The 2018 Bitcoin Crash, Bit By Bit

Call it a long day’s journey into … twilight?

At this writing, bitcoin’s price hovers around $3,807. The nadir has been a bit more than $3,100, and not far behind us, in the rear-view mirror looking back little more than a year, was an all-time high of nearly $20,000.

Long ago and far away, bitcoin enthusiasm was measured in dollars, and what a difference a year makes.

Depending on where you stand, the bitcoin crash, which may still be, well, crashing — or may be prelude to yet another run-up as, in past years, bitcoin has lost well nigh 90 percent of its value only to recover — may be classified as either a perfect storm or perfectly obvious.

Speculating about speculation has its rewards, because it can help avoid the pitfalls of “it’s different this time.”

Voting Vs. Weighing Machine

To borrow an old investment maxim, when it comes to pricing any holding, there’s a difference between those who vote and those who weigh. Simply voting? Well, that’s a popularity contest, and for bitcoin, popularity reigned as evidenced by the roughly $20,000 for which the cryptocurrency changed hands, a heady rise from the less-than $800 level that marked the beginning of 2017. At the time, the promise had been that the crypto would be used as, essentially, a replacement for fiat, for the hard stuff in paper and coins that changes hands for everything from coffee to houses.

The idea, too, among some skeptics of the current way we conduct commerce, is that cryptocurrencies would be able to, or should, replace fiat.  Consider the fact that UBS said this past summer that bitcoin could replace fiat when it reached a value of $213,000. Also, said UBS, bitcoin would have to be considered as “money or even a viable asset class.”

To be accepted as money? Well, merchants and all manner of enterprises need to be willing to accept bitcoin as both a store of value and a fluid mechanism of transporting that value between parties in a transaction. Data from August show that, as Bloomberg reported in August, bitcoin as used in everyday life … was not being used in everyday life. One proxy was spotlighted as the 17 largest crypto merchant processing services took in as much as $411 million in September 2017, but only $6o million in May of 2018.

“It’s not actually usable,” Bloomberg quoted Nicholas Weaver, a senior researcher at the International Computer Science Institute, as stating in an email. “The net cost of a Bitcoin transaction is far more than a credit card transaction.” Also, the transactions have a sticking point, as they remain irreversible and there seems no way to address fraud.

So, if the promise had nothing underpinning it in terms of easily adoptable real world use cases, then the voting machine had to keep … voting.

Until the weighing machine kicked in. This is other part of that investing maxim and the part that likely has caused bitcoin to land with a thud. The thud came as at least some of the oxygen came out of the very idea of tokens as currency. You might be familiar with the initial coin offering, where fiat is given by investors for tokens.

During this year — in November, a month in which the bitcoin lost roughly a third of its value — the Securities and Exchange Commission levied a quarter of a million dollars in civil penalties against two purveyors of initial coin offerings, those two firms being CarrierEQ and Paragon.

The ruling meant that investors were able to be compensated for losses — in hard currency. Perhaps implicit in all this is the thought that maybe the hard stuff is going to remain the way we do business — and in God We Trust, all others pay cash. Turns out you are not going to buy coffee by wielding bitcoin (even Starbucks has said as much).

Think it’s all about individuals, and that the speculation is spread out among mom and pops who wanted to get in on something novel and perhaps life-changing? Think again.

When institutions get in the game too, and use financial firepower (and sometimes leverage) in an effort to goose returns … well, what goes up might come down, and with a vengeance. As profiled in MarketWatch, dozens of hedge funds that have focused on cryptocurrencies have shuttered amid the steep selloff. We are a far cry from the early days of the year when 44 funds launched in the month of January alone. Selling off holdings to realize losses or shut doors has no doubt added to the downward pressure on bitcoin and brethren. Call it a vicious cycle. Along the way a few investment/financial services powerhouses such as Goldman Sachs walked away from nascent plans to open crypto currency trading desks.

Fed Scrutiny, Too

Oh, and it never helps to have the Feds peeing into what you are doing, by the way. There was no Thanksgiving for bitcoin as it was revealed in the financial media that the U.S. Justice Department was and is now investigating whether the aforementioned rocket-fueled rally in bitcoin’s price was tied at least in part to manipulation.

Bloomberg reported that “a tangled web” that involves bitcoin, a digital token known as Tether and the exchange Bitfinex may have served to boost bitcoin prices — and illegally so. The machination is one where, allegedly, Tethers have been used to buy bitcoin when the latter was seeing downward price action, in effect helping the pricing as the marquee cryptocurrency neared its 2017 record highs. The subpoenas are flying, and an academic paper from the University of Texas says that Tether was used to help manipulate bitcoin prices.

Hmm. A speculative vehicle with no real intrinsic value (and volatile to say the least), where use cases have been slow-going and regulatory lights continue to flash … perhaps the question better asked of this bubble might be not “why?” but “what took so long?”