The wave of sell orders that swamped the U.S. market on October 10 — and could swamp it again — should not have surprised anyone. The bitcoin market heralded it months ago.
Bitcoin, and other cryptocurrencies, began falling in price after China’s government decided it didn’t like the market. Bitcoin bulls denied this, even laughed it off, but the lack of Chinese investment has caused a two-thirds drop in the market, from $20,000 at its peak last December to $6,277 early on October 11.
The good news is that things have been worse, with bitcoin trading near $6,000 back in August. The bad news is that bitcoin prices are still subject to sudden violent bouts of selling, like the $200 drop that happened as Asian trading opened for October 11.
As this was written the total value of bitcoin had fallen below $115 billion — that’s not even a mega-cap stock. The “currency of the future” should not have a smaller market cap than Nike (NYSE:NKE).
The Real Costs of Bitcoin
China moved against bitcoin before the trade wars began because mining of the cryptocurrency and its transactions use as much energy as the country of Ireland, according to PwC. China recently jailed one crypto miner who was stealing power from the train network.
A recent paper estimated that China still represents 74% of bitcoin mining. This was portrayed as a threat to the market and called China “the most powerful adversary to bitcoin.” But Chinese dominance in bitcoin is not news. I myself have been covering this story for over a year.
What bitcoin bulls most want is American participation in the market. The Securities and Exchange Commission has been slow to approve bitcoin exchanges, with one expert recently expressing hope that public opinion and Congress could get the agency moving.
But western economists, the constituency regulators consult, remain wary. Nouriel Roubini calls bitcoin “the mother of all bubbles.” In congressional testimony on October 11, he called blockchain “no better than a spreadsheet,” predicting the imminent demise of the market.
Western regulators and financial institutions are reluctant to endorse anything associated with crime, and cryptocurrency is still associated with crime. Malware that mines or steals cryptocurrency and the use of bitcoin to skirt currency controls in collapsing markets are both crimes — not to mention the use of cryptocurrencies to purchase illegal goods online.
The November 5 launch of Bakkt, a set of cryptocurrency futures contracts run by the founder of the Intercontinental Exchange (NYSE:ICE), owner of the New York Stock Exchange, is the latest hope of the bitcoin bulls. By giving bitcoin a legitimate trading platform, subject to government regulation, it is hoped big institutions will finally jump into the market and legitimize bitcoin once and for all.
But the presence of bitcoin futures contracts on the Nasdaq hasn’t stabilized the price. The announcement of a European exchange called Extauri, similar to Bakkt, has not stabilized the price either. Neither has Yale’s $400 million investment in Paradigm, another new trading platform.
The Bottom Line for Bitcoin
Trading platforms don’t make assets valuable. Institutional interest doesn’t make an asset valuable.
What makes an asset valuable are willing buyers who have a use to make of an asset. Right now, the primary use of bitcoin is as an alternative for wealthy people when local currencies collapse. But until the price of bitcoin stabilizes it can’t even do that. It’s a “safe haven” only as a mechanism to get from a failing currency to more stable currencies like the U.S. dollar.
And even that “legitimate” use of bitcoin violates capital controls. Maybe China was right to be wary.
Dana Blankenhorn is a financial and technology journalist. He is the author of a mystery novella involving bitcoin, The Reluctant Detective Saves the World, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. To follow the value of cryptocurrencies bookmark https://coinmarketcap.com/