Why Bitcoin will eventually fail

First of all, this is a scenario, and a hypothetical one at that. I wanted you to know that before you start to shout at me.

In this post I am going to talk about why I think the Bitcoin currency (BTC) will collapse, not today nor tomorrow but some day not too far from now. I am not going to explain what BTC is or how it works, so if you’re not familiar with it check out this video for a quick introduction.

1. Recent history
We’ve seen a significant increase in value of the BTC over a one-year period. In March 2010 one BTC was worth USD 0.0065. That’s not very much is it? Well things have changed. May 29th this year the value in USD of one BTC was $8.30. In one year the value of the bitcoin has been multiplied by over a thousand. As of now, June 5th, the going price is at about $17.5 for one bitcoin. Get my point? The value has been increasing at an explosive rate and as a result more and more people are getting interested in this new online currency. Some are even converting their life-savings into bitcoins.

2. Speculation
Sadly, the explosive increase in value will also be the fall of the BTC I’m afraid. People have started to buy bitcoins as if they were stocks because of the rapid growth. It’s kind of like a legal version of insider trading. At the moment we all know it will continue to go up, but for how long? That’s the tough question. As long as people are willing to buy bitcoins for dollars or euros the value will increase, especially since the fresh supply of coins gets smaller every day. It’s entirely possible that the value of the BTC will keep increasing until we reach the 21 million that will be generated, but what will happen after that? This max amount is, by the way, one of the things I find weird and impractical about the BTC. It’s supposed to be an international currency available to everyone. There’s almost 7 billion people in the world right now, which means the average BTC per person if divided would be 0.003. By todays standards you’ll be a millionaire if you own a single BTC. Does that seem very practical to anyone? That’s not really why I think it will fail, though, so I’m getting a bit off track here.

3. Collapse
I’m pretty sure that the fall of the BTC will come the day the large speculators decide that they’re happy with the millions of dollars they will have made if they convert the coins back. You’d already be a millionaire if you’d invested $1000 a year ago, why not cash out? I’m not saying the bitcoin will fail if someone tries to sell 100 of them, but what about a million or two? Basic supply-demand strategy tells us that the value will drop if lots of coins are sold in one blow, since the supply is larger than the demand. What will happen if this starts a chain reaction? Every “investor” will want to get out with as much profit as possible, that’s just common sense. What I’m getting at is: A big enough drop in value and the currency will be right back where it was a year ago, or maybe a month ago. What will happen then? Will there be new people willing to try the bitcoin stock market? Will the old ones want to start over, they’ve already made quite a bit of cash after all?

There is no escaping the fact that the value will drop some day. It’s increasing now because more people are willing to buy than to sell bitcoins and it will decrease when the scales tip in the other direction. Only time will tell what happens when the value starts to decrease but I wouldn’t be surprised if it meant the beginning of the end for the Bitcoin.

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3 Responses to Why Bitcoin will eventually fail

  1. David says:

    Summary: “Speculators are pushing the price up wildly. They’ll cash out at some point. At that point, bitcoin will fail.”

    By the same logic, any currency (or stock) must fail once its price has been pushed up significantly by speculators. But we have seen many currencies and many stocks survive many bubbles.

    I think you’ve only proved that any bubble must eventually stop growing.

  2. anon says:

    “This max amount is, by the way, one of the things I find weird and impractical about the BTC. It’s supposed to be an international currency available to everyone. There’s almost 7 billion people in the world right now, which means the average BTC per person if divided would be 0.003.”

    You should read a bit more about bitcoins before you start commenting – if the value of bitcoins is too high, they can be divided into very small pieces.

    “the explosive increase in value will also be the fall of the BTC I’m afraid. People have started to buy bitcoins as if they were stocks because of the rapid growth. It’s kind of like a legal version of insider trading”
    People who do that are missing the point of bitcoin, which is to be used primarily as a currency, and they will suffer as the value of the currency fluctuates. As for the comparison with insider trading, note that insider trading is illegal because it involves the insider profiting from knowledge from “inside the tent” that the general market doesn’t have yet (i.e. it is unfair). Anyone can buy bitcoins, and no-one knows which way the price will go (they may have a theory, but that’s just speculation, not knowledge), so it is *nothing* like insider trading.

    Your final point, about liquidity, is important though. If there are lots of bitcoins, and nothing to spend them on, sooner or later your point will come true – people will want to convert to dollars and the conversion rate will collapse. However, there are increasingly a number of things to spend them on. Furthermore, there are many things (e.g. online virtual goods, in game currencies) that have limited real-world value, but that people pay for and that rise in value over time even though people can never use them or convert them to dollars.

  3. Olly says:

    As long as people are running he software bitcoin will continue to exist. If some of the early adopters cash out the price will certainly fall, but the currency wont fail. For many the point is the ability to transfer money internationally with no fees and no hassle. The value of a coin does not really matter, as long as the price fluctuations are no worse than currencies they would otherwise have to deal with.

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