Why Bitcoin crashed and will rise again

Journalist:
Christoph Marckx @cryptomaniacs
April 3, 2014
Despite all the bad news, we have to keep believing in Bitcoin. This is our chance to give the entire world access to a honest financial system.

Once again the Bitcoin world is full of panic. Shit (mostly Chinese) has hit the fan and prices are falling down as we speak. Five months ago, Bitcoin was at an all-time high. One coin was worth more than a thousand dollars. At the moment I’m writing this; a Bitcoin is valued at a ‘mere’ 400 dollars. How did we get to this point and are people right to panic?

No crash is ever the same

I often hear cryptocurrency fanatics say this has happened before. They refer to crashes that happened one or more years ago and the climb Bitcoin made after that. Are they lying? No, of course not, they are talking about facts. But I wonder how you can compare Bitcoin’s recent developments to things that happened in the past. Circumstances have changed, and the reasons for Bitcoin’s decrease in value are different now. That does not mean Bitcoin is dead though, not by a long shot.

So what are the reasons for Bitcoin’s recent drop in value? Well, that is a question with multiple answers. Some are positive if you practice long-term thinking. Others are negative and related to severe growing pains. I believe there are three big influences right now.

1. Humane error

Ths is a very important one, in fact, I think it is easily the biggest influencing factor. For as long as we have roamed this planet, we have been known to make mistakes. Some are intended, made by bad people to increase their own gains. Others are not intended, made by people who only want the best for this world but failed to deliver in the process.

I am convinced most errors related to Bitcoin were not made by bad people. Most, not all. If an exchange like Mt. Gox collapses, much money is lost to many people. We hold a single person responsible while there was an entire team behind this exchange and its failure. Nevertheless, Karpeles is our scapegoat. I will probably hit a sensitive note here, but I do not think Mark Karpeles is a horrible person. I refuse to believe he wanted to steal millions of dollars, leaving all of his loyal customers in the cold. Instead, I think this was caused by bad management. Karpeles is no CEO. His qualities are different from that. And that is one of Bitcoin’s severe growing pains.

Multiple startups have appeared ever since Bitcoin started gaining momentum. Some were led by competent people. Coinbase or Bitpay are great examples of how a Bitcoin enterprise can work. And even they make mistakes sometimes.

The truth however is, unfortunately, that many of these startups were founded by people that lacked business experience. With Bitcoin’s rapid growth, these companies expanded very quickly. Too much growth at once never happens without sacrifice. Hacked exchanges often (not always) happen because their board underestimated the risks. Just a little while ago, we saw the first independent audits of only a few of these websites. When you are dealing with people’s money, audits like these should be standard. Especially when you claim to be part of a movement that wants to improve our traditional banking system. We should learn from previous mistakes, not repeat them.

The bad news that comes forth of mistakes made in the Bitcoin world is eagerly picked up by authorities and mainstream media. Which brings me to my next point.

2. The powers that be do not like Bitcoin, even when they say they do

Make no mistake, Bitcoin is an attack targeted at the system. Certain governments may tell you they think Bitcoin is an interesting technology, that does not mean they like it. In fact, I’m sure there is not a single government out there that wants to embrace Bitcoin as the future of money. They just take different approaches.

The US seems divided on this. They see a disruptive technology which they fear; but at the same time, they notice the scent of money that they love. An outright ban could destroy Bitcoin; they won’t do that as long as they believe profits can be made. The IRS ruling that Bitcoin is a property instead of a currency was made to sustain Bitcoin. “We’re not banning anything, we’re just making it less interesting for you.” That was their basic thinking behind that move. Of course, it wasn’t well thought-out. One of their biggest ‘Bitcoin criminals’ made headlines when he managed to use that ruling in his favor. On top of that, the paperwork brought by this measure is supposed to be enormous, close to impossible to process.

Still, people made huge gains by trading Bitcoins over the past year. To think there would not be any form of taxation on this, would be downright naive. The IRS will keep taxing Bitcoin. If ‘property’ turns out to be too difficult, they will change it to something more fitting.

China, that other major Bitcoin player, likes to turn the entire cryptocurrency world into a soap opera. In the past weeks, Bitcoin has been banned about four times. The price plunged down every time some Chinese journalist claims he read a letter from the People’s Bank of China. No official letter has yet been seen. Truth be told, the Chinese exchanges announced they would stop accepting Yuan deposits, which is probably proof enough to believe the rumours.

Thinking a nation like China would accept a technology as Bitcoin is, again,  downright naive. Bitcoin stands for freedom; China does not…

Adding the numerous other governments that keep warning people for the dangers of the criminal Bitcoin world, it is very clear that the anti-Bitcoin movement is working around the clock to keep the FUD spread. And that will have a negative impact on Bitcoin’s value.

Amidst all these bad signs, there is a ray of light shining on our beloved virtual currency.

3. Increasing merchant-adoption rate

I read a very interesting post by Vinny Lingham, CEO of Gyft. He links Bitcoin’s falling to the increasing merchants that accept Bitcoin as a method of payment. That seems odd when you hear it at first, but when you think about it, it starts to sound reasonable. These merchants receive Bitcoins for their services. Obviously, they will sell a certain amount of these coins. Lingham explains it as follows:

“Although many Bitcoiners are hoping for more large retailers like TigerDirect and Overstock to adopt Bitcoin, it may have a negative impact on the BTC price as these retailers will most likely convert 90% of their coins to cash — putting additional selling pressure on Bitcoin. This outcome may not be as desirable in the short term, but it will create a better long-term outlook for Bitcoin given the liquidity options. Again, if you asymmetrically add large retailers without driving consumer adoption at the same time, the demand supply curve will shift undesirably.”

Makes sense right? I do not believe this is a bad thing, however. As Lingham says, it’s worth it in the long-term. For now, however, this- will- have an impact on the markets.

We will succeed

So, after listing all these reasons, why do I still believe we will end up in the right place? First of all, I believe in the Bitcoin protocol. We create so many chances for less fortunate people in the world who have no access to our financial system. The idea behind Bitcoin is a really good one. On top of that, the Blockchain provides us with more security than our paper-money system could ever do. People do not believe it yet, so we have to explain to them why that is.

If I want to do something illegal, I will choose to do it with cash. I pay up and leave. If no photographs or anything of that kind are taken, it will be close to impossible to trace me. The Blockchain, however, records every Bitcoin transaction ever made. Yes, transactions are anonymous but in the end, everything can be proven. That is an asset no official instance can ever provide. Not the way the system works right now.

I also believe that adoption is growing. Amidst all the FUD being spread and governments doing their very best to warn people for the big Bitcoin monster, more and more merchants are starting to accept virtual currencies. New enterprises are popping up every day, and their founders are more experienced. They learn from the mistakes they saw. And this does not only apply to new startups.  Exchanges are increasing security measures and performing audits. That’s the way they should be working.

We are picking up the pieces right now. Bitcoin is at a turning-point. Compare it to somebody who is on its way to maturity. We’re not there yet, and there is lots of work to be done, but we’re well on our way. We will overcome this; we will end up stronger, and we will reach that place where we all want Bitcoin to be. Falling down a few times just gives us more tools to face the future. So keep calm and never give up on your ideals!

Bitcoin world picture by dreamstime.com
Front picture by Forbes.com

Last modified (UTC): April 4, 2014 01:07

Christoph Marckx @cryptomaniacs

Internet addict and virtual currency aficionado living in Belgium. I work in a school, where I am responsible for every computer and the entire network that keeps our students connected to the world. I love cryptocurrencies, mostly because it gives us a chance to take back our freedom. If we do this right, there are exciting times ahead!