There’s much being said about Bitcoin’s dip in value last month. The chatter might make you ask if cryptocurrency really is just a fad that will fizzle like the Dot-com bubble or if there is long-term value in its emergent market.
Let’s pump the breaks and first take a look at what happened to Bitcoin.
Bitcoin has been on a downward trend.
The value of an individual bitcoin was more than $19,000 in December 2017, something that could be un-ironically described as a meteoric rise from its reported $1,000 value just eleven months earlier: an increase of 1,800%.
Yesterday, the price of Bitcoin dipped to $9,628, and just this afternoon CNBC reported that it sank below $9,000—the lowest it’s been since those halcyon December days. If you’re a Bitcoin investor, that’s a pretty tough pill to swallow. But what caused the most famous cryptocurrency’s price to plunge?
Why did the value of Bitcoin crash?
A volatile investment will understandably give people pause. What happens if major countries decide to severely restrict or outright ban that investment? Well, we may be seeing those results in real time.
In mid-January, China signaled its intention to ban on all cryptocurrency trading, while South Korea—“the third largest crypto-trading market in the world,” according to Time.com—is significantly stepping up oversight. Understandably, every time a major market announces increased regulation or an outright ban, the value of all cryptocurrency drops.
So are the skeptics right? Has the Bitcoin bubble finally burst? Maybe.
Then again, maybe not.
While major markets actively regulating or limiting the reach of cryptocurrency is a newer development, this isn’t the first time the value of Bitcoin dropped by a large percentage. In January 2015, Bitcoin fell 32.5%. Going from $244 to $173 isn’t nearly as dramatic as what’s happening in 2018, but it’s still a significant crash.
Here’s the thing: if we compare the January-2015 price of Bitcoin to its 2014 price—the then-all-time high of $1,161—it might lead people to believe that the “Bitcoin bubble” had finally burst. That was three years ago, long before Bitcoin surged to $19,000 a unit in late 2017.
Does Bitcoin have intrinsic value?
Some economists criticize Bitcoin for “only being worth what people agree it’s worth,” arguing that anything exclusively deriving its value from industry speculation is doomed to fail. This, of course, begs the question: does Bitcoin have intrinsic value?
Critics view cryptocurrency as little more than digital competition for fiat currency, but proponents would say that this is a misunderstanding that fundamentally misses the point.
The 2008 white paper ““Bitcoin: A Peer-to-Peer Electronic Cash System”,” written by a person—or persons—using the pseudonym Satoshi Nakamoto, explains the technology upon which Bitcoin is based: the blockchain. Without going into too much detail, the program is basically a decentralized, global digital ledger that keeps an encrypted copy of all Bitcoin transactions that is constantly updated by Bitcoin miners.
Since blockchain is open source, would-be cryptocurrency developers can change the code to perform a variety of functions, like acting as a ““smart contract”” or decentralized Internet service provider. Investors would likely point to blockchain as the thing that gives cryptocurrency its “value.”
But if Bitcoin itself doesn’t serve any function beyond acting as an alternative to fiat currency, then why is it still the most valuable available cryptocurrency? One guess would be familiarity: Bitcoin has been around since 2009, giving it time to saturate numerous markets. Another guess: it’s what altcoins—upstart cryptocurrencies—are valued against and is generally accepted when users want to convert one altcoin into another, functioning as a middle-man currency.
What are we covering next week?
Next week we’ll look at how IRS treats cryptocurrency.
Ryan Norton, Contributor