Alternative Finances

Bitcoin’s Troubled Times

“While I praise the sheer ingenuity of bitcoin and its payments innovation, it should be buried.”

  •         Dr. David Evans, “Bitcoin Is A Brilliant Innovation, Here’s Why It Will Fail” October 2013

Though we are only 12 days into the new year, 2015 has not been terribly kind to bitcoin. The digital currency started the year off with a price plunge that has more or less continued through early January. It’s dipped a whopping 74 percent since this time last year, trading at less than $300  on the PYMNTS bitcoin price index.  And, two hours before the open of the Stock Market on the East Coast, bitcoin’s price is around $269.

Prices being down, however, is only one small part of bitcoin’s recent woes. Last week, of course, Bitstamp, supposedly one of bitcoin’s more respectable and liquid exchanges abruptly went dark after cybercriminals reportedly made off with about $5M in bitcoin. Bitstamp is run by two Slovenians in their 20’s and backed by U.S. hedge fund Pantera Capital (as sub-unit of Fortress Investments). Bitstamp was up and running again on Friday, four days after the company told users that they would be up in 24 hours.

Now, this weekend in perhaps the ultimate slap, the Vault of Satochi – named for bitcoin’s creator – has announcedit is closing up shop, to pursue the apparently more lucrative (and less risky) world of helping consumers skirt Netflix regional controls.

In one of the more alarming pieces of news for the bitcoin community this week, however, mining company CoinTerra announced plans to suspend payouts to mining pool clients. Mining pool contracts allows those who did not invest early on in Bitcoin mining equipment to sign onto professional mining operations, in return for a capital investment.

As a note to their customers  posted on the company site reads:

"The company has defaulted on its secured notes. The Note Holders have senior, secured and, we believe, perfected liens on all of CoinTerra’s assets, including servers. We have proposed a plan to the Note Holders. However, at this point we do not know how they are going to react to our proposal. The Note Holders are evaluating their options. Until this is resolved, CoinTerra will be unable to make further payments."

What this means is that we cannot issue any payments to customers at this time. Rest assured we will let you know if this situation changes or if there are any relevant new developments but, for now, we have no further information."

Just like miners in the gold rush days, investing in mining equipment was only as appealing as the promise of future riches. No future riches, no incentive to lay out a bunch of dough to look for stuff whose value is only going down and not up.

So, when exactly did things go wrong for bitcoin?

Some analysts have pointed recently to the run-up in price, followed by the ruinous collapse of Mt. Gox.

The Financial Times, this past weekend, compared the bitcoin bubble to the “Flash bubble” of the early 2000’s and argues that the structure of the bitcoin market was a sort of “wild west” where some big players were likely to have enough information and pull to influence the market, so long as the market remained underegulated and largely opaque to outsiders.  And, as the first in, they were also the first out with their money.

Economist and MPD Founder, Dr. David Evans, over a year ago, noted that the problem was even more deep-rooted. Bitcoin, he argued, by its very nature, couldn’t be any less opaque since it’s main appeal is that it is digital cash and highly anonymous.  He noted then that governments would never agree to a global currency, much less one that didn’t allow them to see who was bringing money into their country for what purpose, which would in turn tube the value of bitcoin.

"Governments will—and I think sooner rather than later—realize that bitcoin is to cash what crack is to marijuana – a more potent and addictive drug. Exactly because bitcoin has done such an exceptional job of replicating the critical features of cash—anonymity and irrevocability—it has become a much more potent method for engaging in tax evasion, various illegal activities and terrorism than cash ever was. Bitcoins have all those exceptional features of cash but can also be zapped instantaneously across the globe from criminal to criminal."

And now, even among those who have been particularly dedicated to bitcoin in the past, the orchestra playing that particular tune is starting to tune their instruments.

Bitcoins aren’t for everyone, the FT article noted, quoting adamant bitcoin enthusiast Gavin Andresen, the unofficial CEO of Bitcoin, who told the publication:

"It actually is dangerous and people should be aware it’s like the early internet,” he tells the Financial Times. “If you lived through time, you remember lots of press articles that came out saying don’t give internet companies your credit card details. But the internet grew past that. Bitcoin will be the same way. Over time, I will stop saying to people, ‘Don’t use it unless you’re technically proficient enough to keep your computer secure’."

That may not sound much different from what others have been saying all along, but more and more of the early investors are brushing off bitcoin the currency as not that important. Marc Andreessen, Silicon Valley investor whose invested tens of millions into a variety of bitcoin ventures has recently said the same thing, citing theunderlying technology  – the blockchain-  is what matters instead, adding that tech needed the sort of high enthusiasm investment to get off the ground and that it will definitely be worth it in the end.

In a piece Andreessen wrote about a year ago to the day,  he made the case for bitcoin’s potential contribution to advancing trade, refuted claims that bitcoin was the currency of criminals,  and suggested that hacks into bitcoin systems would not be possible, stating that had Target used bitcoin as a method of payment, the hack into their systems would have yielded nothing.  Andreessen suggested that “the fact that Bitcoin has risen in value in part because of speculation is making the reality of its usefulness arrive much faster than it would have otherwise."

A year and about a 74 percent decline in value, the question is does bitcoin have a future?  That depends, according to the FT article. If investors continue to have the appetite to pour money into digital currency start-ups, it’s possible.  If the money transferring capacity of bitcoin-like currency (as opposed to the not financially supportable mining aspect) is developed, it’s also possible – though those transfers will be much less inexpensive when transfer fees are the primary revenue generated from digital currency. As any economist will tell you, there’s no such thing as a free lunch, even if bitcoin is on the menu.

It does seem, however, that the bloom is starting to come off the bitcoin rose and that bitcoin as both and asset and a currency are on their way to that innovators graveyard of the next big things that weren’t.

 

 

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