Perception of Value & Today’s Cryptocurrency “Crash”
Today, many cryptocurrencies lost ~35-50% of their value. Reddit even posted contact information for the National Suicide Prevention Hotline in /r/cryptocurrency, knowing how emotional investors were bound to be today. Bitcoin, which was nearly $20K in mid-December and has been hovering near $14K this past week, dropped nearly $4K and almost sunk below the $10K milestone. I usually track the price of Bitcoin at http://bitcointicker.co, which can show the posted prices from several exchanges (web locations where people go to buy and sell, like Ebay). There are hundreds of cryptocurrencies and many of them dropped in value today.
Why did the prices drop so much on Tuesday? Here are some likely influences:
- The government of South Korea announced its plans to prepare a bill banning cryptocurrency trading (specifically Bitcoin, Ethereum, Ripple); trading volume has been high in South Korea this past year, and the transactions have propped up global cryptocurrency prices.
- The web-based BlackWallet software used to trade the Stellar Lumens (XLM) cryptocurrency was hijacked by hackers who redirected the Domain Name Service (DNS)
to a site that looked just like BlackWallet – but wasn’t. They were able to capture $444K worth of XLM. (https://www.hackread.com/blackwallet-hacked-hackers-replace-dns-server-steal-stellar/)
- Wells Fargo Chairman and CEO Dick Kovacevich called Bitcoin a “scam” and “pyramid scheme” today, asserting that traders are exchanging something with no inherent value and the people at the tail end of the scam are doomed to financial losses. (https://www.express.co.uk/finance/city/905688/bitcoin-price-news-Ripple-ethereum-value-today-latest-cryptocurrency-chart-cash)
- The day after, North Korea was suspected of hacking the Bitcoin wallets of South Koreans, further destabilizing perception of the cryptocurrency’s safety (https://www.cnbc.com/2018/01/17/north-korea-hackers-linked-to-cryptocurrency-cyberattack-on-south-korea.html)
Market prices are usually driven by supply and demand — for example, if there aren’t that many lobsters available in a particular area at a particular time, and you go to a restaurant hoping to order one — you’ll pay a premium. But that price is also influenced by the quality of the product, the image of the product, which influences your perception of its value. Quality reflects how well something satisfies stated and implied needs or expectations.
Value, however, is quality relative to price, and influenced by image. And people are not always rational: they’ll pay a premium for image, even if the value of a product isn’t particularly high. Just think of all the Macs on display at schools, coffee shops, and airports. Price is related to value… usually, price goes up as value goes up.
Where’s the value of cryptocurrency? A Bitcoin does not, on its own, have any inherent value — just like a dollar or a Euro (a “fiat currency”). But the prospect of an asset that will increase in perceived value — where you can buy low, hold (sometimes just for a few days), and sell high because there are lots of people willing to buy it from you — will have perceived value. Hundreds of early adopters — or “Bitcoin millionaires” — are getting people excited about the prospect of making small investments and reaping huge rewards. That this has happened so recently lends a mystique to ownership of cryptocurrencies and Altcoins (or “alternatives to Bitcoin,” like Ether) in addition to the novelty.
Value is attributed to things by people, and cryptocurrencies are no exception. The quality of the currency itself, and the technical solidity of the platform upon which one is based, isn’t really tied to the cryptocurrency price right now — although this will probably change as knowledge and awareness increases.
Is this the end of Bitcoin? That’s doubtful — there are too many innovators who insist on exploring the technological landscape of cryptocurrencies and blockchain technology, and lots of investors willing to fund them. In the meantime, there are unlikely benefits: because cryptocurrencies are not yet mainstream, a “crypto crash” is not as likely to ripple through the whole economy (no pun intended) like the subprime mortgage crisis of 2008. But if you do decide to buy cryptocurrency, don’t invest any more than you can afford to lose.