Virtual currency Bitcoin in freefall

Virtual currency Bitcoin is continuing its wild ride this morning and is currently dropping like a stone in a period of hours after reaching as high as US$266 at Mt Gox, the largest trading exchange for the virtual currency, sparking speculation that it may be crashing.

As of writing, the value of Bitcoins against the US dollar is down to US$105 on a volume of just over 118,000 BTCs at Mt Gox, which continues to accept trades.

BTC vs US$. Source: Mt Gox

The value of Bitcoin versus Australian dollars has also dropped sharply, dropping below the A$100 level.

Exactly what is causing the sharp drop today is not known, but the US Bitcoin exchange Tradehill says Mt Gox is suffering another denial of service attack, causing severe delays for traders.

"MTGox, Bitstamp are down due to DDOS attack. We are continuing to execute internal orders normally, but routing to external orderbooks is not possible at the moment," Tradehill reported on its front page.

If so, this is the second time in less than a week that Mt Gox has been a target for denial of service attack, causing extreme volatility for the virtual currency.

Other sites related to the currency such as Bitcoincharts are also displaying error messages this morning.

The decentralised digital currency Bitcoin has become increasingly popular as an alternative to real world money in as fiscal woes in the developed economies worsen, with its monetary base exceeding a billion dollars currently.

It has gained some official recognition and some of the financial institutions associated with the digital currency have been given limited banking rights. On April 9, Malta based brokerage and hedge fund Exante said it would start offering Bitcoin units for investors.

Update 10:54am: To underline the extreme volatility of Bitcoin, the currency has staged a recovery at Mt Gox exchange over the last few hours. Currently it is trading roughly around US$170 to the BTC. Over thirty days, Bitcoin has seen lows of US$36.65 and as high as US$266."