Find a back issue

Kurt Eichenwald Deserves a High-Five for Predicting Bitcoin Collapse

Okay, so you might be thinking that it wouldn’t take a genius to predict the collapse of Bitcoin, that goofy-sounding web-based “currency” whose value had gone bonkers recently. But here’s the thing: Eichenwald timed his prediction perfectly. Here’s the Dallas-based writer’s take on Bitcoin, published Tuesday on the Vanity Fair site. The jist:

Put simply, despite all the hullaballoo, Bitcoins are not a currency, at least in any traditional sense of the word. Rather, they have transformed more into an investment, like a stock. … This year, the insanity of Bitcoins is obvious for all to see. Within a few months, the value of Bitcoins soared to a high of $147, an eleven-fold increase. … What caused this unprecedented jump, which translates into an annualized return of about 4,000 percent? The general consensus is that the financial crisis in Cyprus, which led to proposals to raid domestic bank accounts, set off a panic among Spaniards, who feared that the tumult would cross the Mediterranean and put their savings at risk. So large numbers of them converted their euros into digital Bitcoins. But the reason for the price jump is almost irrelevant. What matters here is that the experience shows that the Bitcoin is not functioning like a useful currency. …

Hoarding has become a common feature of the Bitcoin market, as purchasers hold on to the investment in hopes that the prices will keep rising. One comprehensive study released last October found that more than three-quarters of all Bitcoins — 78 percent — had been stuffed into virtual mattresses and taken out of circulation. In other words, in a system where supply and demand dictate prices, the available supply in the market is far less than might be imagined. In essence, the market is a fantasy. Once the hoarders stop buying, what buyers will step up to the plate to take their place? My bet? No one. There will be, at some point, a time when some hoarder decides to unload. Prices will drop.

The day after Eichenwald’s post, Bitcoin collapsed from an all-time-high of $265 to as low as $105. The reason offered by Bitcoin? It was a victim of its own success. From the Facebook page of Mt.Gox, the leading Bitcoin exchange:

Hi everyone, just a quick update on the situation and what happened last night.

First of all we would like to reassure you but no we were not last night victim of a DDoS but instead victim of our own success!

Indeed the rather astonishing amount of new account opened in the last few days added to the existing one plus the number of trade made a huge impact on the overall system that started to lag. As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!

Me, I’m too smart to get mixed up in this Bitboin silliness. I’ve got all my money in Mike Merrill, a guy who sold shares of himself.