Bitcoin Crash: This Was Entirely, Utterly Predictable, Everyone


After peaking at $266 earlier this year, the Internet-based currency Bitcoin is collapsing in value faster than most of its proponents thought possible. That peak alone should tell you that Bitcoin, which is unbacked by traditional means (read: no gold, no full faith and credit of a national government, just the calculated net worth of the distributed market as demonstrated by the proof-of-work system), was well overdue for a bitter, harmful market correction.

By unbacked, I mean that Bitcoins are only worth anything if people are willing to use it to buy goods and services, like any other currency. Since there's very little "real" market value to a Bitcoin (have you paid for groceries using one lately?), it's incredibly volatile.

See below:

As of the time this article was written, Bitcoinity measures the current value as approximately $122 per Bitcoin. That's a 54.14% drop from peak value. Expect it to keep plummeting, though the price is fluctuating wildly thanks to the dubious efforts of automated trading bots to protect investor holdings. That last part is just a theory developed by a programmer friend, though it lines up with previous analyses of the Bitcoin market.

Of course, this was all entirely predictable, and in fact was built into Bitcoin as a standard feature from the start (although I doubt its creators intended for this kind of market instability). The current crash is what happens when you create a crypto-currency: it becomes completely unhinged and divorced from the realities of any kind of normalized, government-and-economy-backed currencies. Bitcoin has essentially become a speculatory engine writ large, and the entire market is dominated by the whims of the speculators. That's why values peaked at such a ridiculous high. As BTC's value skyrocketed, irrational exuberance set in, and Bitcoin holders had every reason to contribute to the push for a higher exchange rate. Huge fluctuations in value were to be expected. In some ways, it's astounding Bitcoin managed to climb so high.

Wildly shooting up and down in price is not what a currency should do. It makes the medium of exchange worthless as a long-term investment, which is crucial for any monetary system to succeed. Market instability may have generated a fantastic return on investment for a relatively small segment of the Bitcoin-holding population, but there really is no such thing as free money from a macroeconomic standpoint. Today, a lot of people find themselves suckers. Bitcoin is a vehicle for transferring money to the smartest, quickest investors, whose only real motivation is to pump up the price and jump ship.

For some evidence of this, check out this hilarious market prediction from just earlier today from the Bitcoin Bullbear admitting serious risks that "prices could pull back significantly," but predicting prices of $300, $400, even $500+ for people willing to give them lots of money for something that basically doesn't exist ...

What does this mean for Bitcoin? Well, this isn't the first time that Bitcoin has crashed. In June-October 2011, a similar trough saw the coin lose more than 90% of its value. So it seems likely the panic will fade, the market will stabilize ... and we'll see this happen again in just several months.

My recommendation for smart investors who don't mind riding a roller coaster? Wait until it hits rock bottom (who knows how far this plummet will take it; a crash that takes it to under $30, or even under $15, is not completely unforeseeable), then buy in for the inevitable rebound and sell the very second you sniff out any market instability.

Am I advising you to make an incredibly risky investment into a volatile market with no clear value beyond speculation? Yes. But isn't that kind of the point?

I'll leave you with this final word from David Clinch: