Are Bitcoin Pricing Fluctuations Growing Pains or the Beginning of the End?

No news is good news, but maybe bad news could be good news for BitCoin?

In the last two weeks, the Internet cryptocurrency has been the subject in no less than three high-profile negative events. High-ranking personnel have been implicated in money laundering charges (ex-Vice Chairman Charlie Shrem), a huge corporation has banned the use of the currency (Apple), and one of the largest economies in the world has declared war on the currency (Russia).

For most other digital currencies, this would be an immediate kiss of death. Yet Bitcoin still seems to be growing in terms of both usage and potential. This is not to say that it will always be assured as a usable monetary system. In fact, both users and non-users predict a death to the system, but some of the current nay-saying may be unwarranted as to the currency's future.

The good...

A quick look at Bitcoin gives the greatest bonus in favor of the system: since it's a system that is absent of a true national owner, there are no international transfer fees. With an increasingly interconnected business world, this is a great benefit to the market actor who depends on more than domestic goods and services. Given that standard fees to transfer money run between $5 and $25 per transaction (and "less than favorable exchange rates"), Bitcoin becomes a system that circumvents the additional costs of capital transfers. 

The system is also theoretically inflation-proof, given that money supply is limited. (There are allegations of money laundering and fraud that claim otherwise, but these are yet to be completely substantiated.) 

The bad...

Bitcoin is extremely volatile. While the figure below is based on November valuations of the cryptocurrency, the rapid price changes look more like a hospital patient's heartbeat than an example of a stable alternative currency. And this figure charts the price variation over two days.

Given the rapid growth and fall of such a system, many (Fools included) are concerned about the very real possibility of a bubble ready to burst in the near future.

On top of the volatility concerns, the lack of universal adoption of the system means that the ways in which it can be used is somewhat limited. Fool Gaurav Seetharam makes the excellent point that "(a) currency is only useful when it can be exchanged for other goods and services." Seen in this light, Bitcoin will face a hard road ahead as it looks for prominence in a system that seems set against it.

How does the bad news factor in?

As with any commodity or money system, the recent spate of bad news has hit Bitcoin hard. Valuation of the currency has dropped by 20% to a Feb. 8 low of $659.18. While it may have rebounded slightly, the recent bad press may have made the system radioactive in the short term, at least in terms of potential adoption of the system.

There are some who claim that all bad news recently is an indication of how strong Bitcoin is, in that it is consistently in the public eye. But to take this view is idealistic at best and shortsighted at worst. Apple and Russia did not move against the system out of fear, despite the viewpoint espoused. No, rather, this was done to protect themselves from a largely untried system that is clearly going through developmental issues. 

Are these growing pains, or the beginning of the end for Bitcoin? The overwhelming response is that the system is slowly collapsing because it reached too far too quickly. The desire of the current system to be both anonymous and yet compliant with government is impossible, says Forbes. Anonymity is not hard to enjoy, but the lack of "respect" given to current monetary systems means the currency faces an uphill struggle toward acceptance. 

Sometimes no news is good news, sometimes bad news can be good news, but where Bitcoin is concerned, too much negative news seems to be the first nail in an eventual coffin.

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  • Report this Comment On February 13, 2014, at 5:36 AM, famiglia112 wrote:

    Yes, because Apple and Russia are such known bastions of openness and freedom.

    I don't know what the future holds for Bitcoin, but know one should take it as a surprise that institutions that thrive on absolute control hate any system that enables anonymity. Likewise, no one should be caught off guard when central bankers inevitably come out against a currency that doesn't allow for monetary policy- their entire careers depend it.

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