Bitcoin Price Collapse: Early Warning Sign Or Opportunity?

You cannot have missed all the recent media hoopla regarding Bitcoin’s recent price plummet. If you remember, we pretty much warned you this was going to happen just a few weeks ago. Okay, so now it’s time for the million dollar question. Is Bitcoin here to stay, was this merely some profit taking by investors before the Christmas holiday, or is this more of an indication of its true value?

 

Chicken Little Weighs In

To review the latest Chicken Little headlines from around the world, you might at first glance think Bitcoin was just a fad, a silly attempt at an alternative currency by a bunch of computer nerds. But hold on a second, pause a moment before you join that silly crowd and rush to condemn the whole idea. Why not sit back in your chair and examine this situation from a logical perspective?

Real Numbers First

Take a look at some real numbers. In January of 2013, a single bitcoin was priced at around $13. However, by the end of November, it had shot up to $1,061. Yet, not even a month later, in December, it was trading in the $800 range. Now if you follow the financial markets at all you know full well that the markets rise and fall on the news. If you were paying attention, this rapid drop in price happened shortly after the People’s Bank of China announcement that it was prohibiting Bitcoin transactions from all of China’s financial institutions. Note that they also said individuals could still use Bitcoin at their own risk. Huh? Whatever.

More Bad News?

Moving on, you can see the plot starts to get even more interesting in India when several Bitcoin Exchanges closed their doors after stern warnings from government officials about money laundering and anti-terrorism law compliance. Almost at the same time, the Bank of France spoke out that Bitcoins are “highly speculative.” As if that wasn’t enough, former Chairman of the Federal Reserve Alan Greenspan told Bloomberg News that “Bitcoins are a bubble.”

All right, that’s one side of the story. Let’s call them the naysayers and the Chicken Littles. You know the guy/gal who always shows up to the party bitching and whining about one thing or the other. Now how about if we look at the other side of the coin (pun intended). What’s to like? Start with the real fact that using Bitcoin cuts out the middle man. We all hate the middle man, right? Why pay a third party, such as a fee to an intermediary bank that processes your credit card transaction? As you might expect, cutting out those middle man transactions cuts the cost of buying and selling for businesses and consumers.

No More Funny Money

Remember that part of the allure of Bitcoin is that it eliminates the possibility that a government can simply print more money at will. That is, governments won’t be able to manipulate the currency up and down at their whim. Take a look at the history of the monetary policy of most countries if you have any doubt how common it is for governments to play around with the currency.

Who’s on Board with Bitcoin?

Did you know that our very own Department of Homeland Security and Governmental Affairs has already held a congressional hearing on Bitcoin? Sources report that senior (that means important) members of President Obama’s administration were all for Bitcoin. They were full of praise. These executive team members made an extremely important point, saying that it “…is important to be careful not to stifle virtual currencies.”

Justice Department Says Yes

Perhaps you missed another tidbit of Bitcoin news with all of the up and down hoopla over its rise and fall. An official from the Justice Department is quoted as saying that “Bitcoins can be a legal means of exchange.”

Ben Bernanke Looks the Other Way

At the same Senate hearing, the current Chairman of the Federal Reserve, Ben Bernanke says that the U.S. central bank has no plans to regulate the currency. Hmmm, well thank you Mr. Chairman. It’s good to know that our own Federal Reserve Board is not planning on trying to regulate Bitcoin.

Side Note – Keep in mind that the nature of Bitcoin does not allow it to be regulated by any one government, but we already addressed that earlier. Anyway, more to the point, the Chairman was also quoted as saying ” that Bitcoin may hold long term promise, particularly if the innovations promote a faster more secure and more efficient payment system.”

What Does it all Mean?

Like just about anything to do with finance and markets, prices rise and fall. Keep things in perspective, this is an entirely new way of doing business around the world. Bitcoin could in fact lead to a true global currency. As with any new innovation there will be bumps along the way. Nevertheless, indications are that Bitcoin is here to stay and that those that got in in January are still way ahead of the game.

What do you think about Bitcoin?

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