Image 123RF/Akarat Phasura
A photograph capturing crypto currencies as the price tanked Image 123RF/Akarat Phasura

I imagine it's pretty crushing for the believers. After sagging, drooping and sulking somewhere around R125,000 per bitcoin for a week or so, the market collapsed over the last two days leading to what has been described as the  'worst weekly performance since 2013'.

This follows weeks of relentless miserable news: India clamping down, China clamping down, Facebook banning cryptocurrency advertising ... 

Trading on ice3x.com mid-morning Friday
Trading on ice3x.com mid-morning Friday

The recriminations are going to be surreal — a green investor class with zero experience and ability to sustain losses — leveraged to the hilt through credit cards and second mortgages — sold on the idea that Bitcoin and other cryptos would trade higher forever — are now under siege — getting ripped from loin to limb in broken elevator trading action akin to what equity traders bore during the 2008 market crash — only this is happening with decentralized, non-regulated, alacrity. - http://ibankcoin.com

Circulating on Whatsapp
Circulating on Whatsapp

The latest numbers (real traded ZA numbers, which are less flattering than dollar numbers converted to rand) show Bitcoin at R96,000. I must immediately point out that within five minutes of publishing this, the price is likely to be different, such is the volatility of crypto right now.

Others such as ethereum and litecoin have not been spared.

The ZA price is now roughly where it was in mid-November and way off the high of more than R300,000 in mid-December, which means that everyone is adjusting their expectations and trying to establish if there is a bottom and what it might be.

There are still optimists, like this "teenage bitcoin millionaire" breathlessly quoted by that voice of calm reason in a sea of turmoil, the Daily Mail:

But the world is tiring of teenage bitcoin millionaires and their phony advice. And tabloid newspapers and their phony reporting, come to think of it.

For some, the whole thing needs a fundamental rethink. Among the questions is, how is it possible that hundreds of millions of dollars in coin value can disappear overnight when exchanges are hacked?

Tech columnist for Bloomberg, Tim Culpan, wrote this about why exchanges are vulnerable:

At the end of last week, someone stole 523-million NEM coins, worth around $500m, from Coincheck. It took about eight hours for the exchange to even notice that its wallet had been siphoned. Google the term "crypto hack" and you'll find plenty of listicles highlighting some of the most infamous breaches, including that of Mt Gox, which in 2014 lost around 850,000 bitcoins.

The reason that the results of my informal survey are confounding is that the correct answer is "0". I suppose we should be happy that 30% answered correctly, but the fact that 50% chose "1 BTC less fees" shows confusion about how centralised exchanges work. 

When someone buys cryptocurrency from a centralised exchange — I'm going to stick with bitcoin as an example — they swap fiat money for the nominated bitcoin. But that coin doesn't get sent to the customer. If it's bought from a nonexchange seller, then it comes into the exchange's own wallet, and gets held there. A ledger entry is made, and the customer gets an IOU. If the seller is on the same exchange platform, no bitcoin even needs to be shifted, the exchange simply changes its accounts to note one less bitcoin for the seller, one more for the buyer.

The customer only actually holds the bitcoin if they then go through the process of sending it from their exchange wallet to another wallet, for example on their smartphone, and that usually incurs fees. Given the large amount of bitcoin held by just a few wallets — likely owned by exchanges — it's clear many customers don't bother to take possession of the bitcoin themselves.

Meanwhile, the number of shysters, hucksters and even corporates that are cashing in on the crypto hype continues to grow.

In a desperate attempt to impress — and not to be left behind by new technology this time — Kodak announced it was going all blockchain.

Turns out it was all crypto buzzwords pasted onto an old business model, writes Matt Levine:

The rough idea seemed to be that Kodak's licensee — WENN Digital, "a California-based affiliate of a British photo agency that specialises in paparazzi photo licensing" — will run a blockchain-based system for licensing photographs, combine it with web crawler to make sure no one is using unlicensed photographs and invent some kodakcoins to pay the photographers. Or something, I don't know.

What seems to be certain is that bitcoin's utility as a functional currency has evaporated as more and more merchants back off from using it. The latest to dump Bitcoin was online payments company Stripe.

From the Bloomberg article:

There are essentially three reasons bitcoin isn’t working out as a currency — two technological, and one economic. Technologically, bitcoin tends to be slow and laborious to use because it verifies transactions in small blocks. That problem isn’t particularly hard to overcome — just use bigger blocks, or use a form of temporary credit to ease the burden on the network. More ominously, bitcoin relies on people known as miners to verify all transactions, and compensates them by creating new bitcoins. But soon, this will stop, since the total number of bitcoins is capped at 21-million — at that point, transaction fees will be needed to pay miners.

And finally ... 

Want to be the first to know when the bitcoin bubble is bursting? You might want to try out a new app, which is devoted to predicting the moment the market disappears. Its tagline? "Be ready for the blockchain apocalypse."

This column does not offer — or take — investment advice in any way, shape or form.

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