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A Bitcoin Depression?

Daily Tech is reporting that we are in the midst of the first great “bitcoin depression.” But if bitcoin is depressed, the dollar must be suicidal. While bitcoin lost nearly half of its value over the past two days, it is still trading at over $17 USD. And people should remember that bitcoin’s value has been growing by leaps and bounds since the media started covering it en masse last week. A correction was inevitable.

The bitcoin economy is growing. More and more businesses are beginning to accept bitcoin as a form of payment. But the bitcoin economy has not grown fast enough (no economy could) to keep up with the skyrocketing exchange rate. Bitcoin isn’t in a depression – the speculative bubble has simply collapsed. The present exhange rate reflects the real value of bitcoin, just slightly above the level it was trading at prior to the media blitz. The bitcoin economy will continue to grow because bitcoin has real value.

To those who entered the bitcoin economy months ago, and who see bitcoin as a long-term currency asset, the bursting bubble has little significance. Those people will continue to earn, buy, mine and use bitcoin just like they have been doing. Eventually the competitive advantages of bitcoin (no transaction fees, liquidity, and deflationary valuation) will give those who choose to use it as a currency a leg-up on those dealing in dollars.

To those who entered into the bitcoin market recently, the bursting bubble has tremendous significance. Many of the newcomers purchased bitcoin as an investment asset. The value of bitcoin as an investment asset directly impacts the value of bitcoin as a currency. In order for people to want to hold bitcoin as an investment, it needs to be gaining value relative to other currencies. Reports (largely overstated) by the media of bitcoin’s tremendous rise in exchange value directly fueled short-term speculation. As the value of bitcoin began to soar due to speculation, the real value of bitcoin as a currency decreased. People slowed their bitcoin spending and invested thousands (millions?) of dollars in bitcoins, high-end computers for mining, and in bitcoin startups. Short-term hoarding helped to drive the price higher, and made it difficult for consumers to justify spending their bitcoins. Why would anyone choose to spend money today when they could get double the value for it tomorrow?

The party ended as bitcoin’s value approached the $35 mark on Thursday. Many of the short term speculators, satisfied with their earnings, cashed out of the market. Their exit prompted many more speculators to jump ship. Those who weren’t paying attention were left with a rapidly depreciating investment asset. But today it seems that bitcoin has bottomed-out. Some reports, such as the one released by Daily Tech, are calling this new low a “great depression.” But I would remind readers that bitcoin is still trading at over $17. If this is what counts for a depression in the bitcoin world, I’m going all-in.

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