24 hours ago BEN KRITZ
BITCOIN, better known as “the most annoying concept in economics,” is apparently in the process of a crash this week, shedding more than $14 billion in market capitalization in less than 24 hours on Monday and falling to its lowest price in over a year. Although the cryptocurrency market has managed to defy predictions of its inevitable total collapse in the past, there are reasons to believe that this time the fall may be terminal.
Since its peak in December 2017, bitcoin has lost more than 63 percent of its value; an investor who bought bitcoin 12 months ago is now seeing a return of about negative 37 percent.
Bitcoin has always been extremely volatile, but what is different now than in previous sharp downturns is that the entire cryptocurrency market is falling right along with it. In the past, a drop in bitcoin’s price has generally meant a boost for one or more alternative cryptocurrencies such as Ethereum, Ripple, or Litecoin.
That is not the case this time. Every one of the top 20 cryptocurrencies is losing value, and quickly, according to data from CoinDesk.
That tends to belie the reason given by crypto-optimists for the latest market downturn, that it is mostly the result of uncertainty around a “hard fork” in bitcoin alternative Bitcoin Cash. In the simplest possible terms, a hard fork is a significant change to the protocol that determines the validity of transactions in a blockchain, and usually results in the creation of a new cryptocurrency. The change requires users to update to a new software version that won’t recognize previous transactions validated by the older version, hence the “fork” onto a new path for the blockchain. The older version and its corresponding cryptocurrency may continue if it retains enough users, or it may peter out as users update their systems and abandon it for the newer version. Bitcoin Cash, for example, was the result of a “hard fork” for bitcoin.
A “hard fork” in a major cryptocurrency has not, until now, caused a general dive in crypto prices; a chaotic situation for one cryptocurrency usually benefits a few others as investors look for safer havens. Ascribing the current market collapse to a technical issue that will eventually sort itself out is unreasonably optimistic.
Even if it were true, all it does is cast a harsh spotlight on one of the inherent instabilities of a system driven by “consensus” but in reality controlled by small groups of “miners” – the operators (many of whom are Chinese) of the huge data processing banks that validate transactions and create new cryptocoins – that make it extremely sensitive to market shocks.
The reasons for the market collapse seem to be rather more pedestrian than a “hard fork,” and precisely the sorts of problematic issues that those who haven’t been bewitched by crypto-evangelism have been warning for years would be the inevitable downfall of the concept.
First, the regulatory environment appears to be growing less favorable for cryptocurrencies. The US Securities and Exchange Commission has been hesitant to approve a bitcoin-based exchange-traded fund (ETF) out of concerns about the risk of fraud and manipulation.
These concerns only tend to be confirmed by disruptions such as the Bitcoin Cash “hard fork” issue. Crypto traders have been holding out hope for an ETF for some time – at one point a few weeks ago, it was even announced one would be launched, although that news now seems to have been premature – as it would inject a significant amount of new money into the market; the anticipation managed to keep bitcoin’s price reasonably stable at the $6,000-$7,000 level for most of the last three months.
Those hopes have apparently been dashed, leading some investors to pull back from the market.
What may have been an even bigger trigger for the latest sell-off is a statement released by the SEC last Friday that it would require at least some companies holding ICOs (initial coin offerings) to treat their coins as securities. The Philippines’ SEC, coincidentally, has issued similar rules in the past few months. The SEC decision came in the wake of two recent settlements with companies that had failed ICOs, resulting in $250,000 fines for each and a requirement that they honor investors’ requests for refunds of their now-worthless tokens.
Second, the cautiously favorable view the wider financial industry was beginning to take as the cryptocurrency markets soared toward the end of last year has become increasingly pessimistic.
Some analysts have connected the current downturn to a statement issued by accounting giant KPMG last Wednesday, which trashed the one positive attribute cryptocurrency advocates have been able to cling to – that even if they are not yet useful as a medium of exchange, they are at least a legitimate store of value.
“To fulfill the requirements of ‘store of value’, cryptocurrencies must be much more stable,” KPMG said. “Extending credit in a currency that risks significant devaluation or borrowing if the value appreciated beyond the borrower’s ability to pay would be a fool’s errand.”
Finally, it appears that bitcoin in particular has hit a technical wall in terms of its value to miners. As of now, about 17.
8 million of the 21 million bitcoins that can be created have been generated and put into circulation, and as the remaining stock diminishes, the complexity of the calculations required to generate new ones requires enormous amounts of computer power. The cost to generate a single bitcoin is now reliably estimated to be about $7,000, meaning that most of them that have been created in the past three or four months have been created at a loss. A reduction in the number of miners as some begin to cut their losses and switch to different cryptocurrencies or stop operating altogether only drives the per-coin cost higher. Every cryptocurrency, even those that do not have a fixed number of coins that can be mined, will eventually encounter the same problem and simply not be worthwhile to mine.
There is still better than $100 billion tied up in the world cryptocurrency trading markets, and that amount of money is not going to disappear overnight. But the signs that it will disappear in the future – likely a nearer future than most crypto-fans are willing to admit – are clearer than ever.
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