Bitcoin has come down a lot from its highs, and is in the midst of a very significant correction. Some new security fears have emerged that will test it further.
Bitcoin, the world’s preeminent and most popular cybercurrency, has experienced a wild ride indeed over the past couple of years. In a rise that was compared to the Dutch tulip craze, we saw its price increase tenfold in 2017 only to see it lose over three quarters of its value in 2018.
When the price of something does down as much as Bitcoin’s has, many price floors will be broken through. One of the unique characteristics of Bitcoin and other cybercurrencies is that since they have no intrinsic value, there really is little to prop them up, as opposed to other investments whose intrinsic worth or at least people’s perceptions of it will tend to keep its price up at certain levels.
Stocks and bonds for instance both have income streams, yields with bonds and at least the promise of yields with stocks. With Bitcoin, there is no such constraint on prices, and Bitcoin trading is as pure a market phenomenon as possible, with its price being purely influenced by investor supply and demand.
Bitcoin has recently broke through a key support level of around $6000 back in mid-November, and within a month, it lost half its value. Things move quickly in the world of cybercurrency trading, and while Bitcoin may be the biggest and most famous of them all, they are far from immune from such extreme excursions.
Such a move, if it happened in the world of stocks or any other type of investment for that matter, would have investors and traders panicking, and even the great crash of 1929 took a couple of years to drop this much once it got underway.
We Already Know Bitcoin is Very Volatile Though
The massive volatility that Bitcoin experiences does temper people’s expectations though, and while Bitcoin still needs to be considered to be mired in an extremely bearish environment, this move did not create the degree of panic that might have been possible otherwise, and things did settle down after the 50% retracement.
We’ve seen things come back by 13% since these dark days of mid-December, as those holding or wishing to hold it have established yet another floor, in the $3200 region, and we’re up over that by a good amount presently.
A new security issue has emerged though with Bitcoin, called the 51% attack. This attack was perpetrated not on Bitcoin but on one if its sister cybercurrencies, Ethereum Classic.
This sort of threat has been around for a while, but this time it was successful, resulting in a loss of $1 million to Ethereum Classic. It’s not so much the million dollars that is the issue here though, as the general security threat out there to cybercurrencies if such a thing could happen is much more worrisome.
Cybercurrencies have prided themselves on their intricate security measures, and while there are other things that people find appealing about them, security is of course a primary concern when investing or holding these forms of digital money. There is plenty enough to worry about when holding Bitcoin as far as retaining its market value and it has experienced a dramatic enough drop without having to worry too much about your money being stolen.
People are generally very concerned about the security of their money, and some may insist on not depositing an amount over the government’s deposit coverage if their bank fails for instance. That’s a very low probability threat but it’s still taken that seriously by many, and while cybercurrency investors may be more daring than your average bank depositor, their risk tolerance does have real limits as well.
The thinking here is if this could happen to Ethereum Classic, a major cybercurrency in itself, Bitcoin may be exposed to similar or even worse threats. When you’re the biggest, you tend to attract the biggest criminals as well, and with the prize higher, they will be willing to commit even more effort and resources to commit these thefts.
Security Risks Like This Make People Show Their Cards More
The good news, so far at least, is that this hitting the streets did not cause a lot of panic with Bitcoin, as we may have feared. If something is in such a freefall like Bitcoin has, it may not take that much to propel it further downward and perhaps quite significantly.
While we did see a meaningful drop on Jan 13, where the currency gave back around $100, Jan 14 has brought us a bit of a resurgence, where the loss of the previous day was made back and then some.
With that said, we’re still about $400 lower than where we were less than a week ago, when Bitcoin was trading around $4200, but the fears of these security concerns bringing on yet another big dip are at least subsiding.
It’s not that Bitcoin really needs much of a reason to go down at this point anyway, but we’re at least seeing some short-term price stability now, and the hopes are that it at least will not drop below $3000, which would involve both making new lows in this bear run and also breaking though what is considered to be a major psychological level of support.
Whole numbers are in themselves meaningless, but given that some investors do impart an artificial meaning to them, for instance seeing $2999 as being much more than just a dollar worse than $3000, this could certainly cause more people to worry enough to sell.
Bitcoin may therefore have deflected a potential blow here, and this may actually bode well for the view that we may see a support level that lasts more than a little while finally.