Bitcoin Crash (Simple Explanation)

Bitcoin, Bitcoin Bitcoin.

Bitcoin is everywhere – from US States considering letting residents pay their taxes with it, to the take up of blockchain technology by the corporate world, everyone is getting involved with this new and exciting technology.

It seems today you cannot read the news, log onto social media, or even listen to the radio without hearing about cryptocurrencies and the blockchain.

While some countries such as Russia and China are cracking down on this fledgeling and disruptive technology, the majority of the rest of the world sees it as an incredible opportunity.

Since Bitcoin was launched, its value has increased dramatically, particularly towards the end of 2017. Unfortunately, this exponential growth was not to be and come January; its value took a rather drastic plunge.

But why did this happen? What made things take such a drastic change? And how is its stability looking for the coming year?

This is the Bitcoin crash explained simply, easily and in digestible chunks so even if you are not a cryptocurrency expert, you can make sense of one of the most significant crashes in recent times.

What Is Bitcoin?

Now for those of you who have not read a newspaper or had access to the internet in the last few years, you might be wondering what exactly Bitcoin is.

Bitcoin is a worldwide payment system and a cryptocurrency.

It was the first decentralised digital currency in the world, and it works on the basis that any bank or single administrator do not control it.

The network that it runs on is what is known as a peer-to-peer network and the transactions that take place, do so directly, without any intermediary.

These transactions are then verified individually by network nodes that use cryptography and are then recorded in public distributed ledger that we call the blockchain.

Bitcoins creator remains anonymous and goes only by the pseudonym Satoshi Nakamoto, and it was released to the public as open-source software in 2009.

A single Bitcoin is created as a reward for an individual undertaking a process known as mining. This is a distributed consensus system which is used to confirm a transaction by then including them on the blockchain.

To be confirmed, transactions must be combined in a block that adheres to strict cryptographic rules which are then verified by the network.

These coins can be used to exchange for other currencies, as well as to purchase products and services.

By 2015, over 100,000 merchants accepted Bitcoin as currency – a number which has grown substantially since then.

Bitcoin’s Growth

Bitcoin always showed promise – from the early days in 2009, its value increased at a steady pace, eclipsing what many sceptics predicted.

But 2017 took success to a whole new level, and Bitcoin had a record-breaking year.

Its value grew from $900 at the beginning of the year to around $20,000 by December. For anyone that invested in Bitcoin, back in 2009 or 2010, they would have been looking at a pretty significant payday towards the last quarter of 2017.

Despite the CEO of JP Morgan and a couple of hedge fund managers turning their nose up at it and citing Bitcoin as nothing more than a “bubble” or “fraud” its popularity continued to grow and grow as the months passed.

As each month passed, the value of Bitcoin continued to rise and rise.

People raged about its stratospheric increase in popularity, some suggested it could reach over $1million per coin by the end of 2018, and others were sure that its success was due to peak, and then trough spectacularly.

Sure enough, after peaking at around $20,000 per coin in late December, the value of the Bitcoin took a hefty tumble.

A matter of weeks later, its value had more than halved, and those who had invested in the currency at its peak were feeling the pinch.

As the popular saying goes, “what goes up, must go down” and this was most definitely the case with Bitcoin.

Potential Reasons Behind Bitcoin Crash

HODL Explained

If you are someone that has frequented Bitcoin community forums or other Bitcoin-centric places, then you may well have come across the term “HODL”.

This is a slang term and a meme that has been used by the Bitcoin community to refer to holding the cryptocurrency as opposed to selling or exchanging it.

The term originated in a 2013 post on a Bitcoin Forum message board, entitled “I am hodling”. The typo in the text resulted in it being adopted into general usage, and it is now one of the essential terms in the Bitcoin culture.

There are some that say it can also mean “Hold On for Dear Life”.

Either way, it has become a term that refers to the need to hold onto your Bitcoin in times where its value has soared enormously, such as before January 2018.

Is Bitcoin Just a Bubble?

bitcoin bubble

This is a question which creates an awful lot of debate.

There are some that believe Bitcoin is just a bubble that will burst in the coming months, leaving millions holding coins that are essentially worth nothing.

The best way to analyse this question is to consider the model that demonstrates how bubbles operate. This classic model was developed by Hyman Minsky and then further developed by Charles Kindleberger, a historian.

He described five stages of a bubble: displacement, boom, euphoria, financial distress, and revulsion.

The displacement is described as a technological development which can be used to signal the beginning of a “new age”- examples being rail, air travel, the internet, or in this case, blockchain.

A surge in popularity then occurs – the boom and more and more investors come on board.

A sort of frenzy occurs, and this develops into the euphoria stage where its popularity becomes widespread, and many investors make a lot of money.

This is where Bitcoin got to in November and the beginning of December.

At this stage, other casual investors start to invest in the idea, purely because everyone else is and they believe they can sell quickly and easily, at a much higher price – therefore making a significant profit.

For a while, this trend continues to be self-enforcing, and the circle continues. But it cannot last, and it did not.

What Went Wrong?

At some point during this bubble process, doubt set in amongst members of the public and investors alike.

At this point, fearing that the value would cease to increase, or that a crash might be imminent, many investors decided to cash out their profits while they had the chance.

This was then combined with the news that South Korea (one of the largest Bitcoin trading industries) was planning to crack down and tighten controls of the trading of the currency.

It was then that the value started to fall because the psychology, as well as the hype around it, began to change.

Those investors that bought early on and made millions in profit began to see a decrease in their wealth, whereas those who had purchased at the current price, lost a fortune and had some pretty bitter regrets.

We are yet to reach the “distress” stage of the bubble format, and many believe that this might not occur, although the cynics amongst us think it is imminent.

Some say that worries about the security of cryptocurrencies, in general, could trigger another fall in value.

Those that believed Bitcoin might not be suitable for everyday transactions, and is instead a better method of storing value, would see their hypothesis dashed.

The other issue with Bitcoin centres around its lack of scalability.

When we talk about scalability about Bitcoin, we are referring to the limit on the number of transactions that the Bitcoin network can process.

This is because the records, or blocks, in the blockchain, are both limited regarding their size and frequency.

At the moment, the capacity of transaction processing on the Bitcoin network is limited to a block creation time of 10 minutes as well as a set block size limit.

This means that the throughput of the network is constrained and limited to a maximum of between 3.3 and 7 transactions per second.

While this was fine in the early days of Bitcoin, due to its popularity, this is becoming a bit more of an issue. It means that transaction times are taking longer, and fees are getting higher.

If Bitcoin and blockchain are utilised as much as their potential allows, this could cause some significant issues in the future. It is believed that the realisation of this situation, also lead to the crash in value.

There are, however, several solutions that have been proposed to alleviate the issue such as forks, a new type of coin, Schnorr signatures, and signature aggregation, yet nothing has been finalised as of yet.

But it is not all doom and gloom.

What Is In Store For 2018?

bitcoin acception

While the volatility and unpredictability of Bitcoin is a cause of concern for many, it seems that there is an equal number of people that are not phased in the slightest.

Uptake of both Bitcoin and blockchain technology is on the rise, and not a day passes without some new announcement regarding its influence.

Take for example, in the State of Arizona – a bill is up for discussion that would see Arizona residents be able to pay their tax bill in Bitcoin.

Also, in the news this week – Warren Buffets biggest railway firm has shown its dedication to blockchain by signing up to a consortium of logistics businesses that seek to integrate blockchain technology into their industry.

Also, the Maltese government has announced plans to create a comprehensive yet flexible framework to support the growth of Bitcoin, its general use, and the incorporation of blockchain tech into other areas of the economy.

These are just a couple of examples which of course, go alongside the increasing number of companies that are now accepting the currency, as well as even giving their staff the option to be paid in Bitcoin.

Some analysts believe that despite Bitcoins rocky track record, we could see its value rise to anywhere between $100,000 and $1 million in the coming 12 months.

Whilst this is not hard to believe, there are obstacles such as scalability and competing coins to consider.

You see, Bitcoin is no longer the only big player on the market and it considers some pretty stiff competition from similar coins that offer better features regarding scalability, transaction cost and transaction times.

Coins such as Ethereum, Litecoin, Monero, and Ripple are all giving Bitcoin a run for its money, and we could see 2018 proving to be a year where another cryptocurrency pips Bitcoin to the post.

While the value and the price of this currency may not be particularly stable, it seems like the concept and the general idea behind it are being embraced.

Whether this means that Bitcoin will continue to be popular, or it will have to make way for a new and improved cryptocurrency remains to be seen, but one thing is for sure- cryptocurrencies and blockchain technology are not going anywhere anytime soon.

So, the future may be a little bit uncertain, but that doesn’t mean you shouldn’t still invest in Bitcoin.

To be honest, no one really knows what will happen to Bitcoin, as you can tell from the simple explanation on the Bitcoin crash, surpassed everyone’s expectations.

Perhaps don’t invest your life savings in it, but a small investment cannot hurt, and who knows, if Bitcoins value does hit more than $100k in 2018, you could be in for a pretty healthy payday!

Read more on Bitcoin Price Prediction for 2018.