As the price of Bitcoin continues its heartrending slide, it’s important to remember a couple of things about this nascent technology:
- It’s still in its infancy and the infrastructure that is going to give it its real utility and spur its real adoption is still being built out.
- Its price at this stage of the game is really nothing more than speculation, and price swings occur with very low valuation trades.
- Despite the very exciting news that keeps coming out of Bitcoin startups, the prevailing market conditions are driving the price down.
For this article, we’re going to focus mostly on the third point here, the conditions that are driving the price lower.
Hacks and Scams
Over the last few days we have been seeing some large trades on the various exchanges. Though there is no way to know for sure, there is speculation that the hackers from the recent Bitstamp hack are cashing out their ill-gotten gains as quickly as possible. This is in addition to the disappearance of Cryptodouble.com, a clear Ponzi scheme that has been running for the last few months and seems to have made off with a few thousands of BTC.
In the past, such scammers might have been satisfied to hodl their stolen lucre, but with the falling prices they may be trying to get out while the getting is good. If this is the case, given the small size of the Bitcoin market and the fact that a majority of Bitcoin users are not users at all but holders, the sale of just a few hundreds of bitcoins can noticeably impact the price.
Miners Paying the Bills
Also, as the price declines, miners, who have invested large sums of money in their equipment, need to pay the rent, the electricity, and the upkeep of their machines. CEX.io has recently announced that they are going to soon suspend their cloud mining services as the low-price point has made it unprofitable, signaling just how dire the situation may be for many miners. Currently there are 3,600 coins mined per day, and if any significant portion of those need to be sold to keep things going, then that would account for a constant downward pressure on the market.
Soft User Adoption
As much as those of us on the inside of Bitcoin believe that it’s going to revolutionize the world and that everyone should aspire to hold even a fraction of a coin, the compelling need for most people to buy in just hasn’t appeared yet. This speaks to one of the core theses of Bitcoin Warrior that it really isn’t a currency yet and it won’t be a currency until it reaches a much higher market cap. In the short term, Bitcoin is a commodity and an investment vehicle. Even more, it’s a safety net that will catch those smart enough to fall into it when the next financial crisis hits (and mark that, not if, but when). Because of this, there is simply not enough buy pressure from mass users to offset the sell pressures listed above.
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Now, it very may well happen that in 2015 we start to see institutional investment in Bitcoin pick up which may fuel other types of adoption as well, but the current downward spiral of the price is likely to work against that. If Bitcoin’s price bottoms out and holds stable for a while, and if startup activity keeps up apace, then we might very well see Wall Street start to take notice. This will be especially true if the indications of another severe market correction keep coming.
Soft Merchant Adoption
Well, this really mirrors the picture above with the exception that merchant adoption hasn’t really been that bad. The biggest problem with getting merchants to adopt is that once they do, there haven’t been enough customers to really make them feel it’s worth their while. At the beginning of 2014 it looked like this picture was going to be different as the peak price was causing people to want to spend their bitcoins. At the beginning of 2015, spending bitcoins can feel like a losing proposition since they were probably bought at a higher price.
What’s more, many claim that merchant adoption is adding to the downward pressure on the price since most merchants use payment processors who then turn around and sell the bitcoins to reimburse the merchant in cash. If the customers who paid in Bitcoin are not turning right back around and rebuying Bitcoin, then that would put downward pressure on the price. We think that this is overstated, but it’s difficult to know at this point.
With the trend in Bitcoin being so clear for so long, taking the short positions is what the smart money does. The trend is your friend, as they say which only holds true until it isn’t. But, for the time being, the people betting against Bitcoin are winning and this puts even more downward pressure on the price.
Ever since I’ve been involved in Bitcoin, every dip has brought people out talking about how the price drop is driving out the ‘weak hands,’ or the ones who did not really believe in Bitcoin and who would sell at the drop of a hat when things started to look rough. I think we’re well beyond the point of weak hands, now, and we are reading on Reddit the statements of experienced users saying that the ride has just gotten too wild for them. Indeed, watching the price drop to near 200 is gut-wrenching even for those who believe that the short-term price doesn’t matter. Those saying it’s time to just pull up stakes and get out are probably also adding just a little bit to the downward pressure on Bitcoin.
Ancient Trading Bots
This one goes back to the ATH price of 2013 a price which was spurred partly by irrational Chinese exuberance, but even more by a couple of trading bots on the now defunct Mt. Gox trading platform that seemed to have been designed to pump the price. It’s been hard watching the price of Bitcoin step down over the last year, but it was elevated to a price it likely never should have been at at that stage of its development. It’s taken this long for the balloon to deflate. But it also means that when the price starts to rise again, it will do so based on fundamentals and real solid interest and when that happens, there will be no deflation of the price again.
What this all means is that the current price dips can be explained, and that they don’t seem to be based on any fundamental weakness in Bitcoin as a protocol or as a project. Bitcoin still holds the same promise it always has and the infrastructure is still being created that will allow Bitcoin to be the transformative technology it is destined to be. It took the Internet decades before it became the world changing force that we know it to be today. It will take Bitcoin less time than that, but still more than the six years it has already existed.
So our advice, turn off the charts and keep focusing on the good Bitcoin can do for you and for the world.