Could the so-called Bitcoin ‘price crash’ be good for the cryptocurrency?

By Last updated: August 6th, 2014

In December last year, Bitcoins were trading at $1200 a pop, and the Winklevoss brothers predicted that the coins could peak at $40,000each. Of course, it turned out that, as in so many other things, the brothers were dstealthepixels-faucet-banner-160x600ead wrong.
Over the last few months, the price of Bitcoin has gently slumped; at the time of writing, they are worth just under $600 each, and have been about that for several months.

Previously, Bitcoin has been incredibly vulnerable to speculation driven by media reports; there’s a big part of me that thinks that the reason the Winklevii went out and made their “$40,000” claim was to talk up the value – after all, the “Winklevoss Bitcoin trust” set up by the brothers owns millions of dollars worth of the cryptocurrency.

However, recently, big media announcements haven’t bounced the Bitcoin price very much. New York published licencing guidelines for traders wanting to accept Bitcoin; many reputable businesses including both Dell Computers and (bizarrely) The Royal National Lifeboat Institution will now take payments in the cryptocurrency. All of these are the sort of thing that would previously have sent the price rocketing up, but it’s stayed pretty level.







Personally, I think Bitcoin has shed many of the penny-ante speculators who were only in the currency as some sort of short-term, get-rich-quick commodity play. Ironically, they’ve been scared off by the lack of volatility. In a year when Bitcoin went from $13 to $1200, the get-rich-quick stuff made sense; in a year when the price has meandered within 10 per cent either side of $600, it’s much less appealing.

Those people who are still holding coins are probably doing so with a specific purpose in mind. Many of the professional investors who are in Bitcoin have automated sell functions set up if the value declines below a certain point. In addition to that, there are numerous high-frequency trading algorithms watching the Bitcoin market; a stable price means these are triggered far less often, so stability breeds stability.

This sort of stability is what Bitcoin needs to function as a currency; if the money I use to buy a pizza today could have bought a motorbike tomorrow, I don’t dare use it to buy stuff, but if it’s reliably roughly the same for a few months, I might start using it as an ordinary currency.

That said, despite some promising signs, I still probably won’t get into Bitcoins.

For all the hype around being able to buy the occasional coffee in hipster meccas like Palo Alto or donate your money to lifeboats, Bitcoin is still mainly used for illicit transactions – buying and selling illegal goods online being by far the most compelling reason to own some.

As I outline above, the second reason to own Bitcoin is to speculate on the value of them. While at least one of the more cerebral online drug dealers I know has mused that he wished there was some kind of Bitcoin futures market to reduce volatility, an economy based on a mix of crack dealers and libertarian day traders still seems like a risky bet.

Even if you do trust Bitcoins, the increasing importance of the Winklevii to the currency should give you pause. I’ve always felt anyone who understands all the words in the name “Winklevoss Bitcoin Trust” should realise the first two don’t create the third.

Their previous ventures – online shopping website Hukkster and social network for Fund Manager SumZero – are hardly household names, even if you don’t believe the portrayal of them as buffoons in “The Social Network”.

Even their own SEC portfolio says “As the sponsor and its management have no history of operating an investment vehicle like the Trust, their experience may be inadequate or unsuitable to manage the Trust.” They also point out the inherent risks of Bitcoins – while the currency has never been hacked, the wallets people use to hold their currency have been.

With disarming candour, the portfolio says “The trust may not have adequate sources of recovery if its bitcoins are lost, stolen or destroyed” and that “The loss or destruction of a private key required to access a bitcoin may be irreversible. The trust’s loss of access to its private keys or its experience of a data loss relating to the trust’s Bitcoins could adversely affect an investment in the shares.”

Frankly, I’d rather burn my money in a bucket than give it to the Winklevoss brothers to invest in Bitcoin. However, if the price stays stable for another few months, we might see it more as a currency, and less as a pure speculator’s commodity.


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