Bitcoin Bears Say Told-You-So as Digital Currency Falls

Venture Capitalist Tim Draper
There are still plenty of bitcoin diehards out there. Silicon Valley investor Tim Draper remains a booster. Photographer: Armando Arorizo/Bloomberg

If you think oil had a rough 2014, consider bitcoin. The digital currency has plunged 54 percent since the beginning of the year. By contrast, Brent crude has fallen 44 percent; the ruble is off some 46 percent against the dollar.

Bitcoin’s collapse comes as governments around the world consider regulating or prohibiting the virtual currency to prevent criminals from using it to trade contraband. Meanwhile, bitcoin is facing competition from a slew of rivals striving to be more palatable to regulators.

The dramatic reversal -- bitcoin reached more than $1,100 in 2013 and is now trading at about $350 -- is prompting told-you-sos from skeptics who long said the currency’s promise was overhyped.

“I don’t know that it’s on its last legs, but it’s not looking good,” said Nathalie Reinelt, an analyst at financial consulting firm Aite Group, who has written reports expressing doubts that bitcoin will become a mainstream currency. “It’s not in a healthy state.”

There are still plenty of bitcoin diehards out there. Silicon Valley investor Tim Draper remains a booster. Conferences devoted to the so-called cryptocurrency are attracting droves of adherents. Venture capital firms are funding bitcoin-related startups. Companies from Microsoft Corp. to Overstock.com Inc. accept bitcoin as payment.

Bitcoin proponents like the relative anonymity afforded by the virtual currency. Because users can register for bitcoin wallets without disclosing their identity, they can buy and sell stuff without the government looking over their shoulder.

Bitcoin Ban

Regulation could end that. A proposal under consideration in New York State, for example, would require companies that store or exchange virtual currencies to obtain licenses and verify customers’ identities and addresses. Ukraine has banned bitcoin altogether, China has prohibited banks from clearing bitcoin transactions and Russia is considering fining users.

With bitcoin under pressure, more than 500 alternative cryptocurrencies are vying for acceptance, according to CoinMarketCap, a website that tracks virtual currencies. Many borrow and build on bitcoin technology and some are now trying to comply with existing regulations.

One called Ripple lets banks transfer money in seconds, without spending days to clear transactions. MaidSafeCoin allows people to pay to store files on other users’ hard drives, among other services.

Investors are bullish on the newer entrants. MaidSafeCoin has more than quadrupled in value since its April debut, according to CoinMarketCap. Ripple has gained 36 percent this year; eventually it could displace bitcoin, Reinelt said.

‘Muddled Message’

“There’s a bit of a muddled message with bitcoin,” said Chris Larsen, who runs Ripple Labs. “There are some players who want it to be anonymous, some that want it to be compliant. We don’t like the anonymous aspects. We are compliant from Day One. We constructed it to go in the opposite direction.”

Steven Englander, managing director at Citigroup Global Markets Inc., said building new currency systems from the ground up using parts of bitcoin technology may make more sense than trying to modify bitcoin so it adheres to requirements likely to be imposed by financial regulators.

“Over time, I think other alternatives will emerge,” he said. “It won’t be one coin fits all -- it will be a basket of characteristics.”

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