Does the Recent Price Crash Spell the End for Bitcoin?
By: Jason Deane
Tags: Finance, Cryptocurrency, Bitcoin, Investing, Blockchain

Does the Recent Price Crash Spell the End for Bitcoin?

A simple market cycle — or does someone know something we don’t?

If you’re heavily invested in Bitcoin, like I am, it’s easy to get bent out of shape about its current price drop.

Day after day, the stats glow red. The market is bleeding out. Surely it’s time to panic. At the very least it’s time to sell and stop the losses, right? After all, that’s what a lot of people are doing and there’s safety in numbers isn’t there? The conventional wisdom of the man in the street is that you should follow the crowd because you can always buy back in when (if) the worst is over.

In a cold, emotionless, analysis this doesn’t make any sense though. You're effectively saying you’ll sell low and buy high — the exact opposite of what dealing with any commodity is about. If you want to make money that is.

Markets are, of course, driven by crowd actions rather than individual decisions. It’s important to understand the crowd mentality so you can do the exact opposite, even though this feels ‘hard’ because every fiber in your body is urging you to sell, to be part of that crowd.

But with the price in apparent free fall, should we consider the possibility that Bitcoin itself is finished before it’s even really started?

It’s always sensible to take stock of your investments in an ever changing world, of course, but how do you make that judgement? And how do you do it on something that few people really understand properly and, worse, many people think they do, but often don’t. How do you even tell the difference?

How do you know for example, I have any credibility in this field?

How, indeed.

Supply vs Demand

We DO know that price, for anything at all, is driven by only two things: supply and demand. Both, however, have large subsets of ‘ifs’ and ‘buts’ and all are subject to our fallible human emotions. We sell when we’re scared. We buy when we feel confident, often regardless of any other factors.

But let’s deal with supply first.

Bitcoin is, by design, the rarest commodity on the planet. It’s a man made limit set specifically to enhance it’s value over time, and is, in fact, the only asset available globally whose supply is fixed for ever. Not only that, but we even know exactly how many Bitcoins will be available at any point and the exact schedule of availability for the next 111 years. This information is absolute and available publicly from any number of sources by anyone at any time.

It’s easy to overlook that that is completely unique. Gold’s supply cannot be known with any degree of certainty and the total amount available is based on guesswork. Any of it could change at any time, especially as new mining techniques make previously impossible-to-mine deposits available. If a new, vast deposit of gold is ever discovered, what would that do to the value?

Even currencies are not fixed. New Dollars, Pounds or Euros are printed at the whim of governments every day in an unsustainable debt mountain that we all know we’ll have to deal with at some point in the near future. But, hopefully, we all say to ourselves, not today.

Since we know that the supply of Bitcoin is fixed — that is, we know half of the equation with absolute certainty — the falling price must, therefore, be due to a low demand. Specifically, that demand must be lower than the current supply of 1800 new Bitcoin being produced each day. In other words, those 1800 are not being bought which means that the supply of new coins is building up and depressing price.

That being the case, then all we need to understand is why the newly minted coins are not being snapped by the market to make sense of the price.

That, in turn, will allow us to make a judgement on whether it’s worth keeping our money in this new, as yet unproven, technology or getting out as fast as we can back into our unstable, but at least familiar, fiat currencies.

But since that requires moving into less certain and theoretical territory, that’s not quite as easy to figure out.

Who is selling and why?

The short answer is that it’s hard to tell. Analysts, experts and lay people alike all have opinions, but we can’t know for sure who’s right. We can only make an educated guess on the balance of probabilities.

We do know there are a very large number of HODLrs (crypto world slang for people who will never sell under any circumstances based on a typo made by a drunk early investor in a famous late night forum rant) and that somewhere around 4 million Bitcoin have been lost forever due to carelessness in the early days when it was worthless. Add in the 3 million Bitcoin that are yet to be mined and we can say, with a reasonable degree of accuracy, that there are only about ten million Bitcoin actually in circulation right now. That’s not a lot.

In fact, not only is it a small number, it’s a small number in a relatively small market. That means even modest transactions, ie a just a few hundred Bitcoin, can affect the price one way or the other, and often do. This explains the volatility of the price, something that in theory anyway, should subside as the volumes and number of active participants continues to grow.

But, even though Bitcoin is a new commodity, even though it is an absolutely uncorrelated asset (ie does not move in tandem with any other) and even though most people still don’t quite understand it, the same laws of supply and demand still apply. To apply Occam’s Razor, the simplest explanation is more than likely the correct one.

And that means ‘weak hands’.

We come full circle to the point made at the start of the article. When markets are down, people sell to stop their losses. This depresses price, which causes another round of selling and so on. Bitcoin's fundamentals haven’t changed, but the confidence around it has taken a pounding. Just last week Bitcoin’s Fear and Greed index hit 21, as measured by alternative.me. This puts the current sentiment in the category of ‘extreme fear,’ common in falling markets.

Lower market prices also have another effect on our psyche — heightening our awareness for bad news. There is always plenty of FUD (Fear Uncertainty and Doubt) in the press about Bitcoin anyway since its such a divisive and complex concept, but when markets are down, they seem much more pertinent. After all, prices must be down for a reason, right? These ‘new issues’ must be the reason. Twitter is full of people announcing they are offloading their Bitcoin, and the forums on Etoro are full of people complaining that they ‘got in’ at the wrong time. Total collapse of the whole thing is imminent.

Smart investors buy in these situations, and retail investors (individuals like you and me) panic and sell to them happily, relieved to get 30 cents on their dollar. In fact there’s often a scramble to offload them, resulting in a glut of supply. Eventually, of course, sellers dump what’s left in disgust (known as ‘capitulation’) and the market is saturated. Buyers gradually absorb it all, but, as no new supply is coming in, the process begins again in reverse.

Of course, this is all just standard market cycle stuff. We all know this to some extent. But with something so new, misunderstood and experimental, is there something else going on we don’t know about?

Is Bitcoin secretly dying and we’re too blind to see it?

It’s all about the fundamentals

I really struggle with the conclusions the market analysts come to with new and unproven markets. Analytical theory has it’s place, but where we’re always one announcement away from big changes, as we are here, it would be mad to take this single viewpoint as anything more than an interesting side note.

The fact is that Bitcoin’s fundamentals are stronger than ever, if you take the time to find them. Development is happening at a frightening pace. The network and awareness is, broadly, growing, and it’s already proven to be completely secure, bulletproof system. If you’re looking more information on that point, by the way, try this article:

So, if this is the case and the world is quite clearly moving towards a digital system of some sort, why isn’t Bitcoin doing better? Why does it appear to be dying when measured in terms of price?

I believe the answer lies in one word: uncertainty.

We still don’t know what governments plan to do with it — or against it. We don’t know if Bitcoin will be usurped by a younger, sleeker technology. We can’t even explain it properly to the masses if our main stream media is anything to go by. Uncertainty comes in many forms and today’s big question seems to be attacking its very basis of being: what is it supposed to be used for?

I’ve been flamed for suggesting it’s a currency (although it is, and it’s what Bitcoin’s white paper set out to achieve). I’ve been chastised for offering it up as a store of value due to its volatility, and there are fair arguments against.

But if it’s neither, then what is it? Is it the case that we have a new invention that we have yet to find a use for? And, if so, is it possible that none will be forthcoming? Is it this uncertainty that’s driving the price down?

Yes, it’s possible, but all new technologies go through this exact same phase of questioning as they grow, but each time we forget this is normal. The internet, remember, was supposed to be a useless passing fad that was only relevant to academics and geeks. And yet here we are.

And whilst we wrestle with the answers, let us remember a couple of interesting facts:

Last week 44,000 Bitcoin (or $310,000,000) was transferred from one wallet to another. To do that via the traditional banking system would have been very slow, subject to any number of checks and very expensive, especially if it was an overseas transaction. To do it via something like Western Union — assuming you even could — would cost in the region of $6,000,000. The total cost using Bitcoin?

32 cents.

Of course, this transaction is not isolated, there have been many examples of these sorts of moves. They are all visible on the blockchain and can be independently verified. Do we really think that instances like this will not increase as time go by? Logic dictates that it will. In that case we have just proved that Bitcoin is a currency — at least to some people.

But there’s more. Despite Bitcoin’s volatility, it can still act as store of value, especially for failing currencies. I find it fascinating to note that any person who bought Bitcoin in Venezuela, for example, would be significantly better off than if they’d left their money in cash or in any other financial instrument, even if they were unlucky enough to buy it at it’s peak in December 2017.

I include gold in this, but only because buying and storing gold just isn’t a realistic option for the average man in the street as it’s almost impossible to do. Bitcoin, however, is accessible to anyone with an internet connection and without requiring permission from a third party.

These two facts alone are enough to convince me because they prove beyond any doubt that the technology works as a currency and that it can act as a hedge (or ‘store of value’) in a certain situations. There are hundreds of other examples I could cite of course, but these ordinary, almost routine, effects of the system in operation make the argument perfectly.

And, after all, it’s not like Bitcoin hasn’t died before. There have already been several crypto winters, and some have been far more serious than this.

In fact, there’s actually an obituary that lists all the times where it has been pronounced dead since its inception in chronological order. As of today, Bitcoin has ‘died’ 378 times in eleven years.

And yet we’re still developing it, I’m still writing about it and you’re still reading about it.

So l’ll leave you to draw your own conclusions from that.