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Bitcoin values plummet steeply after peaking

It took decades for Tulipmania to peak and crash and years for the recent housing bubble to burst. But the meteoric, week-old bull market for Bitcoins appears poised to tank at a hyper-accelerated pace.

Just a day after Bitcoin prices were reaching $266 (£170), per trading site Mt. Gox, the bubble showed signs of popping violently for the virtual currency. Bitcoins were trading at a weighted average of $210 (£135) on the site as of Wednesday afternoon, but hit a low of $105 (£70) later in the evening.

Bitcoin prices actually took a while to reach this week's high-water mark, relatively speaking. After climbing steadily from around $20 (£13) to the $40 (£26) range over the previous 12 months, the price of Bitcoins began ascending at an accelerated rate beginning in February.

Over the past week, things really got crazy.

Eight days ago, when prices broke the $100 (£65) mark, some market watchers began warning of hyperinflation and the ominous signs of a massive bubble in the making. Those observations proved prescient as Bitcoin prices more than doubled during the past week, with the overall value of all Bitcoins circulating in the global market surpassing $1 billion (£650 million) for the first time ever. Then, in the past 24 hours, prices began falling back down to Earth with a quickness as Bitcoin investors watched their digital wealth hemorrhage value in real time.

Bitcoins, a digital currency traded outside the control of state-based regulation via an open-source peer-to-peer network protocol, were introduced with the January 2009 release of the first Bitcoin client and currency issuance by an unknown party or parties using the pseudonym Satoshi Nakamoto.

Trading in the non-sanctioned alternative currency, particularly amongst gamers and people associating themselves with the Anonymous movement, grew steadily over the past several years. Bitcoins went mainstream as increasing numbers of merchants and service providers began accepting them as payment.

According to some analysts, the currency has shown signs of dangerous volatility since its introduction. But the chaos of the past few days has been extreme even for Bitcoin.

So how did this apparent currency bubble begin and why is it now bursting?

Some have linked Bitcoinmania to the economic crisis in Cyprus, which appears poised to infect some other European nations. Perhaps, but the Bitcoin Foundation's Jon Matonis told Der Spiegel this week that he's not seeing that connection given that Bitcoin trading is still heavily concentrated in "affluent regions, like the United States and Northern Europe," which he contended were well outside the Cyprus danger zone.

Others, like Business Insider's Joe Weisenthal, have put forward more general theories about the psychology of bubble behavior instead of trying to isolate specific causes for what's been happening with the Bitcoin market.

"So a few weeks ago, a pizza might have cost you one Bitcoin," Weisenthal wrote at the start of the Bitcoin hyper-bubble earlier this month in an article accompanied by a Bitcoin price chart. "Today it might only cost you a fifth of a Bitcoin, which sounds great, but then if you're looking at the above chart, why would you spend anything? Why would you buy a pizza (or pot or anything else) when tomorrow your Bitcoin will be worth more? With this kind of chart, you'd be insane to do anything but horde your coins."