Daily Archives: October 7, 2014

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Bitcoin Filter Episode 23: "EYE OF THE BITCOIN"
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Bitcoin Filter Episode 23: "EYE OF THE BITCOIN" - Video

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In the past three months, the price of the cryptocurrency bitcoin has fallen nearly 50 percent going from about $630 per bitcoin to $320 per bitcoin, according to CoinDesk's bitcoin price index, which averages the prices on major exchanges.

That's obviously an extreme shift, though bitcoin trading prices are notoriously volatile, sometimes making similar percentage drops in a matter of hours or days.

The difference here is that it appears to be a slow, measured pattern of decline.

There has been major regulatory news in the past few months, including New York's proposed rules for virtual currencies and Russia's proposal to punish their use. But that doesn't seem to have produced the same type of seismic shifts as when China ordered local payment processors to stop transactions involving digital currencies such as bitcoin.

Instead, Jerry Brito, the executive director of industry-backed think tank Coin Center, said he believes the downward trend in bitcoin may actually be related to its rising popularity among merchants in recent months.

In September, Overstock.com became the first major online retailer to accept the cryptocurrency globally.

"It's hard to tell what exactly causes these price movements, but what I think makes most sense is that as bitcoin merchant adoption grows, there is increasing sell pressure in the market," Brito says. "Because there are not yet very good hedging instruments for bitcoin, merchants that accept bitcoin for payment will immediately sell, so as to not be exposed to any volatility."

Basically, merchants don't want to hold on to the bitcoins they accept as payment. Thus, Brito says, there's a constant sell pressure, which he said he believes may have snowballed into the downward trend.

Brito is optimistic, however, about the future of the market, saying that "needed hedging instruments are coming along very shortly" and that long-term investors may actually buy in the current low.

The $320 exchange rate that the cryptocurrency is floating around is a substantial drop from the highs of last year, when bitcoins reached more than $1,100 on some markets near the end of the year after dramatic surges.

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Bitcoin prices drop nearly 50 percent in 3 months

Remember bitcoins?

The digital currency swam into the average person's attention last December, when the price of a single bitcoin reached about $1,150. The Winklevoss twins, who gained fame from their connection with the founding of Facebook, announced plans for a bitcoin investment fund. The airwaves and news columns loaded up with declarations about how bitcoins were the biggest threat to the banking system since bankers were invented. The bitcoin creed was about defeating evil central bankers with freedom and libertarianism.

Since then thousands of businesses announced they would accept bitcoins for goods and services. That level of interest should have kept the price of bitcoins stable, because theoretically their value is tied to their acceptance.

What's happened instead is that the price of bitcoins has plummeted, especially over this past weekend. The coins were quoted late Monday at $333.88 by CoinDesk, a bitcoin information service, up a bit after bottoming out at about $290. Many of the bitcoin faithful are in paroxysms of grief over the price collapse.

The main problem is that no one in the bitcoin community can adequate explain the price action. Accordingly, rumors and speculation abound. Some think it's the advent of new regulations on "virtual currencies" coming from New York State banking regulators.

Another theory is that Chinese computer programmers have sharply stepped up their "mining" of bitcoins. (The bitcoin supply can be increased only when programmers solve an increasingly complex algorithm, which requires ever-more-powerful computers.) Some even think that bitcoin's success in the marketplace is its own enemy, on the theory that merchants accepting bitcoins rapidly convert them to dollars or other hard currencies, which drives down the price. And then there are bitcoin believers who dismiss the plunge as merely an artifact of bitcoins' natural volatility.

What's hard to dispute is that the long-term price decline underscores the dangers of bitcoins as an investment. As we observed last year, bitcoin fans can be divided roughly into two categories: investment enthusiasts and transactional users.

Investment enthusiasts see bitcoins as the next best thing to gold--a currency/commodity that will retain intrinsic value, or even gain value, as the world goes to hell. Just as gold never loses its glitter, the argument is that bitcoins are immune from manipulation from the gnomes of international finance in central banks and central governments.

For those who bought into this argument and collected bitcoins as the price rose to $1,000 and beyond, the decline is nauseating. One investor's post on reddit.com's r/bitcoin forum was headlined "Desperate: How long to hold out / What would you do in my situation." The poster said he or she already had lost more than $100,000 this year, on an investment at an average cost of $623 per coin. "So far i am down a lot." (No kidding.)

For those who use bitcoins as transactional instruments--that is, to move money in and out of currencies or across national borders without financial authorities interfering--the price might be irrelevant. That's the view of Stanford University economist Susan Athey, an expert in crypto-currencies. Athey told us last year that if you're selling goods in bitcoins and exchanging them for dollars, or trying to transfer your wealth from yuan in Beijing to euros in Frankfort, "inprinciple, you need to only worry about the exchange rate for 10 minutes.... The point is that we have a new technology that allows any individual in the world to send value from one place to another instantly, in a way that's secure and verifiable."

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Bye-bye, bitcoin? The crypto-currency's price agonies intensify