Bitcoin is proving a big disappointment. The would-be currency is down 33 percent against the dollar so far in 2015, and 71 percent in the last year. There’s almost certainly more bad news to come.
The
electronic token has lots of enduring problems. As a store of value that
is not subject to government intervention, it lacks the support of
authorities and is always in danger of being banned.
The market was illiquid to begin with and is becoming even more so,
increasing the risk of abuse. Bitcoins generate no income, so they count
as collectibles – more like an artwork than a few shares of Google. In
these matters, beauty and value depend on the fickle eyes of the
beholder and potential buyer.
Anonymity and free
transactions offer some allure. But the former leads to an association
with illegal activity. The latter is an illusion, since someone has to
pay for the computers used to process and store bitcoin information.
Bitcoin “miners” provide the service in exchange for new bitcoins.
Bitcoin psychology
Right now, the biggest problem is psychology. In a more ebullient and
inflationary world, the novelty and limited supply of bitcoins might
appeal. These days, disinflation and discontent are the dominant themes.
Bitcoins touched $171.41 on Jan. 14 and on Jan. 16 traded at $216. At
these levels, the economics of bitcoin mining look terrible. Full cost
of production is closer to $600 per token, based on a recent study by
Australian researcher Hass McCook. If miners retreat, users may end up
paying directly for the service.
