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Bitcoin’s Christmas crash

The bitcoin rally has taken a sharp plunge over the last two weeks. It was trading at almost US$20,000 on 17 December before taking a dramatic plunge to almost US$12,000 according to Coindesk.

Bitcoin recovered to over US$16,000 by the start of Wednesday but has since fallen again to under $15,000. Who knows where the price will go next? Some commentators believe the price will drop below US$10,000 over the next few months.

The bitcoin price had been on a long-term winning streak since mid-November, but it now appears several of the bitcoin bear arguments are showing.

Bitcoin’s original purpose was to be an alternative currency to the typical country denominations or gold. One of the main reasons those national currencies work so well is because we trust the issuing governments and we trust the value of that money.

An example of trust would be trusting that I can buy a loaf of bread for $1.50 today, tomorrow or perhaps $1.53 in six months. A currency that fluctuates wildly week to week isn’t useful as a currency. If bitcoin holders think the price is going up they’ll hold rather than spend it. Meaning that it’s not a currency, but a speculative tool.

The other issue that’s causing problems is the technology behind bitcoin. I don’t profess to fully understand it, but sadly most bitcoin investors / speculators don’t understand it either.

Essentially, a bitcoin transaction must be verified by bitcoin miners for a fee. These fees are now reportedly reaching $30, $40 or even $50 per transaction. The fees are so high because of all the interest in bitcoin, only a certain small number of transactions can be processed per hour, whereas Visa, Mastercard and Paypal can process a huge amount more.

There’s a large backlog of transactions which need to be verified. Even though bitcoin is using incredible new technology, it’s actually behind some of the newer ‘altcoins’. Ripple, litecoin, ethereum and bitcoin cash all reportedly have better technology, which could seem them leapfrog bitcoin in the future.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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