The Bitcoin Swan Dive Was Utterly Predictable

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Bitcoin took a pounding in the last 24 hours, dropping below the $500 mark on the popular Mt.Gox exchange before rebounding. As TechCrunch’s John Biggs wrote this morning, “China’s biggest Bitcoin exchange, BTCChina, has stopped accepting deposits in Chinese yuan,” which added to the currency’s decline.

However, the fall of Bitcoin’s value has been underway for some time, making the Chinese news merely component to the larger story: Bitcoin is losing momentum.

What pushed Bitcoin to $1,200 is the precise quantity that is taking it down. Hype, media interest, and speculative hope drove it up, and a lack of hype, media disinterest, and falling speculative buys are driving it down.

Bitcoin is trading at $606 at the time of writing. I made fun of Bitcoin when it initially hit $645: “Currently trading around $645 per coin, it has never been worth more, or generated more headlines that I can recall. The two are likely connected.” Yes.

The rise of Bitcoin was a classic bubble. Here’s the Mt.Gox chart of Bitcoin’s price on a daily basis:

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So, to see a huge Bitcoin price correction isn’t surprising in the slightest. Let’s go over a few past entries on why Bitcoin was, and is a bubble:

The current rally is being fueled by the usual combination of presumed scarcity, an overzealous investor class, and truckloads of optimism. So, things will calm down in a bit, with a decent price correction. History teaches us that much. Also, can I sell you this tulip bulb.

And:

People keep saying this isn’t a bubble, and it confuses me. Of course this is a bubble. It’s a far too rapid increase in the price of a financial instrument that is unmoored from any inherent value that is being bid up by aggressive individual speculation. What else is that?

Bitcoin has risen up to $621 from $606 since I started writing this short blog post. That doesn’t matter.

What does matter is that the price of Bitcoin has long outstripped the utility that it can provide. This became far more true after the implosion of Silk Road. Until Bitcoin has benefits commensurate with its price, it will remain overvalued. For now, the dollar cost of each coin is far higher than the value you can derive from it — its use for things that you can’t use other currencies for, or wouldn’t want to — aside from its status as an instrument of speculation.

Speculative demand never keeps the value of an asset class high over time.

And Bitcoin is hardly even an asset class.

Top Image Credit: Flickr