Bitcoin’s tumble this week must have crypto-skeptics rubbing their hands in “I told you so” glee. That might be premature, even though the recent correction is dramatic enough to make it understandable.
After all, the “mainstream” cryptocurrency (contradiction acknowledged) fell almost five per cent on Monday, and then hastened its declines on Tuesday, plunging as much as 20 per cent. By the end of the day, anyone holding Bitcoin since its peak had taken a more-than-40-per-cent hit; in market cap terms, that’s more than US$100 billion gone. And that’s not counting the losses suffered by holders of the hundreds of other cryptocurrencies that have sprung up in Bitcoin’s wake, many of which saw similar (or worse) declines.
Wednesday, Bitcoin skidded a further 12 per cent to almost half in value from its peak. The price of bitcoin fell to as low as US$10,0000 on the Luxembourg-based Bitstamp exchange, the lowest since Dec. 1.
The epicentre of the meltdown was South Korea, which reiterated earlier threats to ban cryptocurrency trading. Meanwhile, China — which has already banned mainland coin exchanges and made life harder for Bitcoin mining operations — is reportedly ready to take further steps to crack down on cryptocurrencies.
Regulatory intervention is a key vulnerability to the Bitcoin rally, and there might be more to come: the U.S. Securities and Exchange Commission and European regulators have voiced concerns over the Bitcoin markets’ high risk and rampant speculation. Still, it’s not clear what the long-term price impact will be.
Faced with outrage from crypto-crazy citizens outraged at the government for destroying their “happy dream” (as one put it), Seoul could well put its threats on the backburner. Even if it does make good, other jurisdictions could take up the slack. When China passed its first wave of anti-crypto rules last year, much of the market action simply shifted to Japan; some mining operations just moved elsewhere, including Canada.
So who knows if this is the end to the cryptocurrency rally. Yet there are other factors that could undermine it. And the biggest is this: the recent rally and correction have demonstrated that Bitcoin, as either a currency or a “store of value,” just doesn’t work very well.
What, after all, is the value-holding capacity of Bitcoin? Crypto-evangelists often cite gold as a similar asset class, in that it has no value beyond marginal industrial uses; its value is what people say it is. Maybe that’s a good comparison, but I’d apply it differently, by noting that the base value of gold is not just in those industrial uses, but also in the hundreds of millions of people around the world who believe that it looks good or can bestow prestige. Granted, this is a historical/cultural value, yet it’s proven pretty reliable over the past, oh, 5,000 years or so. And it comprises at least part of the price of gold, one that should persist no matter how other factors fare.
In that sense, Bitcoin has a similar base value, but it lies not in history but ideology: namely, the belief among evangelists that the world is in need of a medium of exchange backed only by computation and free from the oversight and manipulations of governments and corporations.
How many Bitcoin investors today hold to that ideal is an open question, but I think it’s safe to assume that the recent speculative bubble has not been fueled by a mass conversion to libertarianism. If that’s right, then the base or “intrinsic” value of Bitcoin, supported by true believers, is somewhere under US$1,000 — where it was a year ago. (That’s assuming, of course, that the believers’ faith is more or less unshakeable; we’ll see what happens if the meltdown continues.)
Everything else (about US$10,000 this week) is the speculator’s share of price and has proven itself to be remarkably volatile — which is to say, hardly a good store of value. The gold price, which has seen annual moves in double-digit percentages before, is capricious enough, but it can’t hold a candle to Bitcoin.
The other problem is probably bigger: as a currency, Bitcoin sucks.
For its evangelists, one of its advantages is that it will facilitate low-cost, disintermediated transactions around the world. But as market action has soared, so have transaction costs and times. Bitcoin miners can only process so many transactions, and they prioritize those from the highest bidder rather than the next customer in line. With the tidal wave of trading, the average transaction price rose from about US$3.50 in October to about US$55 in mid-December; it has since come down to about US$25. (Fees got so high that gaming network Steam stopped accepting Bitcoin payments last month.)
Meanwhile, the processing time to confirm transactions is anything but dependable, and the trend is toward longer. At the start of 2017, the average confirmation time for Bitcoin transactions was about eight minutes, according to Blockchain.info; it was 54 minutes on Monday; on Dec. 31, it was more than 3,300 minutes, or 55 hours, or more than two days. If Bitcoin gains wider acceptance, how will it keep up with demand for transactions? And is it going to gain wider acceptance if people might have to wait two days to get paid, without any way of knowing beforehand?
Look, I’m not such a Luddite that I can’t see that blockchain is cool and Bitcoin is at the very least a grand experiment in solving an interesting challenge. But it’s not a currency, or at least not a good one — not yet, anyway. And if its regulatory and internal challenges persist, it won’t be much of an investment for much longer, either.