My opinion hasn’t changed much in the month since I wrote my first post on how I think BitCoin is a pyramid scheme, ultimately destined to unravel unceremoniously when all the speculative investors decide to pull the plug and cash out of the BitCoin market. Still the discussion that that post spawned was quite enlightening, forcing me to clarify many points both in my own head and here on my blog. Since then there’s been a deluge of other blogs and press chiming in with similar opinions about BitCoin and how its intended purpose is far from its reality. There’s been enough noise about BitCoin’s issues that last week saw the first major dip in the exchange rate, and it hasn’t been smooth sailing since.
The image above is the historic trading price for BitCoins to USD on the biggest BitCoin exchange Mt.Gox. The BitCoin “Black Friday” can be seen as the first dip following the massive peak at around $30. Since that day BitCoin has been shedding value constantly with the latest bid offers hovering around the $18 mark. This is not the kind of volatility you see in something you’d class as a currency where single percentage changes are cause for concern and usually government intervention. In the space of a week BitCoin has shed almost half of its peak value which in any sane market would have seen suspension of trade to prevent a fire sale of the asset. The market isn’t showing any signs of recovering either as the market depth report from Mt.Gox shows:
There’s a very large discrepancy between the majority of seller’s idea of how much BitCoin is worth and what the market is willing to pay for it. The vast majority of sellers are looking to cash out at the mid-twenties range when the highest buy offer doesn’t even break the $20 mark. Any rational actor in this sort of market would be looking to get out before the market wipes out all of their value completely and for what its worth I believe the main speculators have probably already withdrawn from the market which is what triggered the initial dip in price. Liquidity in the BitCoin market is fast drying up and that will only serve to drive the price back to (or even below) its initial stable equilibrium.
On the surface this would appear to be the beginning of the end for BitCoin since confidence in the currency is rapidly disappearing with all the accumulated wealth that’s being lost to the diving market. However whilst many who were hoping to make their riches with a nascent currency might be finding themselves short changed the diving price of BitCoins means that those who were working against the currencies intentions, I.E. those who were using it as a speculative investment vehicle, are more likely to leave the market alone now that it’s been pumped and dumped. Once the price retreats back to more stable levels BitCoin could then start functioning as it is supposed to, as a vehicle for wealth that has no central authority regulating it.
It’s not going to be an easy road for BitCoin and its adopters though as confidence in the currency has been dashed with even some of its earliest supporters withdrawing from it. Mining will then no longer be a profit driven enterprise, instead run by those who support the idea and large companies like Mt.Gox who run exchanges. Once the idea that BitCoin’s value would ever be increasing has dissipated we may finally see a point where BitCoins are primarily used as a vehicle for value transfer and not speculative investment. It will probably be another month or two before we reach a new stable equilibrium in the BitCoin market but after that I might finally stop harping on about it being an elaborate (though probably unintentional) scheme.
This still doesn’t detract from the concentration of wealth for early adopters in the BitCoin ecosystem but once their incentive to hoard currency has vanished then the impact of their vast BitCoin stashes means a whole lot less than it did during the speculative price explosion. This will encourage them to put those BitCoins into circulation adding much needed liquidity to the market and hopefully restoring some more faith in the system. Time will tell if this works out however as with market volumes so low on the BitCoin exchanges price manipulation is bound to happen from time to time and realistically can only be solved by having wider adoption. I’m still not convinced that BitCoin is a safe place for any of my wealth currently but once its recovered from this rapidly bursting bubble I may revisit it, should the want arise.