When Bitcoin creator Satoshi Nakamoto, launched the currency in 2009, the intention was to give people an option to transact with a tender that replaced government fiat.
But it has not been a smooth journey, despite peak prices at $20,000 last December.
Bitcoin has tumbled to its lowest level since February, today trading at $6,600 as of publishing time, renewing concerns about the future survival of what is believed to be a promising alternative to traditional currencies.
Bloomberg reported that Bitcoin fell as much as 4.6% Tuesday to $6,450, bringing the slide for the year to more than 50%.
According to coinmarketcap.com, the market value of digital assets crashed to a nearly two-month low of $294 billion, compared to January values worth $830 billion.
But until now, the reasons behind the rollercoaster performance of the digital currency were anyone’s guess, mostly perceived as short-term reactions to incidences like scams and wallet thefts, or due to currency exchange crackdowns, money laundering, and interpretations on price performance averages that switches the appeal between bulls and bears.
Some of this still happens and has a say on why prices are so volatile, but there is more to it than what is visible on the surface.
Explaining the current doldrums Bitcoin is facing, Kyle Samani, managing partner at Austin, Texas-based crypto hedge fund Multicoin Capital, told Bloomberg in an email. “A lot of people who bought at $9,000 in April are realizing that they’re not going to break even anytime soon, and are instead trying to get out.”
But also all cryptocurrencies have seen their prices take a hit after a“cyber intrusion” on the South Korean cryptocurrency exchange Coinrail this past weekend which resulted in a loss of an unknown quantity of digital currency.
“Bitcoin slumped 12% on Monday,” according to Bloomberg.
Back in May, after the US Justice Department opened up a criminal probe into illegal trading practices to manipulate the market, the crypto world was shaken.
In China, People’s Daily reported on June 7 that the country will continue to crack down on illegal fundraising and risks linked to Internet finance, Bloomberg said quoting central bank officials.
But these are just short-term bursts.
Exclusive data from blockchain research company Chainalysis quantifying a shift in the make-up of bitcoin owners from longer-term investors to short-term speculators was probed by the Financial Times (FT).
“Last November, before December’s pricing peak, the amount of Bitcoin held for investment was roughly 3 times that held by traders,” begins FT.
“However, by April 2018, the data show the amount held by investors, about 6 million Bitcoins, was much closer to the amount held by short-term speculators, with 5.1million Bitcoins.”
Chainalysis estimates that longer-term holders sold at least $30bn worth of bitcoin to new speculators between December to April period.
“This was an exceptional transfer of wealth,” says Philip Gradwell, Chainalysis’ chief economist.
In essence, the amount of Bitcoin available for trading rose by close to 60% over that period, and according to Gradwell, was a “fundamental driver” behind the recent price decline.
At the same time, bitcoin trading volumes have now fallen in tandem with the prices, from close to $4bn daily in December to $1bn today, according to FT.
Chainalysis estimates Bitcoins held by groups such as exchanges or merchant services held steady between December and April at about 2.2 million Bitcoins
Has the hype died down?
According to research published this month by Morgan Stanley, only 4 of the top 500 US e-commerce merchants accepted cryptocurrencies in the first quarter of 2018, compared with 3 at the beginning of 2017.
This is the attractive nature of Bitcoin having a finite limit.
Only 21million Bitcoins can be created, and about 4 million are yet to be mined, and 3.7m Bitcoins worth about $28bn are lost forever.
“Speculation remains the primary use case for these digital assets; merchant or institutional adoption does not appear to be a primary driver of price,” Preston Byrne, an English structured finance lawyer, and cryptocurrency observer told FT.
The problem with price speculators in Bitcoin is how it shifts the purpose of the technology to something that closely resembles a Ponzi scheme, and by extension, another form of dot.com bubble and tulip mania, opined Tech News Leader, a prominent technology site.
“If the primary use for Bitcoin is only through price speculation, trading and waiting for appreciation profits, there is almost no way to grow the industry organically or get others involved in crypto on an individual basis without actually participating in a Ponzi-like model.”
FT said that given this breakdown in bitcoin owners, most market watchers do not rule out another rapid price run-up but this is likely to be the random movement of pure speculation or market manipulation rather than anything else.
Whale of a Bitcoin problem
The Chainalysis data also show that a small cluster of investors aka “whales”, hold a sizeable portion of the market, which brings its own risks.
“Overall, some 1,600 Bitcoin wallets, managed by both speculators and investors, contained at least 1,000 Bitcoin each in April,” according to Chainalysis, collectively holding nearly 5 million Bitcoins, or nearly 1/3 of the current total.
Of those, just under 100 wallets owned by longer-term investors contained between 10,000 and 100,000 Bitcoin, or between $75 million and $750 million at today’s prices.
“This concentration of wealth means that bitcoin is at risk of volatility, as the moves of a small number of people will have a large effect,” says Chainalysis’ Gradwell.
Good news at last?
There is a belief in the crypto sector from traditional powerhouses. Prominent US futures exchanges, such as the CME Group and Cboe Global Markets, are now learning how to offer Bitcoin futures. Nasdaq’s chief executive, Adena Friedman, said this year that the group would consider offering cryptocurrency exchange services in the future after entering into a partnership with crypto-exchange Gemini in April.
Stanley data show there is now more than $3.5bn in estimated assets under management across 250 dedicated crypto-funds.
Forbes said recently that transaction fees are down, the number of stores accepting Bitcoin both online and in the real world is up, and regulators appear to be favoring a soft touch.
“Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, was revealed last month to have been developing an online platform to buy cryptocurrency,” Forbes said quoting a report by The New York Times.