Why the Hell is Bitcoin Crashing So Hard?

And boy, is it ever crashing hard.

Getty Images / Sean Gallup

It seems it’s finally happened. After several months of sustained growth, the value of bitcoin isn’t just tanking, it’s in full-on free fall. When the year began, a bitcoin was worth about $1,000, and just a few days ago that had ballooned to just over $3,000. As of this writing, a bitcoin is worth about $2,300, a loss of almost a quarter of the currency’s value in less than a week.

This has actually been a losing week for most cryptocurrencies, with Ether seeing a huge drop in its own value after a similarly sustained period of growth. So, why is this happening? The easiest answer is that this is actually long overdue. A better question might be, why did it take so long for this to happen?

“I’m happy that the price is being corrected to something more realistic,” said Ethereum programmer Daniel Vaughn told Mic. “This sort of wildly speculative investment is bad for the technology since it’s still in its infancy.”

Analysts have certainly been predicting this “correction” for a long time. Specifically, the charge has been that investment in bitcoin is not coming due to the currency’s actual vitality as an instrument of trade. Rather, the growth is supposed to be due to speculation, meaning that it’s simply being used as a place to park large amount of money — and those investments often end up being quite short-term.

There is a tendency in the cryptocurrency business to dismiss criticism from the traditional wings of economics and finance as somehow ignorant — even if the bitcoin’s boosters couldn’t actually point to the specific flaws in these analyses. All they knew was that the price kept going up, but without some more real-world utility to the currency it’s too easy for the entire market to pack up at leave, all at once.

The specific reasons we’re seeing that sort of rapid sell-off now as opposed to a week ago, are debatable. One idea is that widespread fear possible future volatility in the bitcoin community has sparked a run in the other direction; in very general terms, there are disagreements about the way bitcoin should be administered, and some users could very plausibly get together and “fork” bitcoin into multiple separate and competing entities. Needless to say, this is an unpopular idea with those who simply want bitcoin to stay stable, and huge.

Another idea is that looming legislative changes, particularly in the United States, could pull the rug out from under bitcoin and its crypto-cousins.

We should also note that despite these enormous recent losses, the currency is still way up over the start of the year. Many investors will choose to keep their eye only on long term gains, and try to ride this one out. The hope is that the price will bottom out soon, and resume a slow upward march.