The Rainbow After the Storm or Why the Price of Bitcoin Doesn’t Matter Right Now

Bitcoin price plunged below the $200 mark yesterday, which without a doubt is causing many Bitcoin enthusiasts a bit of concern. The currency has been plunging steadily since the holiday and is now at or below the level set when bitcoin exchange Mt.Gox crashed.

Photo: Roy Wangsa/Flickr

Photo: Roy Wangsa/Flickr

On Tuesday morning bitcoin was traded at $267 on Bitstamp. However, by late Wednesday afternoon it plunged to just $195, which comprises 27%. The decrease means that the currency has plunged by more than 80% from its record high level of $1,150 that was reached in November 2013.

It is currently fluctuating  from $223 to $209. However, that price is a far from the exciting $1,000 days of late 2013. Seems like the world will never see that price again.

Greg Schvey, a partner at digital currency data company TradeBlock, told the New York Times that the abrupt decline showed signs of a “squeeze” on bitcoin. “People have these very real fiat-based liabilities that they have to pony up for, and to do that, they’re going to have to sell Bitcoins,” he stated.

“Here’s why I don’t focus on price much. Bitcoin is best thought of as a 5- to 10-year project, and we’re at the very early stages. An (admittedly imperfect) analogy is the early Web,” said Jerry Brito, an executive director of Coin Center, a non-profit research and advocacy organization based in Washington, D.C. focused on the public policy issues facing digital currency technologies, to WIRED. “Like the early Web, Bitcoin is an open platform that no one owns, and on top of which anyone can build without having to get anyone else’s permission. And just like the early Web, success requires investors, entrepreneurs, and developers to build out the infrastructure and applications that will make it useful to average users.”

He continued: “Those of us old enough to remember using Navigator to browse the Web over a Winsock connection on a 56k baud modem can attest that it was not the amazing experience we take for granted today. In fact, if you couldn’t see that the technology would evolve, you would have concluded that it was practically useless. For one thing, there was no easy way to find things on the Web. Well, we didn’t get Google until 1998. So here’s the parallel: Bitcoin was conceived by Satoshi Nakamoto and proposed in a paper published in 2008. He worked on implementing the idea into code, mining the first block of the blockchain in January of 2009. So, if we take the Web as a parallel, we’re at the stage in Bitcoin were we would hope to see a Mosaic level development, not a Facebook.”

“In other words, it’s early days. The Googles and Facebooks of Bitcoin–the killer apps that will make the technology indispensable for ordinary users–may not come for another 5 years. Unlike the early Web, though, Bitcoin has a price ticker people look at daily, and so they wring their hands. Every dip and spike in the price gets a lot of attention and spells either doom or “irrational exuberance.” But as Marc Andreessen has pointed out, “the price of domain names didn’t determine the usefulness of the Internet.” With a longer time horizon in mind, you can put the short-term drops and rallies in price of Bitcoin in perspective. So don’t worry so much,” Brito concluded.

But not everyone is so optimistic. There is no doubt that the plummeting price of bitcoin has had effects throughout the bitcoin economy. While merchants may be climbing to refill their margin accounts or to bulk the short swaps, some miners are apparently beginning to find their positions unsound as well.

Companies that have invested millions of dollars into building specialized server farms have come to monopolize the mining process, and received their part of the rewards. Schvey suggested that the real money those companies obtained to start running were beginning to be regained. That made them to sell some of their profit that they may otherwise have kept placing reliance in a recovery in the price of bitcoin.

Matt O’Brien, a reporter for Wonkblog at Washington Post, has expressed his opinion as well: “Bitcoin isn’t a currency. It’s a Ponzi scheme for redistributing wealth from one libertarian to another. At least that’s all it is right now. One day it could be more. Venture capitalists, for their part, are quick to point out that it’s really a protocol, like the early internet, and its underlying technology could still be revolutionary. What are they supposed to say, though, when they’ve bet hundreds of millions of dollars on it?”

He continued: “But that’s not much of a consolation to anyone who bought anywhere near Bitcoin’s $1,100 top. Or near $1,000, or $900, or $800, or, well even yesterday’s prices. That’s because Bitcoin hasn’t just fallen 76 percent the past year. It’s fallen 36 percent the past two days, as you can see below, with a 24 percent decline the past 24 hours. It’s too bad Bitcoin doesn’t have a central bank to help stabilize its value.”

“Bitcoin, in other words, is suffering a deleveraging shock like the one that our economy in 2008, but without a Federal Reserve to cushion the blow. That means this doom loop of debt and Bitcoin deflation could take prices down a lot further still. The only solace is that, in the long run, the system should self-correct, as miners drop out and mining gets easier,” he added.

Taking into consideration the situation with bitcoin value, many bitcoin enthusiasts are paying their attention to a more fundamental technology called the Blockchain. Staying at the core of the bitcoin currency, the blockchain is the concept that allows money to be traded on a truly decentralised basis, but some people argue that its potential goes far beyond that.

“Wait a minute and I’ll explain exactly how the blockchain works. (Or at least try.)” wrote Scott Rosenberg  at Medium’s Backchannel blog. “For now, think of it as a way of transferring a digital message from one party to another, where both parties can count on the integrity of the message, even when they don’t trust, or even know, each other.”

He continued: “Right now, these messages are mostly virtual cash. But they could be any kind of information. On an Internet where your inbox is besieged with spam, your credit card number’s about to be poached, and you can’t possibly remember all your passwords, this could be extremely useful. But it could be even more.”

What do you think about all this? Do you believe in Bitcoin and/or Blockchain technology? Tell us in the comments below.

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