What Could Kill the Bitcoin Boom
Bitcoin
If you bought a Bitcoin in early 2017  when one cost less than $900  you could have a profit of more than 1 200 percent now. But you almost certainly didn’t do that. Perhaps you dipped in a toe in November or December  as the price hit headline-grabbing records—$10 000  then $15 000  then higher. If you were very unlucky and bought at the peak of about $20 000 on Dec. 17  you’d have lost more than 40 percent of your money as of Jan. 16  when the price was $11 200. More than $2 000 of that decline came in about 24 hours  after South Korean Finance Minister Kim Dong-yeon indicated the country may crack down on cryptocurrency trading to discourage speculation. It’s not every asset that can feel like it’s in a bubble and a crash at the same time.
But based on no other valuation metric than what it cost a year ago  the price of  Bitcoin  is still dizzyingly high. For the many doubters who can’t believe things have come this far—and for  Bitcoin  owners who can see how much they might lose—the big question is what it would take to knock the price back further.
In past episodes  “ Bitcoin  and digital currencies have been incredibly resilient to bad news ” says Meltem Demirors  director of development at Digital Currency Group  which invests in  Bitcoin  and related technologies. Cryptocurrency exchanges such as Mt. Gox  Bitfinex  and BTC-e have been hacked over the years  with hundreds of millions of dollars’ worth of  Bitcoin  stolen. China in September moved to shut down exchange trading of the cryptocurrency. None of these permanently stopped  Bitcoin ’s rise up the price charts  especially after  it  drew the attention of hedge fund traders and futures markets.
One doomsday scenario would be a successful hack of the blockchain. That’s the underlying technology that records and verifies every transaction  using exact copies of a database spread on computers all over the world. Those host computers  called miners  are rewarded with new Bitcoin for doing the work of verifying transactions. An attacker might be able to alter the blockchain’s history by marshaling more than half the computing power on the network. But that would be monumentally difficult; someone with the technology to do it could instead “opt into the game” and get paid to mine Bitcoin  says Tyler Winklevoss  co-founder of the Gemini digital asset exchange and one of the largest  Bitcoin  holders.
The likelier risks are far more pedestrian. The first is that while plenty of investors and speculators have piled into  Bitcoin    it ’s a difficult currency to use in the real world. The network is slow and expensive for small transactions. And who wants to spend $4 in  Bitcoin  for a coffee if next week that could be worth $8? “My big concern as a company is that digital currency doesn’t find its quote-unquote killer use cases  where people are saying  ‘Wow  we now have tens of millions of daily active users that are using it for payments ’ ” says Adam White  who runs GDAX  the exchange for institutional investors run by Coinbase. “That’s one of the largest existential threats to the company.”
There’s been a very public civil war among  Bitcoin  developers: One group favors changes to the network  the other doesn’t. “It’s got to have the developer community come together and figure out how to scale it properly and continuously ” says Sheri Kaiserman  a managing director at Wedbush Securities and an early Wall Street believer in  Bitcoin ’s potential. Meanwhile   Bitcoin  faces competition from other digital currencies  from Bitcoin Cash to Litecoin to Ether  which have also seen big gains and wild swings.
You could spend weeks learning about the nuances of the various cryptocurrencies. But the main risk to  Bitcoin  is actually the easiest to understand. “The biggest factor in what’s driving the price up is potentially what will drive it down—a reversal of animal spirits ” says Adam Ludwin  chief executive officer of blockchain startup Chain. “There is essentially a belief this will continue to go up. If people believe it will continue to go down  that’s self-reinforcing.”
To explain that psychology  Ludwin invokes John Maynard Keynes. The economist likened investing to a newspaper contest where readers were asked to pick the picture of the person the majority of other people would find most attractive. To win  a reader would have to discard his own judgment and bet purely on a guess of what the average person would find beautiful. Or  maddeningly  even on what the other players would think the average player would like. Cryptocurrency in general is “really one of the most beautiful distillations of the Keynesian beauty contest that’s ever existed ” says Ludwin. All investments have some of this speculative element  but unlike  say  a stock   Bitcoin  isn’t a claim on future earnings to which investors can hitch a valuation. To bet on  Bitcoin  is to believe simply that others will want  it .
One read on the psychology of  the Bitcoin boom  is that  it ’s part of a broad bull market in all kinds of assets. Despite anxieties about politics  North Korea  and rising equity valuations  investors seem to be in a mood to embrace risk and are fearful of missing out on big gains. Or perhaps  Bitcoin  is the shadow side of that optimism: Many are drawn to cryptocurrency because they see  it  as a palliative to the system that came crashing down in 2008  and their belief in  Bitcoin  has been hard to shake. Market psychology is difficult to pin down—the one thing that’s reliable about it is its volatility.
If you bought a Bitcoin in early 2017  when one cost less than $900  you could have a profit of more than 1 200 percent now. But you almost certainly didn’t do that. Perhaps you dipped in a toe in November or December  as the price hit headline-grabbing records—$10 000  then $15 000  then higher. If you were very unlucky and bought at the peak of about $20 000 on Dec. 17  you’d have lost more than 40 percent of your money as of Jan. 16  when the price was $11 200. More than $2 000 of that decline came in about 24 hours  after South Korean Finance Minister Kim Dong-yeon indicated the country may crack down on cryptocurrency trading to discourage speculation. It’s not every asset that can feel like it’s in a bubble and a crash at the same time.
But based on no other valuation metric than what it cost a year ago  the price of  Bitcoin  is still dizzyingly high. For the many doubters who can’t believe things have come this far—and for  [TGT]owners who can see how much [TGT] might lose—the big question is what it would take to knock the price back further.
In past episodes  “ Bitcoin  and digital currencies have been incredibly resilient to bad news ” says Meltem Demirors  director of development at Digital Currency Group  which invests in  Bitcoin  and related technologies. Cryptocurrency exchanges such as Mt. Gox  Bitfinex  and BTC-e have been hacked over the years  with hundreds of millions of dollars’ worth of  [TGT]stolen. China in September moved to shut down exchange trading of the cryptocurrency. None of these permanently stopped  [TGT] ’s rise up the price charts  especially after  [TGT]  drew the attention of hedge fund traders and futures markets.
One doomsday scenario would be a successful hack of the blockchain. That’s the underlying technology that records and verifies every transaction  using exact copies of a database spread on computers all over the world. Those host computers  called miners  are rewarded with [TGT] for doing the work of verifying transactions. An attacker might be able to alter the blockchain’s history by marshaling more than half the computing power on the network. But that would be monumentally difficult; someone with the technology to do it could instead “opt into the game” and get paid to [TGT]says Tyler Winklevoss  co-founder of the Gemini digital asset exchange and one of the largest  Bitcoin  holders.
The likelier risks are far more pedestrian. The first is that while plenty of investors and speculators have piled into  Bitcoin    it ’s a difficult currency to use in the real world. The network is slow and expensive for small transactions. And who wants to spend $4 in  Bitcoin  for a coffee if next week that could be worth $8? “My big concern as a company is that digital currency doesn’t find its quote-unquote killer use cases  where people are saying  ‘Wow  we now have tens of millions of daily active users that are using it for payments ’ ” says Adam White  who runs GDAX  the exchange for institutional investors run by Coinbase. “That’s one of the largest existential threats to the company.”
There’s been a very public civil war among  [TGT]developers: One group favors changes to the network  the other doesn’t. “It’s got to have the developer community come together and figure out how to scale it properly and continuously ” says Sheri Kaiserman  a managing director at Wedbush Securities and an early Wall Street believer in  [TGT] ’s potential. Meanwhile   [TGT]faces competition from other digital currencies  from Bitcoin Cash to Litecoin to Ether  which have also seen big gains and wild swings.
You could spend weeks learning about the nuances of the various cryptocurrencies. But the main risk to  Bitcoin  is actually the easiest to understand. “The biggest factor in what’s driving the price up is potentially what will drive it down—a reversal of animal spirits ” says Adam Ludwin  chief executive officer of blockchain startup Chain. “There is essentially a belief this will continue to go up. If people believe it will continue to go down  that’s self-reinforcing.”
To explain that psychology  Ludwin invokes John Maynard Keynes. The economist likened investing to a newspaper contest where readers were asked to pick the picture of the person the majority of other people would find most attractive. To win  a reader would have to discard his own judgment and bet purely on a guess of what the average person would find beautiful. Or  maddeningly  even on what the other players would think the average player would like. Cryptocurrency in general is “really one of the most beautiful distillations of the Keynesian beauty contest that’s ever existed ” says Ludwin. All investments have some of this speculative element  but unlike  say  a stock   Bitcoin  isn’t a claim on future earnings to which investors can hitch a valuation. To bet on  [TGT]is to believe simply that others will want  [TGT] .
One read on the psychology of  the Bitcoin boom  is that  it ’s part of a broad bull market in all kinds of assets. Despite anxieties about politics  North Korea  and rising equity valuations  investors seem to be in a mood to embrace risk and are fearful of missing out on big gains. Or perhaps  [TGT]is the shadow side of that optimism: Many are drawn to cryptocurrency because they see  it  as a palliative to the system that came crashing down in 2008  and their belief in  [TGT]has been hard to shake. Market psychology is difficult to pin down—the one thing that’s reliable about it is its volatility.