The slow decline of Bitcoin just got fast.

Bitcoin has proven to be a shocker of an investment. I’d been considering buying some for about a year and in this case not acting has saved me a fortune.

Since I first mentioned Bitcoin on this blog, in November 2013, the currency has fallen 84 per cent in US dollar terms. At that time it was trading for $US1097. Now the value of a bitcoin is $179 and some bitcoins have changed hands for under $160 in the last few hours.

A week of Bitcoin
A week of Bitcoin
Two years of Bitcoin
Two years of Bitcoin

One way to look at the digital currency is as a proxy for distrust in mainstream currencies. With the US dollar and the US economy performing a lot better, bitcoin’s raison d’etre takes a hit.

There’s also the simple fact to remember that bitcoin is a currency –  when the USD appreciates, the value of bitcoin falls. That may explain a fraction of the fall.

Screen Shot 2015-01-15 at 8.44.00 am
The US dollar is up, up, up. Source: St Louis Fed

In Aussie dollar terms, a bitcoin investment has fallen less. With the Australian dollar falling from $US0.95 at the start of November 2013 to $US0.81 now, the value of a bitcoin has fallen only 81 per cent instead of 84 per cent. You can still buy a Bitcoin for over $200, in AUD.

Cold comfort for the many nerds who were predicting the price of bitcoin to be ever higher.

With the falling value of Bitcoin, the bitcoin “miners” who run very expensive computers to obtain bitcoins are out of pocket and on the brink of going bust. (“Mining” is the clever idea at the core of Bitcoin. The very expensive computers do cryptographic work that allows the currency to be secure, and in return get Bitcoins from the system. The higher the value of Bitcoins, the more powerful computers that can be economically thrown at the task.)

Some speculate that the current steep fall in price is being caused by miners dumping into the market all the Bitcoins they obtained in recent months and were hoarding as the price fell gradually. (This article about an industrial scale Chinese Bitcoin mine is amazing).

Either way, the mining companies won’t be able to afford those enormous electricity bills for much longer.

It’s worth noting the following though: When I very first wrote about Bitcoin for the AFR nearly two years ago they were worth about the same as now and were suffering a destablising plunge to $US105.  Just months later I was regretting not buying some.

$180 a piece is still a lot for a few lines of code without legitimacy as a currency. And Bitcoin is now accepted at all manner of establishments. Don’t write off Bitcoin just yet.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

3 thoughts on “The slow decline of Bitcoin just got fast.”

  1. I would note that I would consider Bitcoin to be neither an investment nor a currency. Instead, it’s a speculative asset with some interesting convertibility characteristics.

    It bugs me when speculation is equated with investment, because it implies that the speculative act is somehow tied to an intrinsic underlying value. In the case of Bitcoin it most certainly is not.

    Like

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