Finance

Bitcoin is trapped in a ‘death spiral’

By Oliver Smith 6 February 2018
Image: Getty/DarthArt.
Summary

But it won’t die.

If you haven’t been paying attention, Bitcoin is in a pretty bad place.

Since highs of over $16,000 in December, the price of a Bitcoin now wallows below $6,000.

That’s pretty bad news if you were among the millions of armchair investors who decided to dabble over Christmas.

What’s even worse, cryptocurrency fans must feel like they’re stuck in a loop, as the news cycle around Bitcoin seems to be stuck repeating the same 4 stages:

1. First country X begins mulling a crackdown on Bitcoin, with ideas for either regulation or a full ban on trading.

2. Concerned local Bitcoin investors start selling in order to avoid being trapped with no way to cash out their Bitcoin in country X.

3. Selling begats more selling, and the price of Bitcoin starts to fall.

4. The falling price prompts senior bankers and politicians in country Y to condemn Bitcoin and begin mulling their own crackdown, with ideas for either regulation or a full ban on trading for this “very risky” investment…

Rinse and repeat.

 

Bitcoin today

This morning we’re somewhere between stages 3 and 4 in the cycle.

Bitcoin just sunk below $6,000 after the Bank for International Settlements (BIS), which holds accounts for central banks, labelled the cryptocurrency “a combination of a bubble, a Ponzi scheme and an environmental disaster”.

The BIS’ comments come after European Central Bank chief Mario Draghi offered a similar warning, which also sent prices lower.

And Draghi’s comments came after Lloyds in the UK, and many other banks around the world, began blocking their customers from buying Bitcoin on credit, because of the risk.

But just because Bitcoin is stuck in a ‘death spiral’ of bad news, that doesn’t necessarily mean it’ll die.

Bottoming out

At some point, whether that’s at $5,000 or $4,000, or even $1,000, the price of Bitcoin will stop falling, regardless of the bad news cycle.

Investors will swallow the uncertainty and the risks, and they’ll start buying again.

It’s happened at least five times before, and it’ll happen again.

The question for investors is, what price will Bitcoin bottom-out at, and whether it’ll recover in the future.

The future of Bitcoin

For most of us, Bitcoin was never an investment opportunity – instead it was a great demonstration of blockchain, a technology that really will transform our lives.

Whether it’s blockchain being used to transparently track your charitable donations with Donorcoin, to make sure the money gets where it’s going, or blockchain in Australia that lets everyone to buy solar power from anyone.

The spectacle of Bitcoin isn’t over, but today it’s just a colourful sideshow to the real story.