Deepening Slump Tests Fans Of Bitcoin: Is The Bloom Off The Bitcoin Rose?

Deepening Slump Tests Fans Of Bitcoin: Is The Bloom Off The Bitcoin Rose?

     The title above [minus, “Is the bloom off the bitcoin rose?]is from an article in this morning’s (September 13, 2018) Wall Street Journal, by Paul Vigna. Mr. Vigna begins, “the cryptocurrency rout that began early this year with the popping of the Bitcoin bubble has only gotten worse, and there is little sign things will get better soon. The total value of all cryptocurrencies fell below $200 billion last weekend, down 76 percent from an all-time high of $832 billion in January of 2018.  It is a dramatic decline for a sector that experienced furious growth in 2017, driven by a speculative interest in bitcoin,” he wrote.

     Having said all the above, Mr. Vigna reminds his readers that “the cryptocurrency market is notoriously volatile; and, has weathered several boom-and-bust cycles in the nearly ten years since the pseudonymous Satoshi Nakamoto unveiled bitcoin.” As I have noted many times in this blog, “bitcoin is a digital currency that isn’t sponsored by any government, or single entity; it runs on a platform known as blockchain, which is a decentralized, immutable ledger of transactions,” Mr. Vigna noted.

     “Last year’s boom was marked by both mainstream interest in bitcoin, and an explosion in the number of alternative cyrptocurrencies and digital tokens. These [phenomena] dramatically increased opportunities for speculators [and manipulators], and heightened volatility in the nascent market,” Mr. Vigna observed. “The problem,” he adds, “is that such speculation wasn’t matched by concrete activity. More people may have had heard of bitcoin than a year ago; but, even the ones who hold it, still don’t have much to do with it — besides trade,” he added.

     “The selloff in recent months largely reflects doubts about the practical utility of cryptocurrencies,” Mr. Vigna wrote. “It is still difficult to use bitcoin, and other, more established digital currencies to pay for goods and services, causing some investors to question their potential to transform commerce,” especially in the short, to mid-term.

     “This happens in all major technology development cycles,” said Arianna Simpson, a Managing Director at the venture capital firm, Autonomous Partners. “You see a decoupling between the financial capital, and where the technology actually is.”

     “Bitccoin has actually fallen about 68 percent since its peak on December 17, 2017,” Mr. Vigna wrote. “Yet, it is smaller rivals , known as “altcoins,” that have suffered the sharpest declines in recent months.” “Ether, the second-most valuable cryptocurrency behind bitcoin, is down 53 percent since June 30, while XRP, also called Ripple, has fallen 43 percent,” Mr. Vigna wrote. “Bitcoin Cash declined 37 percent, and EOS has slid 38 percent. Bitcoin by comparison, has fallen just 1.7 percent over the same time period. It hasn’t been a tranquil period,” Mr. Vigna adds, noting “Bitcoin is down 20 percent from a recent peak in July.”

     “Many ‘crypto-tourists,’ who bought bitcoin and other [digital] tokens in 2017, when prices were soaring, lost faith in the trans-formative potential of digital currency,” said Dan McArdle, co-founder of cryptocurrency research firm, Messari. “We’re just in one of those periods where the hype has died down.”

     “Take Ether, the in-house currency for the Ethereum network: The project took bitcoin’s core concepts, and adapted them to a platform built to support apps, similar to Alphabet Inc.’s Android operating system,” Mr. Vigna wrote. “The value of ether soared from $8 in January 2017, to $1,400 by January 2018 as investors sought to profit on Ethereum’s potential. Yet, there is still little commercial activity, two years after its launch. There are about 900 live “dapps,” — or decentralized apps on the Ethereum network, with several hundred more in development, according to data from the website, State of the Dapps. But, there are only 9,000 daily active users,” he added. “That isn’t a lot of activity, and helps explain the huge fall in value ether has experienced. At its height, ether was worth $133 billion. Today, it is worth around $19 billion.”

     “Regulatory issues have also weighed on the sector of late,” Mr. Vigna wrote. “The Securities and Exchange Commission (SEC) continues to reject the idea of a bitcoin-based, exchange-traded-fund (ETF), and, the Justice Department is investigating potential market manipulation.” The SEC has also “recently brought a case involving [manipulation] of digital currency.

     “Crypto veterans remain sanguine about the [digital currency’s] market’s long-term potential, pointing to its short, but turbulent history,” Mr. Vigna wrote. “After trading as high as $1,147 in December 2013, bitcoin fell as much as 85 percent over the next year. It didn’t surpass that previous high-water mark until the spring of 2017. In 2011, the price fell more than 90 percent. from about $30, to $2.”

     “A return of 100 times in a year is delightful,” Ms. Simpson said. “I enjoy that as much as anyone,” she added. “But, it’s not realistic. The people who were coming in to get ‘100x,’ are in for a rude awakening,” she warned.

     As Mark Twain once said, “the news of my death has been greatly exaggerated.”  Are we witnessing the ‘death of bitcoin?’ I doubt it, at least for now.  But, I am a bear on the longer-term outlook for bitcoin and digital currency — at least at these elevated prices. A central premise of bitcoin and digital currency — besides anonymity — is, it isn’t tied to any one government, or entity.  One of its very tenants is, decentralization, and lack of government control and/or oversight.  But, this lack of regulation and oversight, has led to market manipulation — as the top one percent of bitcoin holders, control 90 percent of the currency. In order for bitcoin and digital currency in general, to gain credibility and attract more investors — and even get its own ETF — regulation will have to come.  And, governments are also going to want, or mandate their share of the ‘taxes’ based on the transactions that occur.  That is anathema to the digital currency faithful; but, it is likely inevitable if digital currency is ever established as a respectable and dependable means of financial transactions.  Which likely means…..governments will do what governments will do.  As they did with the railroads and the utilities, etc., governments will appropriate.  I am not saying that bitcoin cannot go higher in the short-term; but, a longer=term target for the currency is likely closer to $100 per coin — than it is $25,000 per coin.  Right now, it costs about $5,900-$6000 to mine one bitcoin.  But, as the technology matures, one should expect those costs to decline considerably — over time.  Just one man’s opinion.  RCP,

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