The digital cryptocurrency bitcoin has emerged as the hottest, and perhaps most controversial, forex play in the world over the last month. Befitting its whipsaw nature, bitcoin spiked then crashed on Dec.5-6 as news legitimizing the usefulness of the currency was quickly followed by much stricter regulation in China, rocking the still-unstable virtual currency.

Bitcoin Touches All-Time High on Increased Mainstream Approval

Bitcoin reached a peak valuation just north on $1,200 on Dec. 5, and was further buoyed on news that a bitcoin transfer Apple Inc. (AAPL) app called Gliph had just received significant interest from Silicon Valley. Bitcoin has been on a meteoric rise since mid-October, increasing tenfold in value in just over six weeks, yet concerns over liquidity had dogged the currency. An app simplifying bitcoin transactions would certainly begin helping to assuage those concerns.

Bitcoin had skyrocketed on unexpectedly bullish comments from mainstream economists, with Fed Chair Ben Bernanke praising the currency’s design and future usability. But an important block of investors might soon begin withdrawing their support, leaving bitcoin's future as opaque as its investor's identities.

But is the Bitcoin Party Over in China?

The news on the venture capital interest concerning the Gliph app was tempered by reports from China that the country’s central bank was banning financial institutions from dealing in the currency, triggering a 33 percent plunge in early bitcoin trading.

Up to that point, China’s bitcoin investment frenzy had been tacitly allowed by the government, in that they failed to intervene or publicly comment on bitcoin. However, a statement from the central authorities made clear they did not endorse local traders investing in the currency, saying bitcoin lacks “real meaning.”

If Chinese investors are forced to pull their money out, the results could be catastrophic for the currency’s valuation. As Equities.com’s analyst Nicholas Bhandari asserted, Chinese investors tend to move in packs, and if the massive influx of Chinese capital that has flooded into bitcoin (the wealth storage du jour) was to spontaneously evaporate – say, from direct Chinese government intervention – there would be no safeguard against a worldwide panic and sell-off.

It should be noted though, that despite a near panic on Dec. 6, a massive bubble pop has so far been avoided. After losing billions in valuation in a few hours, the bitcoin slide halted and recovered somewhat, rebounding back above $1,000 USD by midday.

The Next Few Weeks Are Key

The market cap of Bitcoin has skyrocketed in 2013, increasing in value over 89 times in 2013 while swelling to a valuation of over $14 billion USD at its Dec 5 peak. The explosive rise has galvanized both its detractors and proponents, and the tension between the two camps is reaching a fever pitch.

Bernanke and others' tacit endorsements of the currency’s future viability have been tempered by comments from the likes of former Fed Chair Alan Greenspan, who calls bitcoin a “bubble”— this coming from the free marketeer who wouldn’t even call housing or tech stock prices unsustainable during his tenure.

Whether bubble or just the beginning, the rest of 2013 should provide a good indicator of the virtual currency’s correct valuation. If prices can stabilize, it bodes well for the end of wild speculative binges and hoarding, and the fulfillment of the promise of Gliph and its ilk that bitcoin is a viable alternative currency. However, if the volatility increases substantially, or the next panic does transition into a full-on crash, bitcoin could become victim to a bust-out and depression, with investors worldwide scurrying to avoid being the last ones holding onto an increasingly devaluing – and eventually practically worthless – digital investment.

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