With the Bubble Burst Has BitCoin Become the Currency it Strived to be?

At the time that I wrote that the BitCoin bubble was bursting I wasn’t really sure just how far the digital currency’s value would decline. Well here we are 3 months on and the value of a BitCoin has slumped to approximately US$3, an order of magnitude less than the dizzying highs it was on all those months ago. I made the prediction back then that once everyone stopped treating BitCoins as an investment vehicle the nascent currency could actually become what it strived to be rather than a speculator’s wet dream. So since one half of my prediction came true (the arguably easy to predict part) one has to wonder, how is BitCoin doing as a currency now?

Image used under a Creative Commons license from BitCoinCharts

The chart above details the dramatic rise and fall of the BitCoin price over the past year. As you can see whilst the value (the line graph) of a BitCoin may have tanked significantly it is still higher than that of what it was a year ago, by a large factor. What’s interesting to note though is the trade volume (the bar graph) which you can see in the months preceding the speculative bubble was quite low, almost non-existent for some months. The trading volume after the peak however as been far more active than it has been previously from which we can draw some conclusions about the BitCoin market.

Now the first conclusion I drew from this graph was that the market is becoming far more liquid with more buyers and sellers entering the market. Of course this high level of market activity could also be people attempting to sell down their BitCoin holdings, but that just favours the buyer side of the equation which is what is driving the price down. The volatility in the price is still very much at odds with its aspirations to become a real currency however so until the price hits a floor and stays there for a couple months BitCoin will struggle to be more widely adopted as a transaction medium.

The biggest impact that the drop in price will have though is the drop in free infrastructure it was getting from people mining for BitCoins. Whilst GPU mining was very profitable in the $15+ range when you’re getting down around these price levels it’s really not economically viable to mine coins. Thus the only people who will still do it are the ones who believe in the idea and want to help out or those who are running BitCoin services like Mt.Gox. Whilst that’s far from the BitCoin infrastructure just up and disappearing it does mean that many people who flocked to the BitCoin idea because of the financial feasibility of it will drop it in favour of greener pastures, whatever they might be.

Thus the burst BitCoin bubble is something of a mixed bag. Whilst the increased liquidity and speculator free market is definitely a great help to BitCoin becoming a serious currency the continued price instability and loss of supporters negates those benefits completely. The price crash also hasn’t addressed the early adopter problem either, leaving swaths of easily had BitCoins in the hands of a small collective of users.

Summing these all up together it seems that, as a currency at least, BitCoin is still just another alternative currency that’s struggling to achieve the goals it set out to accomplish. Technically it’s a masterful system that’s remained resistant to nearly all attempts to break it with all the problems coming from external parties and not the BitCoin system itself. However the economics of BitCoin are the real issue here and those things can’t be overcome with technical genius alone. BitCoin still has a long, long way to go before anyone can seriously consider it as a currency and there’s no telling if it’ll last long enough for it’s teething problems to be overcome. 

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