Cryptocurrency: Down for the Count?

In Cryptocurrency

No, this is not going to be another gloom-and-doom missive that claims that Bitcoins and other cryptocurrencies like it are doomed. In a moment, we will take a look at why the media loves to take such claims and run with them, but first we would like to point out that Bitcoins—and dozens of other types of digital currency—are still around. And they are not likely to be going anywhere anytime soon.

The media, it should be pointed out, is not fully to blame here. Cryptocurrency markets have had their share of setbacks and scandals; no one is disputing that. Here is a brief time line that presents some of the “bad news days” for Bitcoins:

October 1, 2013: FBI agents arrest 29-year-old Ross William Ulbricht—known online as “Dread Pirate Roberts,” a nickname lifted from the film The Princess Bride—as the mastermind of a black market drug ring trading almost exclusively with Bitcoins. This scheme—run through a website called Silk Road—enabled the buying and selling of illegal drugs totaling 95 million Bitcoins, or approximately $1.2 billion. Bitcoin's detractors quickly pounced, claiming the currency's inherent anonymity would only lead to more of the same.

December 5, 2013: The People's Bank of China dealt a huge blow to the cryptocurrency market when it announced that merchants in that country were officially forbidden to accept Bitcoins for goods or services. Furthermore, financial institutions were restricted from exchanging Bitcoins for Chinese yuan. Chinese individuals are still permitted to use digital currency, but the official government stance is that it is not legitimate legal tender.

January 27, 2014: Charles Shrem, the CEO of the New York-based Bitcoin exchange BitInstant, was arrested for alleged money laundering charges. Schrem's charges also allege he was involved with a possible revival of the Silk Road illegal drug ring.

February 6, 2014: The Russian government—reacting to the popularity of Bitcoins—officially announced that the only official currency in the country is the Russian ruble. While not expressly outlawing digital currency, they did say transactions made with it would be considered “potentially suspicious.”

February 2014: Japanese Bitcoin exchange Mt. Gox—one of the largest cryptocurrency exchanges in the world—froze investor withdrawals when hackers and thieves took advantage of a software glitch that allowed the same currency to be taken out more than once. Mt. Gox officials had insisted everything would be resolved, but as of this writing, their Tokyo offices are empty, their website has vanished, and the exchange is silent. It looks likely that approximately one million investors will lose their Bitcoin account balances there.

March 25, 2014: The Internal Revenue Service (IRS) in the United States ruled that digital currencies are to be officially considered as property, but not as currency. As a result, investments in cryptocurrency will be treated like a stock portfolio, with taxes due on any increase in value. Conversely, investors will be able to take deductions over any loss in value.

Stacked together, all these incidents make things look bleak. However, look at Wall Street. Their markets bounce up and down with good and bad news all the time. The same could be said about the housing market, junk bonds, and so forth. The fact is, no market is static—nor will they ever be.

Newspaper tycoon William Randolph Hearst knew this to be true over 100 years ago, and it still holds true today: bad news sells. While true from a business standpoint, there is also something missing from the equation. Media outlets report the bad news, but often fail to follow up when something good happens. For example, with all four incidents cited above, the Bitcoin market took a hit and dropped—sometimes sharply. What no one told you is that the markets bounced back upward just a matter of days later. Panic selling takes place but merchants and investors believe in cryptocurrency, and the markets tend to stabilize pretty quickly. To illustrate this point, note that Overstock.com—one of the nation's largest online retailers—started accepting Bitcoins as payment in January. That's not a move you make in a dying market.

So, are Bitcoins and other cryptocurrencies doomed? Probably not. Will the markets—and the industry—be tested again? More than likely. In conclusion, we'd like to leave you with a quote from a joint statement of six leaders of Bitcoin exchanges, issued to CNBC and other media outlets in the wake of the recent Mt. Gox incident:

"There are hundreds of trustworthy and responsible companies involved in Bitcoin. These companies will continue to build the future of money by making Bitcoin more secure and easy to use for consumers and merchants."

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