As Bitcoin takes its latest plunge to the floor, it’s really easy to get panicky or lose heart. As much as we tout the fundamentals of the protocol, merchant adoption, and opening of businesses making getting and using bitcoins easier than ever, in our heart of hearts we know that Bitcoin is still a nascent, unproven technology and could, just could, go to zero.
What’s also important to remember as we fixate on the red candle sticks and quail at the latest low, is that Bitcoin is a solution in search of a problem. That isn’t to say that there isn’t a problem for Bitcoin to fix, merely that in the light of a soaring stock market, supposedly improving employment numbers, reported low inflation rates (which the Fed is actually trying to increase), and a strengthen dollar against world currencies and even ‘hard’ assets like gold, many people can’t feel the problem that Bitcoin is meant to fix.
Some commentators have begun saying that the markets have hit a new normal and that a severe downturn won’t happen, or that we have entered a ‘Goldilocks economy’ where everything is just right. Hardly. The market is soaring because the government has been printing money hand-over-fist to shore up the banks, contributing greatly to near historic gap between the rich and poor. The employment numbers have approached their 2008 levels, but have nearly made up for the rise in population, accounted for the massive number of people who dropped out of the job market altogether, nor recognized that many of the people who do have jobs are tremendously under-employed. The officially calculated inflation rate has indeed been less than 2%, but if you just do a simple comparison of what it costs to cook a burger as compared to a year ago, you get a rate of inflation closer to 6%.
There are lots of indicators that we will be seeing, sooner or later, a crash as bad as or worse than the one that sparked the Great Recession. And, when that happens, governments are not going to have the same resources they had the last time to re-blow up the bubble. This time, there is going to be a reorganization of how things are done. If, and in my estimation a lot of work still needs to be done here, Bitcoin has built up its infrastructure enough, when that crisis happens, it will find its place as a kind of global economic safety net. People will need a place to turn, and Bitcoin will be there to fill the need.
In March of last year, the crisis in Cyprus caused a sudden realization for people invested in the banks there that they needed an alternative place to put their money. If there had been no crisis, there would have been no need for them to switch. For most people right now, no matter how uncomfortable they are with how things are, and even if they fear another financial crisis, they don’t yet feel the need to make a radical switch. Add to that the ill-informed, and sometimes well-informed, press that Bitcoin has received in its short history, and you have an adoption rate that’s progressing slowly.
In the meantime, this means that Bitcoin is suffering from what amounts to lopsided success. Rising merchant adoption is increasing the usage of Bitcoin as a currency, but since most merchants immediate cash out to fiat, it puts some downward pressure on the price of bitcoin. When the price of Bitcoin falls enough, large-scale miners have to sell more and more of the bitcoins they mine and even the bitcoins they keep in reserve to keep themselves operational – putting further downward pressure on the price and creating a price death-spiral.
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The current price slide really became noticeable in the days leading up to the Alibaba IPO. Many commentators at the time suggested that people were pulling money out of Bitcoin, gold and other assets to get in on this deal. That may be the case, and that may be what pushed the price low enough that the larger miners began to need to dump their bitcoins to meet their obligations, kicking of the vicious cycle.
Of course there is no telling how low it can go, but as long as the infrastructure of Bitcoin continues to be built, and as long as it doesn’t go all the way to zero, the long-term prospects of Bitcoin surviving to be the safety net for many during the next financial crisis are great.
We are HODLing.