The price of the cryptocurrency has plummeted—and the regulators are growing ever more hostileby Paul Wallace / February 8, 2018 / Leave a comment
It looked like a bubble and it turns out to have been a bubble. After soaring from around $1,000 at the start of 2017 to over $19,000 in mid-December the price of a bitcoin plummeted to a low of just under $6,000 earlier this week—inflicting losses of two-thirds on those who bought the digital currency at its peak. How and why has this reverse happened and what does it mean for bitcoin’s future?
The collapse in the bitcoin price has put paid to the bullish arguments about why the cryptocurrency, so called because cryptography is used to secure and verify transactions while shielding the identity of users, could carry on appreciating.
Bitcoin was founded on the innovative blockchain technology, in which shared digital ledgers are created that allow peer-to-peer transactions without any intermediary. For its enthusiasts, the new decentralised digital currency was the way of the future, sweeping away the need for banks and central banks. It was destined to become a form of digital gold since only 21m bitcoins could ever be created. Of these nearly 17m had already been “mined” by computers that crunch data to solve increasingly laborious mathematical puzzles rather than machines that crush ores.
This story has turned out to be as spurious as other narratives spun to rationalise a speculative frenzy. In particular, the frantic swings of the bitcoin price have vitiated the notion that it could supplant conventional money that provides a stable means of exchange and store of value.
Instead the behaviour of bitcoin has conformed to the familiar pattern of financial bubbles. These typically involve investors piling into assets not because of their intrinsic merit but because they see others doing the same and profiting from it. It is an extreme version of John Maynard Keynes’s now rather un-PC depiction in his General Theory of professional investment resembling a beauty parade in which the prize is to guess who the other punters will typically judge the prettiest. Eventually the frenzy halts when those who bought early take their profits. As the price starts to fall, the pretty turns ugly and there is a rush for the exit.
“The auspices for bitcoin now look unfavourable as regulators sound the alarm”
As well as this inherent tendency for bubbles eventually to burst, bitcoin is now facing attack on several fronts. Up until now it has dominated the digital wild…