lunes, 2 de junio de 2014

Mundo Bitcoin: Why Professor Bitcorn's prediction failed

By Victor Hernandez

On december 17, 2013, Boston University finance Professor Mark Williams, known as Professor Bitcorn among bitcoin supporters, predicted bitcoin's price would fall to less than 10 dollars by the first half of 2013.

"I predict that Bitcoin will trade for under $10 a share by the first half of 2014, single digit pricing reflecting its option value as a pure commodity play," he wrote in the very last paragraph of an article for Business Insider.

On june 2nd, 2014, the price of one bitcoin gravitates around 630 dollars.

Williams tried to justify his failed prediction in an interview with CoinDesk arguing that "asset bubbles cannot be easily timed." Why did he give a specific timing for a sub-10 dollar crash it then?

In reality, William's prediction failed because of his own lack of understanding of cryptocurrencies in general.

In his December article for Business Insider titled FINANCE PROFESSOR: Bitcoin Will Crash To $10 By Mid-2014 he gave several supposed reasons for his prediction, but most of them proved to be wrong.

His first argument was the market "finally realized that hype alone cannot support lofty prices" after bitcoin's price fell to 535 dollars right after China started its attempts to crush the digital currency.

That was a gross mistake. The only thing the market realized in China was they may face jail time in a communist prison if they traded bitcoin. That triggered a panic sale, loss of liquidity for bitcoin and the corresponding price drop.

After that, Williams attempted to discredit bitcoin with a combination of arguments for the central banking system and against the bitcoin network itself.

His support for central banking can be debated. But what can't be debated, and that was William's biggest mistake, was the operation of the bitcoin network.

Williams, for example, argued that "it is assumed that miners will behave in a responsible way and not game the system for greater financial reward."

Big mistake. The mining system is designed to overrule any attempts at cheating through a system of votes. Any bitcoin transaction is picked by thousands of miners. If one miner, or even a group of miners attempted to rig the system by changing the transaction, it would be discarded by the rest of the miners, as the source for the transaction is the user, not other miners.

Only if more than 50% of the miner network were overtaken by a single group of miners you could have a situation in which the system can be altered.

But guess what; The bitcoin network is constantly monitored. If one single mining group were to reach anywhere near 49% of the mining in the network, it would crear an immediate panic and a price drop. There would be no monetary gain for a group of miners if they were to try to rig the system.

Mining networks know this. If any network were to reach 50% of the mining their investment in mining equipment and electricity would be gone, as the bitcoins they mine would be worthless. No mining network would voluntarily shoot itself in the foot like that "for greater financial reward," as Williams claimed.

The next arguments by Williams dealt with lack of regulations and consumer protection in the use of bitcoin. Well, guess what; regulations and consumer protection in the US is in the making. New York will release its bitcoin regulations sometime in 2014, for example. So that argument also proved to be false.

Three more of Williams' arguments that were really a poor understanding of the reality of bitcoin:

1. "Bitcoin has not taken off as a transactional currency and is further undermined by the fact that the majority of Bitcoin owners hoard e-coins."

Well, the rason for that was because there weren't many places were you could spend your bitcoins. But that changed a month after William's article, when started accepting bitcoins. Now even more merchants accept bitcoin.

2. "Unless retailers want to be in the commodity trading business, they would not be interested in taking Bitcoin risk."

Actually, merchants don't have to take any risks. They can simply set up an account with BitPay or Coinbase and have the bitcoins converted to dollars at the moment of sale, thus erasing the volatility risk. That's the reason why more morechans accept bitcoin now.

3. "This is why in recent weeks, as large price movements have occurred, we have seen more credible retailers saying “No” to Bitcoin."

This proved to be false as well. Not only Overstock, but Dish satellite TV network will accept bitcoin. Same reason; you don't have to keep the bitcoins and you can simply convert them to dollars on the spot, thus eliminating the risk. Not because of ideology, as in the case of Overstock, but because or the economic incentive of saving up to 5% in credit card fees.

But the biggest reason why Mark William's prediction failed is found one paragraph before the actual prediction:

"As it becomes increasingly evident that Bitcoin will not be the global currency standard, but simply a novel idea that will be improved upon by more nimble competitors such as Litecoin, restrictions and new regulations will be imposed and prices will plummet."

The mistake has 2 components. First, the idea that regulations and restrictions for bitcoin would cause its price to plummet. Yes, bitcoin restrictions in China caused its price to drop, but every single time the price has crashed it has recovered. And what many are waiting in order to invest in bitcoin and bitcoin related companies are precisely a series of regulations that give investors certainty. In fact, it could be argued that the reason why bitcoin has been appreciating in the last couple of weeks is because of the anticipation for New York's bitcoin regulations.

The second component of the mistake is William's suggestion that bitcoin would simply be replaced by other cryptocurrencies such as Litecoin.

I'm sorry, but you can't just replace one cryptocurrency with another.

You can't do it because in order to replace bitcoin with litecoin you'd have to replace the entire bitcoin mining network with litecoin-specific mining rigs.

Bitcoin mining hardware is designed specifically for the bitcoin code. You can't just mine another type of coin with the same rigs designed for bitcoin. You would have to replace the rigs with litecoin specific rigs. That alone would cost millions of dollars and there's no way a miner will spend thousands of dollars in equipment again again just to switch to litecoin or any other currency.

On top of that, merchants would have to switch to accepting other digital currencies. That may be less difficult to do than spending thousands on mining equipment, but the problem is there's no infrastructure for replacing bitcoin just like that. There's no Coinbase or BitPay for Litecoin or Dogecoin just yet (there are some companies that will let you accept different types of digital currencies, but not at the same level of efficiency as Coinbase and BitPay.)

For William's prection to come true you would need the following to be true:

1. A mining network just as large as the bitcoin mining network capable of handling altcoins.

2. A general use of cryptocurrency by the majority of merchants in a market.

3. A widespread culture of digital currency use by consumers and merchants that would allow to switch from one coin to another.

That's not impossible, but it will not happen in 2014. Probably not in 2015 nor 2016 either. Perhaps by 2018. But when that happens, it won't matter if bitcoin's price goes down. People will probably have different digital coin portfolios to protect themselves from a price drop.

The thing is, if that happens bitcoin itself won't be the issue, but the concept of a digital currency. And that concept will always be valuable regardless of its name.

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