2018 has seen an epic collapse in the value of all cryptocurrencies, falling by about 80% and erasing just under $700 billion in market value. It is a loss so immense it is being compared to the Dot-Com crash of 2000 ($5 trillion to $8 trillion) and the Financial Crisis of 2007-2009 ($11 trillion). No doubt much of the loss in market value was due to the bubble nature of the market. But has Bitcoin fallen as far as it can go?
In a previous blog post I speculated that Bitcoin was worth no more than $600 given its pre-bubble historical value in dollar terms. That’s the value the market gives to transaction transparency and owner opacity, and not to its intrinsic value, which is zero. Why its intrinsic value is zero is handled in another blog post. Warren Buffet also provided an explanation of Bitcoin’s lack of intrinsic value earlier this year. Yet another blog post addresses the opacity component of Bitcoin, which is under assault by the IRS and the SEC and thus is diminishing in value.
Transaction fees were in the press at the height of the market, particularly since they spiked as high as $37 per transaction. Fees have fallen back to a more reasonable $4 per transaction with the pullback of Bitcoin prices. Nevertheless transaction fees have made Bitcoin an impractical currency to use to buy pizzas (the item purchased in the very first Bitcoin transaction), but for transactions more than $150 the transaction price is comparable to a credit card merchant processing fee.
This happy situation is not likely to last as Bitcoin mining costs continue to escalate. The amount of power required to maintain the blockchain ledger is already stupendous, and this power is a cost in an addition the hardware that miners have to cover before making any money at mining. As the load on the ledger increases the mining costs will continue to increase, which in turn will pressure transaction prices. Miners will start to think about dropping out as profits erode or disappear altogether, as was seen in 2015 when Bitcoin fell to $174.
Ironically any reduction in mining activity will form a floor under the market value of cyrptocurrency–assuming the underlying demand for owner secrecy and transaction security sustains volumes. The question is, at what level is the trade-off? $0, $174, $600, or today’s price for Bitcoin?
That, unfortunately, is anyone’s guess. Better keep a handy supply of US dollars on hand.