Earlier this week, the BTC to US dollar exchange rate dipped below $200, a level unprecedented since the value of the cryptocurrency rose past $1,000 as an effect of its popularity as a fast and cheap means of online fund exchange. By January 15, the BTC:USD exchange was at about $170, thereafter hovering to around $200.
This is about an 82% drop in value since the currency’s peak of $1,130 in 2014, and about 76% drop in value since the same time in January 2014, during which BTC was at $850. Just mid-Devember, Bitcoin was trading at about $350, however, which means the drop was not as drastic month-on-month.
Bitcoin is sensitive to both positive and negative news about cryptocurrencies, and this drop has coincided with the opening statements of the criminal case against Ross Ulbricht, the alleged founder behind dark website Silk Road. In the same case, Mt. Gox founder Mark Karpeles has been implicated as having possible links to being Silk Road’s “Dread Pirate Roberts”.
Such severe fluctuations in Bitcoin’s value have mired the image of the cryptocurrency as unstable, and therefore inadequate as a form of monetary exchange. While fluctuations have been used by speculators as a means to gain from any rise in value, a decline in the price of BTC often results in negative repercussions, not only for those who hold on to Bitcoin in the hopes of the value appreciating, but also for the community surrounding the cryptocurrency, too.
Feeling the crunch
Startups and individuals that have invested in the cryptocurrency are feeling the crunch, however. Bitcon mining startup CEX.IO, for example, has temporarily suspended mining operations, citing that this is “the result of cloud mining costs exceeding mining profit.”
Bitcoin is not the only currency that is currently being hit hard with wide fluctuations. The Russian Ruble, for example, lost value in the wake of the Ukraine-related crisis, as well as embargoes imposed in relation to the issue. Even the Swiss Franc has sharply gained 20% in only a few days time due to the Swiss central bank’s lifting of the currency’s cap against the Euro.
This fluctuation has badly affected exporters and several hedge funds heavily invested into the Franc. Everest Capital’s Global Fund, which had about $830 million in assets as of end-2014, lost almost all its money with the Franc’s rise. FXCM reported having $225 million in “negative equity balances” from clients, necessitating a $300 million emergency loan to cover its losses. And this is all because of a supposedly stable currency suddenly gaining.
The future of Bitcoin
While the Bitcoin crash has spelled doom for some, others are unfazed. Jerry Brito has written on Wired, for example, that the price of Bitcoin does not matter at this time, as it is still in its early stages as a technology. He goes to cites parallels between Bitcoin and the Web, which suffered setbacks in its infancy, with the only difference being that Bitcoin comes with a dollar value attached to it. With a longer time-frame to consider, he says, short-term rallies and crashes should not mar Bitcoin’s potential as a technology, not just as a cryptocurrency.
For some, the inherent value of Bitcoin is not its tradable dollar value, but as a fast and inexpensive means of exchange. NewsBTC‘s Trevor Alpeter, for instance, has concerns with the price drops in the short term. However, he cites the possibility of better regulatory environment and support for Bitcoin, as well as an better acceptance among the venture capital community as potential drivers for growth in the long term. It’s the underlying technology that will ultimately spell long-term success for the cryptocurrency.
This has been demonstrated with how some startups have experimented with sidechains, considered to be a protocol for powering next-generation Internet services, and potentially unifying alternative cryptocurrencies, the so-called alt-coins.
Is this a sign of things to come for both financial markets and the cryptocurrency community? Perhaps these are unexpected shocks, but, at least for Bitcoin, there is hope that things will normalize in the end.