Tuesday, 6 January 2015

Bitcoin: The worst investment of 2014? Can it improve in 2015?

At the end of 2013 many investors and currency speculators had high hopes for the cryptocurrency Bitcoin. Some people predicted that one Bitcoin could be worth as much as US$10,000 during 2014. Others were slightly more conservative putting the value of one Bitcoin to be between US$2,000 - US$5,000. On the other hand Bitcoin sceptics forecasted that one Bitcoin could be worth as low as US$10. So, what happened to the promised currency in 2014?

Image by Donaldsonbbb [CC BY-SA 4.0] from Wikimedia Commons

Well, at the beginning of 2014, Bitcoin peaked at a value of US$1,130, depending which exchange you used, and, well that was it. From that point onwards it began a steady downward slide where it finished the year at about US$315, making Bitcoin the worst currency investment of 2014. The second worst currency investment in 2014 was the Ukrainian hryvnia and they had to battle a nuclear superpower. That nuclear superpower, Russia, saw its own currency, the rouble, made it into the top three worst currency investments of 2014.

So what went wrong? How could Bitcoin merchants get it so wrong? Could anything have been done to stop the Bitcoin slippery slope? And what's in store for Bitcoin in 2015?

The 2014 year did not begin well for Bitcoin. In February, Mt. Gox, one of the largest Bitcoin exchanges based in Tokyo, suspended trading, closed its internet exchange services and eventually filed for bankruptcy protection. At the time, Mt. Gox handled about 70% of all Bitcoin transactions.

By the end of February, the CEO of Mt. Gox, Mark Karpeles had resigned when a leaked internal memo indicated that 744,408 bitcoins were stolen and not detected for a number of years.

In April, Mt. Gox began liquidation proceedings amidst allegations that approximately 850,000 bitcoins were unaccounted for. At that time this was valued at more than US$450 million. Since then 200,000 bitcoins had been recovered. Conspiracy theories were abound as to what happened to the missing Bitcoins and suspicions of fraud, theft and mismanagement began to surface as headlines on the Internet.

Customers of Mt. Gox started legal proceedings and by March, Mt. Gox had filed for bankruptcy protection in the U.S. And in April the company was liquidated. The Mt. Gox incident raised serious security concerns about Bitcoin and the whole virtual currency market which in turn began to drive down the value of the virtual currency.

On top of all this is the fact that Bitcoin seems to be the currency of choice by people soliciting illegal activity on the so called dark web. In particular, on the black market site, the Silk Road. During the second half of 2013 a FBI operation seized more than 170,000 bitcoins from the Silk Road where it was alleged that 144,000 of the coins had belonged to the Silk Road's creator, Ross Ulbricht. At the time this was valued at more than US$28 million.

In November of 2014 the FBI closed down the Silk Road 2 and a number of other dark sites selling drugs illegally, including Cloud9, Hydra and Cannabis Road. It is not clear whether these sites used bitcoins but it would be most likely. This adds to the impression that bitcoins tend to be used by the underworld and those that deal in the anonymous dark web.

By the end of 2014, Charlie Shrem, the former CEO of BitInstant and a board member of the Bitcoin Foundation, pleaded guilty to aiding and abetting the operation of an unlicensed money transmitting business. Which is the legal way of saying, money laundering. He was sentenced to two years prison and forfeited US$950,000 to the U.S. government.

Security lapses, allegations of fraud, scandals involving money laundering and a dive in confidence have all added to bring down consumer confidence in the virtual currency market. No one could have predicted all this at the beginning of 2014.

Even so, could anything have been done to stop the falling value of Bitcoin?

For a start Bitcoin is not backed or owned by any nation or financial institutions. Towards the end of 2014, Russia's rouble began sliding on the backs of falling oil prices and the Russians took an unprecedented step in raising interest rates to try and stop the slide. This didn't work but at least they tried. The price of bitcoins are determined by the various privately owned exchanges. Therefore if the value of bitcoins begin to fall, no government will be able to come to its rescue.

During the financial collapse of 2008 - 2010 many banks and financial institutions received bailouts from their respective governments but if Bitcoin fails who is going to bail them out or even help them? The answer is: No one.

Bitcoin is a totally unregulated and anonymous currency. It's very good for people anticipating a global monetary melt down or for countries suffering very high inflation. It is a disruptive technology and can change the financial sector. However it has to be more widely accepted and integrated into mainstream payment systems before it can have a real impact.

The outlook for Bitcoin in 2015 does not appear promising. It is currently hovering about US$270 and went as low as US$250. This might be a good opportunity for long term speculators to invest in Bitcoin but rather bad for people depending on Bitcoin as a source of income.

With little or no regulation it will take some time before Bitcoin becomes widely accepted. The Bitcoin revolution probably needs to be revised or happen in increments rather than a Big Bang. People still prefer something tangible in their hands, something that they can put into their pockets. And businesses tend to prefer regulatory clarification rather than uncertainties and until governments begin to support Bitcoin it remains on the fringe of the currency market.

Author: Vin Coh