The Bitcoin Bears of 2018 Q1

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2018 Q1 for Bitcoin has not been a positive one seeing the price drop from around $ 14,100 to $ 7,130.  Aside from the dramatic drop (the price has effectively halved) over the first quarter, it has increased from the $ 1,000 level a year ago.

In simplistic terms, the value of Bitcoin is pretty much dictated by the supply and demand principal.  In a bullish market, the more people buy, the more the price is driven up.  In a bearish market, when selling transactions dominate, demand will diminish, and the price will go down.  Simple economics.  Factors that drive buying and selling are varied.  Hype (mostly driven by media) is created when positive news strengthens the confidence levels and perception of cryptocurrencies.  People buy because of this.  Lack of confidence or pessimism (also mostly driven by media) causes people to dump their holdings.  So, the value of Bitcoin (and most of the altcoins) is driven mostly by public perception.

The decline over the past few months has been created by several negative events that have diluted a lot of the hype seen toward the end of 2017.   2018 Q1 has been dominated by the bears and it is anyone’s guess as to when things may change.  There are many that feel cryptocurrencies are dead and that they cannot recover from the current loses - the proverbial bubble has arrived.  Then there are those that still believe in the underlying technology and the supposed value that cryptocurrencies can bring.

Ironically, some of the main drivers that push the price down are where Bitcoin is supposedly meant to differentiate itself. The philosophy behind Bitcoin and the various cryptocurrencies is that through the nature of being decentralised, they are meant to be completely democratised.  No single entity or element should be able to control them.  However, centralised banking institutions and governments seem to have the most control over the price of Bitcoin.  Negative sentiment or the threat of regulations from banks or government pushes the price down.  Support from these entities pushes the price up.  Another issue (according to Bloomberg) is that approximately 40 percent of bitcoin is held by about 1,000 users.  And another interesting fact is that the top 100 bitcoin addresses control about one-sixth of the issued currency.  These massive swings could be controlled by Bitcoin “whales” that are buying and selling in large quantities to alter that state of the market.  This indicates that the supposed decentralised technology, is quite centralised.

If we unpack the first three months of 2018; below are some of the factors that have influenced the price of Bitcoin (and most of the cryptocurrencies negatively).

  • Government regulation has started to gain traction to help protect investors along with collecting taxes. Regulation is mostly perceived as negative since it implies a central control over cryptocurrencies.  There is also a feeling that regulation will stifle innovation.
  • There have been many scams, specifically in the ICO space. Cryptocurrency news site surveyed last year’s ICOs and found that of 902 tracked by TokenData, 142 failed before raising funding, and another 276 failed after fundraising.  Another 113 projects were labelled “semi-failed,” because the people that launched the crypto have abandoned it and the communities that supported it have disappeared.  That is a 59% failure rate to the estimated tune of $233 million.
  • Tether, a cryptocurrency whose value is pegged to the United States dollar, has been used by traders to get the value of their money back to dollars without have to convert to fiat. Tethers are supposed to be redeemable for dollars at any time, but in recent months Tether has struggled to gain access to the conventional banking system and has failed to produce a financial audit demonstrating its solvency.
  • A few of the major exchanges were hacked. About $ 530 million of virtual coins was lost earlier this year in Japan – the major exchange Coincheck was one of the victims to the attack. BitGrail, an Italian exchange, was hacked and lost about $ 170 million in the Altcoin called Nano.  The security of blockchain is supposedly strong and “immutable” once mined.  But the weak link is still the exchange.
  • Warren Buffett (renowned as the world’s leading investor) has predicted “with almost certainty that cryptocurrencies will come to a bad ending.”
  • China banned domestic Crypto exchanges and ICOs in early 2018.
  • Facebook, Google and Twitter have all banned the advertising for cryptocurrency-related services
  • Bank of America, J.P. Morgan, Citigroup, Capital One, Discover, and Lloyds say they have or plan to ban customers from using their credit cards to buy cryptocurrencies like Bitcoin.

These events along with others have harmed the growing confidence in cryptocurrencies as an alternative means to exchange value as opposed to the current expensive, centralised banking institutions.  It is anyone’s guess as to what the prices will do over Q2.  There does seem to be a common theme that the cryptocurrencies have a weak start to the year.  Is this just a pattern repeating itself?  We can only wait and see.  I think that it will be a tough ride from some time to come.  The underlying technology and architecture that support the cryprocurrencies could ultimately be what decides the value.  As blockchain is implemented in more and more industries (outside of banking), the technology will become more understood and strenthen as it matures.  This will potentially build higher levels of trust which would translate to a higher adoption of cryptocurrencies across a much broader audience.

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