Last year, the price of bitcoin nearly reached $20,000, leading some optimistic analysts to label the cryptocurrency as the future of money. According to them, the value of the decentralized currency could only go up since it was free of manipulation from any single government or institution. Soon after reaching this peak in late 2017, however, bitcoin began a steady drop that continued throughout the year. In fact, on Monday the price of the cryptocurrency fell below $3,650, representing an 80 percent drop from its height.

With bitcoin’s price now hovering around the $4,000 mark, experts say that the massive decline can be attributed to a “panic” among holders. Many of the speculators who invested in bitcoin during its 2017 rally are selling off their stakes, contributing to the cryptocurrency’s drop in value. What’s more, the number of bitcoin “miners” has also started to fall. These miners use computers to solve complicated math problems in order to generate new bitcoins, a lucrative process that requires huge amounts of electricity. As bitcoin’s price continues to decline, though, fewer people are willing to invest in powering a fleet of computers that create cryptocurrencies.

“Bitcoin’s value is always driven by the intensity of demand and supply,” said venture capitalist Edith Yeung. “If the miners stop mining, bitcoin will not function…and the overall market will lose confidence. If there is no confidence, people will freak out and sell even more.” Besides bitcoin, other cryptocurrencies such as ripple and ether have also plummeted in recent months. All told, the market value of cryptocurrencies currently rests at $130 billion, down from a record high in January of more than $800 billion. And while some analysts insist that bitcoin and its brethren will bounce back, others are not so sure. “It’s hard to look at the price charts of the big crypto assets and not cringe,” said Fred Wilson, a venture capitalist and early bitcoin investor. “I think things will get worse before they get better.”

Questions:

1. What are the possible causes of bitcoin’s dramatic drop in price?
2. Do you think the value of bitcoin could rise once again to its 2017 height? Why or why not?

Source: Steven Russolillo, “Bitcoin Continues Steep Fall as Cryptocurrency Collapse Worsens,” The Wall Street Journal, November 26, 2018.