Bitcoin Lows Test Cryptocurrency Investors' Resolve

It has been a great year for merchant adoption with companies like Dell, DISH, Overstock, Expedia and Tiger Direct accepting bitcoin … but it's been a rough year for bitcoin investors.

Bitcoin on Monday hit $435, its lowest level since May. It has dropped about 60 percent from its November 2013 high near $1,200.

Bitcoin investors who bought in at the end of last year or most of this year are feeling the pain. Many heard about bitcoin’s $13 to $1,200 run up last year and wanted to make some quick money. A price drop was not the result they were looking for. One Redditor likened the damage to his net worth to the Hindenburg disaster.

Related Link: Bitcoin Industry Growing Pains Create Risk For Investors

The lows can be attributed to the proposed New York bitcoin regulations and to margin traders.

Margin Traders Feeling The Pain

Bitcoin exchanges like BTC-e, Bitfinex and BTC Delta allow bitcoin margin trading. All three of these exchanges are located outside of the United States.

Bitfinex last week flash crashed to $451 and BTC-e flash crashed to $309 on Monday. These crashes are caused by bullish bitcoin investors borrowing dollars to purchase bitcoin.

If the bitcoin price drops low enough, investors risk their positions will be automatically sold at the market price. Traders on Bitfinex and BTC-e bitcoin bulls paid a high price for their optimism.

Impact Going Forward

With new holders, longtime holders and optimists all feeling financial pain with their 2014 bitcoin investments, will they continue to believe?

Many people have a hard time holding underwater assets for long periods of time. If bitcoin’s price rebounds to its previous highs, these investors may be even more unhappy if they happened to buy high and sell low.

These crashes could leave a bad taste in some investors mouth and turn some of the bulls into bears.

Disclosure: At the time of this writing, David Smith has a long bitcoin position and owns So What’s Bitcoin?