The Rise and indefinite decline of Bitcoin

By March 27, 2015Bitcoin Business
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Bitcoin is a crypto-currency developed anonymously in 2009. Because the currency is virtual, it has inherent value and can be sent digitally over the internet and is not subject to central oversight, making it very popular with anarchists, conspiracists, and libertarians.

There was (and remains) extraordinary risks as similar currencies have been shut down by the US Federal government. In March 2014, the IRS somewhat calmed these fears by providing instructions for taxation (as property rather than currency).

The virtual currency is produced by the creation of private keys which are stored on a public ledger. The algorithm that manages these computations currently has a finite number available (21 million), but adding decimal points in the future is a possible back-end solution. Until this number is reached, the coins are being manufactured by bitcoin miners, high-capacity computers designed to maximize the yield. Furthermore, the algorithm releases new coins in a declining rate.

In the early days a simple laptop could create the coins relatively easily- but since 2012, the competition grew to the point where now the machinery required to keep up will not be enough to break-even on the investment.

There is a notable story of a desktop PC that ran in a garage unchecked for 6 months, generating over one hundred bitcoins. That will never happen again.

Popular with anarchists and conspiracists and libertarians, what broke the story for me was when the island of Cyprus fell into a currency crisis. The crisis was caused by several factors, originally stemming from the the US financial crisis, but the end result was the island nation was suddenly bankrupt. The wealthy Russian Oligarchs who have hid, stored, and invested money there for years were suddenly interested in relocating their wealth. Bitcoin became the mule for this madness, as could be moved instantly, securely, and transferred with no costs or fees.

I know how much money Paypal and Western Union make simply by transferring cash, so I began investing at this point. It also made headline news as the price increased from $13 to $219. And with a public ledger available, anyone could determine the quantities of ownership (anonymously serialized), which means with the price increasing 17 x, some of these early adopters became suddenly rich. There were multiple millionaires minted with the price rise, and it was evidenced on the ledger.

With this advantage, the transferability and usefulness, I became an investor.

After the Cyprus incident, the price declined to $70, far above the price prior to the event, and stayed in this range for 6 months. I bought more coins every week, convinced that the crisis had proven this was an effective and cheap way to move money, and couldn’t believe Western Union continues to operate. People laughed at me.

Then, in October 2013, six months after the Cyprus crisis, the value of bitcoin began to rise again. Some of the elusive media on the topic was reporting that the coins had become favorable in China, who at the time was growing wealthier while simultaneously having limited investment options (outside of gold and real estate there were just state owned assets and banks, as IPOs would remain banned for the next 2 years).

My coins had doubled in value just as I moved to San Francisco. The coins continued to rise in value, my coins tripled in value and I could not believe the national news was not talking about this. I was blown away with the lack of media attention, and then, all of sudden, the media picked up on it, and this caused a sharp price increase again. The value of my coins, which still had an average cost of around $100, went over $1,000 each. I sold my first bitcoin for $1,100 and started using them to pay rent (I was living in San Francisco, the most expensive cost to income ratio in the United States).

I stopped buying them when the price went over $800, simply because the run-up was too steep, so I made sure to sell them all before the price went back under $800.

Then, not ready to give up (because I still believed in the product), I was turned-off completely because the only advantage I saw in bitcoin, the transfer technology, was suddenly ubiquitous with new apps and payment technologies that were gaining popularity and/or preparing to launch. So just as the world seemed ready to start trading bitcoins on the retail level, the retail-level technology of “regular” US currency dramatically improved. Suddenly you could pay with your phone and move money between friends. Venmo, Paypal, Apple, everyone suddenly had a product and an idea and they all worked great. So the advantage bitcoin had in my mind was now lost, and I am out. With a 2,000% return, I am done.

I expect the value to decline indefinitely.

There was (and remains) extraordinary risks as similar currencies have been shut down by the US Federal government. In March 2014, the IRS somewhat calmed these fears by providing instructions for taxation (as property […]

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