Bitcoin Plunge: Not New, But We Should Ask Ourselves A Few Things

Bitcoin Plunge: Not New, But We Should Ask Ourselves A Few Things

The sudden dip in Bitcoin on Tuesday has left the financial community in a bit of a furor. The cryptocurrency plummeted by as much as 20%, dropping below the $10,000 USD mark for the first time since November of 2017.

These developments came after rumblings from the South Korean, Chinese, and Japanese governments threatening to impose stricter parameters on the currency. South Korean finance minister Kim Dong-Yeon said the government was considering a complete shutdown on all cryptocurrency exchanges.

These factors happen to coincide with the end of the frenzied buying period, known in bubble economics terminology as ‘euphoria.’ The basic principle of bubble theory is that all bubbles are created through ‘displacement,’ a technology or development which creates a new market, which in the case of Bitcoin is blockchain technology. Following the displacement, there is a ‘boom’ which attracts more investors, which is then followed by euphoria, a stage where the feedback loop of purchasing inflates value out of control. For Bitcoin, this was best represented by growth from $900 USD per bitcoin in January of 2017 to a valuation of $20,000 USD by early December.

The next stage is known as financial distress, followed by ‘revulsion.’ Those terms seem pretty self-explanatory.  Whether we have hit the point of financial distress is a matter of debate. Some experts say yes, while others claim that this is merely a return to the mean for a market that was careening out of control.

Now, none of this to say that Bitcoin will suffer the fate outlined in the theory – it bears keeping in mind that the cryptocurrency market is unprecedented and anyone who tells you with certainty that they can predict its behavior is a liar. 

However, it seems difficult to ignore that Bitcoin dropped a fifth of its value in 24 hours, the loss of $30 billion USD leaving many investors in a panic.  And rightly so. The question becomes: what is the future of bitcoin going to look like?

According to Bloomberg, the only thing that would kill Bitcoin outright would be a successful hack of the blockchain operation system which drives the currency. But, such a hack would involve penetrating the servers of all the Bitcoin mining systems across the globe, or at least a controlling share of them (Servers which host the blockchain records are called ‘miners’ and are paid in new Bitcoin). This scenario is particularly unlikely as any hacker is more likely to opt into the game and start producing Bitcoin for themselves.

So, what are other factors to consider when trying to predict the future of the world’s most volatile investment?

One argument is that Bitcoin is very difficult to use as a currency. Imagine a world where you try to purchase a coffee with a thousandth of your Bitcoin. There is, of course, the possibility that Bitcoin will never be used as a currency for small purchases, and that the sheer number of investors will keep the value up despite impracticality. It’s worth remembering that Bitcoin is still up %1000 over last year, even with Tuesday’s drop.

Another threat to Bitcoin is the proliferation of other cryptocurrencies trying to take its place. There are currently no regulations on starting a cryptocurrency, and its as simple as convincing people that whatever unit is being produced has real-world value. Competitors (in as much as cryptocurrencies can compete) like Ethereum and Ripple also posted double-digit losses on Tuesday.

Perhaps like other commodities markets, it will stabilize and wealth will be distributed across major purveyors. It’s kind of impossible to say.

Ultimately, Bitcoin’s salvation and downfall will probably come from more scrutiny and regulation. If governments begin to regulate the exchange of cryptocurrency, there will be much less risk of volatility as more institutions climb aboard. The downswing in volatility will come at a cost – the whole point of Bitcoin and cryptocurrency in general was to have a denomination that was stateless and leaderless. The idea of a democratized currency which derives value only from its holders and the community that supports it was part of the romance. Getting governments involved will only muddy those waters and turn Bitcoin into another currency.

I wouldn’t shed too many tears for the loss of Bitcoin’s idyll – 40% of Bitcoin is held by fewer than 1000 users, with the top 100 users accounting for one-sixth of all Bitcoin ownership. Users don’t always equate to physical people either; it is impossible to track who actually operates which user accounts. Indeed, this concentration in ownership could be a factor in Bitcoin’s volatility – single sellers count way bigger in this type of distribution.

The long and short of all this disparate information is that nobody knows what the hell is happening. Bitcoin remains a highly valued cryptocurrency and one of the riskiest things you can do with your money. My inclination is that where there is a promise of risk and reward, eager gamblers will follow; that is until the government steps in to tell them where and when they can gamble.