Friday, April 12, 2013

The Bitcoin Crash: What Happened? What Next?

In late March, I wrote about bitcoins:
They, in some ways, act like travelers checks, in some ways act like gold and have some characteristics of a penny stock pump and dump scheme.
What has gone on over the last few days is that the pump and dump characteristics have moved to the forefront. When you have a finite supply of any good, coupled with manic buying of that good, you know a crash is going to occur once the pool of buyers is all in.

Bitcoins are nearly in finite supply (though some "mining" does go on) and the manic buying was certainly fueled. On March 29, Jeffrey Tucker at Laissez Faire Books wrote (my bold):
 Many people fear that Bitcoin is overpriced right now. This view is held even by people in the Bitcoin community who worry that a move from $15 to $93 in three months is not good for long-term viability. A crash could bring down the currency unit in devastating ways, leading to another round of debunking and clucking from the advocates of government money.

But here’s the truth: No one knows for sure. Maybe the price will keep climbing. Next month at this time, people might be kicking themselves for not getting in right now. My instincts right now tend in this direction. I’m seeing BTC at $250, then $500, and then $1,000 by year-end.
At the time, I noted:
 Tucker's commentary is extremely dangerous, because, like an amateur, he fails to take in to consideration the possibility of something going wrong and adjusting for it. He is going to drive novices into going all in on an investment that is very complex and has downside if things go wrong.
Let's hope not too many got hurt. Tucker was not malicious, he was an amateur in a game that requires extraordinary understanding of finance and economics. Tucker was followed in his enthusiasm for bitcoins by Max Keiser, another with a following that can best be described as a crowd that is always one tweet away from following the next General Custer into a battle at Little Big Horn.

That's what got the price spike going. The Tucker and Keiser groups were hyped big time.

Fortunately, for many Tucker and Keiser followers the main exchange, through which bitcoins are bought and sold, Mt. Gox, crashed under the heavy inflow of new accounts. Note: Mt. Gox occasionally claims it crashes because of denial of service attacks. Whatever caused the crashes, they are real and it is clear that the bitcoin market is far from what Tucker claimed:
Gold is, of course, the original money and the all-time heavyweight champion of asset protection, but in the present world it’s difficult to transact in. Bitcoin is extraordinarily easy to transact in [...]
The crashes have spooked buyers and created sellers out of many holders of bitcoins. Thus, the ramp up in the price was likely stalled before the full Tucker-Keiser money pool was able to get in.

What happens from here is dependent on how many will hear the siren call to buy-in and do so. If it is greater than the number of spooked sellers, the price will climb---until the pool of buyers is completely drained. If the sellers outnumber new buyers, it is game over and the decline will be very deep and long lasting.

I hasten to add that this serious crash in bitcoins is not the worst that can happen. If the government shuts down Mt. Gox and other bitcoin exchanges at some point in the future, as I expect they will (under some money laundering pretext), that will be the end for bitcoins.


  1. Okay, while I am not a fan of bitcoins, isn't a quick correction in their best interest? Climbing too high, too fast is not good for the means of payment function to which they aspire.

    Ultimately, if bitcoins were successful, you would quit measuring them in dollars anyway.

    One other point of contention: You think Kaiser and Tucker are the reasons people started buying into bitcoins? I guess I don't know how many people they influence, but I find that really hard to believe. I think they many articles in the mainstream news (following that whole Cyprus ordeal) had a bit more to do with it... don't you?

  2. Brent, I like your analysis. Bitcoin could become a competing
    currency with gold, the dollar, stock shares, etc. Corrections are part of a market and if the correction is overcome then the future for bitcoin is great.

    I agree that the Cypress event was the driver in the bitcoin rise
    not Tucker and Kaiser, both of whom I follow. I think there will be more Cypress events so bitcoin has many more tests ahead.

  3. I like your analysis, Brent. Bitcoin looks like a competing currency and could compete once the market deepens. Certainly,
    more Cypress events will bring this this deepening possibility.
    Bubbles like the one that just occurred is not pleasant but are
    inevitable when a new player enters a highly regulated market like
    monopoly money. There certainly have been many fiat market failures.
    I follow both Kaiser and Tucker and agree that both are worthy
    free markets advocates but certainly do not have enough influence
    to create a bubble.