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.
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.
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.