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Backer defends virtual currency Bitcoin after big fall

By Tommy Wilkes

LONDON (Reuters) - The volatility of virtual currency Bitcoin is a sign of "growing pains" rather than fundamental problems, its backer said on Thursday, a day after the currency lost 50 percent in value.

Dismissed by some as a Ponzi Scheme and touted by others as the future of money, the price of a coin plunged to $130 from a record high of $260 on Wednesday, giving more voice to a chorus of detractors claiming it is no more than a speculative bubble.

Bitcoin is a digital currency that unlike conventional money is bought and sold on a peer-to-peer network independent of any central control. Users can send money directly from their computers to others on the other side of the world, and coins can be used to buy real goods, swapped for cash on exchanges or used for speculation.

The currency has gained in prominence amid the euro zone sovereign debt crisis as more people start to question the safety of holding their cash in the bank. Bitcoins shot up in value in March when investors took fright at Cyprus' plans to impose losses on bank deposits.

The Bitcoin Foundation said on Thursday the barely 4-year old currency was still finding its equilibrium, and that the only bubble was the "bubble in the media regarding Bitcoin."

"The volatility that we are witnessing is no doubt due to growing pains and lack of adequate liquidity given the new market demand," spokesman Jon Matonis said in emailed comments.

"I anticipate that once relative equilibrium is achieved, and more traders are comfortable leaving large balances sat at the exchanges, we will see smoother trading and fewer high-percentage price swings," he added, blaming delays in dealing with faxes and identity documentation for the swings in price.

Mt.Gox, one of Bitcoin's main exchanges, said it was not the victim of a hack attack but that a large number of new orders had overwhelmed its systems, causing a lag and sparking a selling panic that led to Wednesday's big slide.

It said it was working to improve its systems.

Bitcoin staged a slight recovery to around $160 on Thursday.

Wednesday's fall comes after a dramatic rally from less than $20 per coin just two months ago.

One of Bitcoin's main traders, Malta-based hedge fund Exante, said it welcomed the correction after recent rises.

"It was around $100 just over a week ago, growing over 100 percent in a week is not very comforting," Anatoliy Knyazev, who co-founded Exanta to give wealthy punters the chance to bet on Bitcoin, said on the Thomson Reuters Global Markets Forum.

There are around 11 million Bitcoins in circulation at present - giving a market value of $1.87 billion at a price of $170 - and the total amount of coins is capped at 21 million.

Critics say the currency's value is dependent only on users' belief it is worth something.

Supporters point out that a growing number of companies are accepting Bitcoin as payment, and claim it also offers a possible hedge against inflation.

Nevertheless, Bitcoin faces threats of computer hackers and of government intervention, its detractors say, as countries will not tolerate anything undermining the role of central banks.

(Editing by Mark Potter)

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