. The fact that other exchanges are still following Gox’s trend shows how immature this market still is. Once the noobs are done fueling this capitulation, expect the recovery to be just as rapid as the decline was.

Enjoy the cheap BTC, everyone.

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