I remember hearing about Bitcoin years ago. It was something called cryptocurrency. It was money that somehow only existed online. This online currency was accepted by people and they were buying stuff with it. It was being traded. It had its own currency exchange. It was in the news. People were wondering if this new cryptocurrency was a good investment.
Hacking and Bitcoin
More news was made in June of 2011 when Bitcoin’s most popular currency exchange, Mt. Gox was hacked. The value of Bitcoin dropped to pennies. Mt. Gox responded by taking actions to try to “restore” Bitcoin to its pre-hack price of $17.50.
Flash forward to December 2017 and Bitcoin was making big news. The price for one Bitcoin hit $19,500. Those values drew people into the world of digital currency. If, however, you were optimistic and invested at that price you would not very happy now. On June 12, 2018, Bitcoin was trading at around $6,500. That is a drop in value of over 65%
Cryptocurrency prices, in general, continue to fluctuate wildly. Bloomberg reported that cryptocurrencies tracked by the Coinmarketcap website had a collective value of $830 billion in January of this year. As of June 11, their value had dropped about 64% to $298 billion.
What Caused The Latest Price Plunge?
For Bitcoin, the value drop has been attributed to hacking. Once again. This time it was South Korea-based Coinrail, the 99th largest cryptocurrency exchange, reporting a hacking attempt. They said hackers stole 30% of all their lesser known virtual currencies. They froze operations while they try to track down what was stolen. Even though no Bitcoin was stolen, its price still dropped.
Speculative Nature of Crypto Investing
Even though there is much movement toward regulation in the cryptocurrency space, it is not necessarily industry-wide nor is regulation universally welcomed. Much different than stocks.
It is not easy to place a value on stocks. But in the United States and other countries, there is standardization and regulation. Publicly traded countries must adhere to certain standards when they report their financial condition. Thanks to these standards, a valuation theory can be applied by investors. The worth of stocks is based upon the cash flow of the company that issued that stock.
Bitcoin does not have anything like this. Its value seems to based upon speculation. A December 2017 Wall Street Journal survey showed most economists thought that Bitcoin’s price run-up was due to the technology of blockchain. The belief in the ability of blockchain technology being able to securely transfer value via the internet.
Others are of the opinion that the value changes of cryptocurrency are due to belief. They believe price moves because coins and the blockchain are superior to current methods of conducting transactions. They believe that crypto and blockchain will become the standard.
Even with the hacking of the exchanges and the value losses, the belief remains.
So it appears that hacking, even the hacking of minor exchanges, is responsible for cryptocurrency price volatility. When a hack occurs, there is fear. When there is fear, people panic. When people panic, the herd mentality takes over. The result is sell-offs triggering price drops.
Can The Hacking Be Stopped?
Many believe that regulation is the answer. They believe that regulators must act to protect the consumers. The claimed “fix” to stabilize the market is security. Exchanges, they say, must adopt the highest level of security possible and keep their security systems upgraded.
But is a “stable” market what the traders really want? Hasn’t speculation lured them in with the possibility of making the “big score”? From what I can tell, some do and some don’t. With all the movements by various countries to increase cryptocurrency and exchange regulation, it seems that the stability side is winning. If that continues then cryptocurrency would be a good investment in the traditional sense.