The bitcoin crash

The technicolor bitcoin race came to a screeching bang.

Oh, how the mighty have falling, from 260 dollars per bitcoin down to 70 and change. My take it that it will fall down to 20 which seems to be resistance level. Now the pundits have spoken with words like:

• This is a wacky currency and does wacky things.
• An experiment gone wrong.
• A failure of this geeky pipe dream.

The issue with bitcoin is that it is the purest essence of free market movements. That's why it's so wacky, because many of us have not seen a free market movement in our lifetime until now.

Stocks

Many of the movements in the stock market come from big institutions. Those companies that have, I do not know, mutual funds with gazillion amounts of money to buy and sell stocks. Although some hedge funds are big, they pale in comparison with the really big guys like Goldman Sachs, Vanguard, or Franklin Templeton. This kind of institutional investment is non existent in the bitcoin market. Why? Well, because it bitcoins have no earnings.

Stock prices are based on a simple formula.

P = E x M

P

is price

E

is earnings

M

is a magical number

The Magical Number (ok, the Multiple) is a reflection on the sentiment of the stock, hence the multiple is guessed from the potential earnings on a given company. It is based on what analysts think on the amount of business that a given company will get for a given period of time.

But a bitcoin is a currency, there are no earnings, that's why bitcoin prices cannot be determined with a certain degree of fundamental assurance, so to speak, because it is pure demand and offer.

Where do the institutions come in the stock market? Well, they buy, sell and hold large amounts of stock depending on what their analyst think how a given company is going to do in terms of earnings growth or dividend payments.

This keeps market movement at a relative sane pace because no individual can move the price of a stock, unless you're a manager of a mutual fund changing positions.

Even though panic sell outs do happen in the stock markets, it is the earnings of a company that dictates its stock price on the long run.

World Currencies

Country currencies depend on many things. Even though these are also pieces of paper (or pieces of metal) there are many things that regulate their price. Some of them in no logical order are:

• Country GDP or some gold standard (or silver standard).
• The worldwide pot of money that says how much money there is available. I think that the International Monetary Fund controls it but it can be controlled by pink elephants for all I care.
• Something mysterious. I mean, c'mon, I do not get all this stuff, if you want to really know, there are plenty Forex markets that explain all this mumbo jumbo.

These regulatory institutions is something that bitcoins do not (and care to) have. There is no bitcoin central bank or the bitcoin reserve.

This means that is no government involvement that freezes the value of a given currency at their whim, raises or lowers an interest rate to regulate purchasing power.

Bitcoins depend solely on a fixed amount of coins in which its amount increases by a mathematical formula. The price depends on how much people are willing to pay for the available supply. Considering that there is no involvement of a government entity, the whole thing rides unbounded.

Is this all bad?

Well, if you think about what money is used for, no, not really. You see, money is a shorthand to barter which was the stone age way of having an economy.

Yes, there are folks in some places in the world in which you can earn your keep by bartering. But currency is more convenient being that it does not depend on a need for a given item to be available to barter.

Even though bitcoin does serve its purpose being that you can buy and sell stuff with it in lieu of bartering, it runs in an unbounded market that happens to have mercurial fluctuations in price compared to other currencies.

My 2 cents

In my opinion, the following needs to happen to have a happy and safe bitcoin market.

Improve security in the exchanges

There have been several bitcoin exchanges that had to close due to hacks causing the whole system to go sour. Until this is solved in a definitive manner, this will not inspire confidence in the system. A money that people do not trust will not keep its worth on the long run.

Have throttles

Bitcoin by definition is peer to peer, and unregulated. This is fine when bitcoins are exchanged. It is not a cause of concern. However, sell off do happen at the exchanges where and this were throttling should be done.

These mechanism are done by the stock markets nowadays. When there is a panic sell off, trading is actually halted until cooler heads prevail. Maybe something similar can be done in bitcoin exchanges to have orderly trades without the drama.