Bitcoin's Shocking Resilience and Achilles' Heel
Some journalists at the Detroit Free Press are asking if bitcoin will survive the Mt. Gox collapse.
Journalists have posed this question a few times before. For anyone paying attention, the Mt. Gox collapse was not news, the only news was the extraordinary amount of gross incompetence being reported.
This is bitcoin’s sixth or seventh crash. Each time bitcoin not only bounced back, but blew past previous high water marks. Will bitcoin rebound again?
Why does bitcoin keep bouncing back?
Let’s start with reasons why doesn’t bitcoin bounce back. It doesn’t bounce back because the currency is inflated, businesses are bailed out or new rules (think regulations) are added to the system. That provides stability to the system similar to the way gold works. No matter what happens in the financial market gold doesn’t change. That gives predictability which generates trust in the system.
The reasons for bitcoin crashes like the Silk Road bust, the Chinese regulatory crackdown, the Mt Gox scalability issue, the Mt. Gox denial of service issue, the Mt. Gox DHS fund seizure, or the most current Mt. Gox solvency issue have been caused by actors in the system, not by a bitcoin shortcoming. Bitcoin rebounds because seasoned bitcoin investors recognize nothing has fundamentally changed so they load up on cheap bitcoins or hold tight. While newer investors and swing traders panic sell.
Lastly there are new buyers, people who have been on the fence about buying bitcoin and see the dips as their chance figuring it is now or never.
Will bitcoin rebound again?
Everyday there are tens of thousands of people working to make bitcoin and digital cash better because they know it is better than all other payment networks and currencies. Their work increases the value of bitcoin in real terms. Anyone who thinks bitcoin is less valuable now than when it was trading at $1,300 / coin in November doesn’t understand the system. Was it fairly valued at $1,300? That is debatable, but bitcoin unquestionably has more utility and less risk today than it did in November.
Back then Mt. Gox was a big question, Overstock, the Sacramento Kings, Zynga, Tiger Direct and Playboy didn’t take bitcoin, Bitpay didn’t have protocol support, the Chicago Sun Times hadn’t tested a bitcoin paywall, a police chief hadn’t started collecting his salary in bitcoin and the list goes on and on. There has been and will be no bailout or damage to the overall economy like when the US financial system collapsed.
In fact the other exchanges are now being pressured by customers to provide radical transparency and entrepreneurs are working on systems that eliminate the need to trust third parties for trading assets. Once implemented those innovations will more effectively prevent large scale losses of customer funds than any laws can.
Bitcoin’s Achilles' heel
What killed MySpace, Blackberry and Internet Explorer? Better technologies. The same will be true for bitcoin. Digital cash is such a technological breakthrough there is no going back. Bitcoin’s value comes from groundbreaking technology, trust in future purchasing power, and the number of bitcoin users in the system.
The big threat to bitcoin is bitcoin 2.0. A digital cash that provides much better features than bitcoin, one that people trust more, or one that has a greater network effect. Right now bitcoin has huge advantages in the second two areas, but there are already hundreds of digital currencies providing different features and trying to unseat the king. Some believe regulation can crush bitcoin.
If bitcoin is banned in the US it will go offshore, the same way online gambling companies and large multinational corporations locate abroad for preferential regulation bitcoin companies will locate abroad and already some teams are in Panama, Hong Kong, and Singapore to avoid US regulatory oversight.
Regulatory bans will definitely decrease the utility of bitcoin by decreasing the participants in the system, but it will negatively impact those countries banning bitcoin and will not kill bitcoin.
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