A few thoughts - Tuesday, January 13, 2015

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Steve Sokolowski
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A few thoughts - Tuesday, January 13, 2015

Post by Steve Sokolowski » Tue Jan 13, 2015 10:36 am

A few thoughts for today:

Fair value

Unfortunately, it looks like my prediction on Sunday came to pass, and pretty dramatically at that. Bitcoins lost 10% of their value in a few hours. I'm not convinced that this is the end of the fire sale like some people who are claiming that the market capitulated.

I'm highly surprised that price can remain this low, given the volume on the darknet markets. Since darknet market volume was much lower a year ago than it is now, if we assume that the darknet market volume has doubled in a year, then last year's high was more than 90% due to speculation rather than usage.

There's plenty of potential bad news to come. I'll cover it below.


Black swan event is coming

Since my last post, this pool dropped into the red, and now we bleed hundreds of dollars per month. Since we are still in a sort of building mode, with stability not expected for 3 weeks, we can take the losses for now. Our business plan was always to have the pool ready for the next bubble, and this extended downturn is good personally for us, because it gives us more time.

But if we are losing some money, pools like wepaybtc.com which run five servers on multiple fiber connections around the world are hemorrhaging funds. Indeed, CEX.io stated that they are going to shut down mining operations during the next difficulty increase. Last week, Vault of Satoshi shut down, and Bitpay fired 9 employees. These failures are beginning to accelerate.

As the price falls, the potential for a huge game-changing event becomes larger. If I were an active trader, what I would be watching for is any sort of rumor that a bitcoin payments processor is having financial trouble. These things happen suddenly and unexpectedly. We could wake up one day to an announcement that a large VC-backed company like Coinbase declared bankruptcy, and that would be devastating to everyone. It means that VCs would no longer invest in bitcoins, that it would be difficult to buy bitcoins, and the panic that would ensue would wipe out everyone's savings.

The volume on the exchanges is minuscule. Between the panics, volume gets lower and lower each time. Remember, bitcoin companies have employees and bills that are steady regardless of business conditions. These companies are undoubtedly losing huge amounts of money right now. The only thing holding them up is the old Silicon Valley business model of getting customers and hoping to turn a profit in the future.

Bitcoin companies have failed before, but most of the failures have been due to scams, incompetence, or legal troubles. Now, we are seeing the first companies fail because bitcoins are unprofitable. It takes a lot of power to hold when you know that any day we could see the bitcoin economy implode because business has become unprofitable.


Where are the regulations?

On Christmas week, Lawsky said that his BitLicense regulations would be released within three days. Three weeks later, they are nowhere to be found.

When the January 4 panic occurred, I thought that what I didn't know was that the regulations had been released to insiders; at the time, it actually turned out to be Bitstamp's fault. The next panic occurred right before the Bitpay layoffs came to light. Was this most recent panic a result of insiders reading the regulations?

While some are optimistic that the regulations will signal to big business that it can enter the industry, I disagree. Lawsky has demonstrated in the past that he is not interested in making New York a place for financial innovation. Regardless of what regulations come about, they are likely to impose costs upon businesses that are on the edge of failure. The news of the regulations could cause some businesses, who were hoping for the best, to decide to shut down and stop the losses. Or, there could just be flat-out bankruptcies as these companies are forced to hire lawyers to file paperwork and figure out how to retain all the data the licenses require. Whatever the case, any saavy businessman is not going to invest money into a declining industry with stiff regulations and legal dangers.


Conclusion

In short, there are two possibilities that can be devastating in the coming days. First, will a huge VC-backed company fail and drag out investment and dependent businesses with it? And second, will Lawsky's regulations cause a cascade of closures by businesses who decide that the cost of doing business is now too high? I wish I could say that I had high hopes, but these are huge shadows waiting to crush the markets.