Ecuador bans bitcoin
Ecuador banned bitcoin today, voting to instead create a "digital currency" managed by the government. There are two issues to discuss here: the fact that bitcoin was banned, and the idea that a government could create a digital currency.
As to the ban, in some ways this ban is more serious than all the Chinese actions. Of course, more people were affected by the Chinese actions, but those were not actually "bans," because some official can later change his or her mind and all of a sudden China is open for business again. In Ecuador, the legislature voted on and passed the measure. A legislature coming to agreement on something like this publicly is a lot different than some people in a back room scheming on how to limit people's freedoms. This is a bad precedent because it allows other countries, especially those in Central America, to follow suit relatively painlessly.
I commented a few months back that the idea of a government creating a cryptocurrency is a laughable one. If Ecuador decided to release an official cryptocurrency, it would grow out of control just like bitcoin has. It's impossible to fix the price of an asset. There would be no advantage to the Ecuador government to release a country-specific cryptocurrency. On the other hand, powerful nations like the United States could attempt to destabilize the regime by mounting a 51% attack on the country's currency. Their entire economy could be frozen by outside forces. There is no way that any country will ever create a replacement for bitcoin for that reason.
By "digital currency," perhaps they mean that they are going to have some sort of centralized server that issues money to people. But doesn't every country have that already? The only significant part of this law is the bitcoin ban; a replacement cryptocurrency will be ineffective and if this is a centralized currency, it's nothing new.
As a final note, it doesn't seem to make a lot of sense as to why the legislature would vote for the ban. With bitcoin being unavailable, a large source of incoming money from places like the United States is now cut off from the country.
/r/bitcoinmarkets having rule #1 issues
The post quality in /r/bitcoinmarkets is going downhill. Has anyone else noticed that when bitcoins go down in price, there are more personal attacks and negative comments? When the price goes up, people are more polite. It would be interesting to analyze this trend quantatively with upvotes and downvotes and correlate it with price.
Of particular concern is that the most thoughtful people are probably going to leave the community because of it. Yesterday, there were people calling /u/moral_agent's bubble charts "retarded." I'm afraid that he will stop posting them because of that. This is the sort of thing that turns people away, as we've seen happen to other contributors.
What this bear cycle will look like
We are now on day 2 of the price being below the lower boundary. If the price stays below the lower boundary for three days (tomorrow), then the cycle will have been broken. The lower boundary tomorrow, according to /u/moral_agent, is at $604.
If the pattern holds until tomorrow, we can't really use the previous charts to make future predictions. However, I'd wager that some of the characteristics of past patterns will still hold in this new reality that has developed since yesterday. There will still be bubbles and falls. For example, it is well known that during the downsides of the cycles, there is a small crash, followed by stability or a slow rise, and then another small crash that ends up at a lower level, and the pattern continues all the way until the bottom is reached. During the last cycle, most of the small crashes were related to Chinese news, with the Mt Gox catastrophe thrown in at one point.
We already seem to have entered into this pattern since this cycle reached a high over a month ago. It is more pronounced over the past week, with yesterday's crash a prime example. Bitcoin stabilizes at a price level for a long time, then something happens to cause movement, and just hours later there is a new stable range a little lower than the previous one.
This bear cycle is going to continue for a while, but I can't make any prediction as to what the bottom will be or when it will be. To do that, we need a model that fits the current data, and everything that has been put out over the past few months has been blown up by recent events. However, I don't think there is any danger of complete failure yet. The warning sign for that would probably be one of the big retailers ceasing bitcoin acceptance, which hasn't happened yet.
What was the question this cycle?
About three months ago, I remarked that there is a theory in psychology that humans develop in eight psychological stages throughout the lifespan. In each of the stages, there is a question that needs to be resolved. If resolved in the affirmative, the person advances to the next stage. If not resolved, the person does not advance. As the theory goes, some people advance through all the stages while others get "stuck" in previous stages and struggle with questions for longer than others do.
I proposed that bitcoin follows this cycle and that there are a number of possible questions for each cycle. For example, the cycle beginning with the April 2013 crash was proposed to be all about whether FinCEN and the government would accept or reject the technology. When the Senate hearings came around, that question was resolved in the positive and there was a run. For the latest cycle that began on December 1, many people were in agreement that the issue that needed to be resolved this time around was whether bitcoins were for scammers, thieves, and fraudsters, or whether those people would be forced out. It's pretty clear that people like Mark Karpeles have been forced out, and I would even say that if someone started up an exchange like Mt Gox now, it would never have succeeded at all. However, if we follow this theory, the question for this cycle had nothing to do with whether bitcoin was for scammers. Otherwise, the significant improvement in reputation by the industry's players would have resolved the question affirmatively and there would have been a run now that companies like Coinsetter and Circle are appearing.
Whatever the current question is, it was resolved negatively, resulting in the false bubble and stagnation. Some have argued that the biggest hinderance to bitcoins right now is their usability - and if so, then the true cause of the downward motion between January and May was that bitcoins were not easy enough to use for people to buy them. Others have said that it takes a long time to buy bitcoins, which is also true - and if that was the true question, then we would have expected the bubble to be aborted.
However, I'm going to just suggest with the obvious: the real question had nothing to do with scams or usability. It was simply whether bitcoins will ever be able to be used as a worldwide payments system, or as a transactional currency. Since they cannot scale in their current form, the lack of development activity and the inability to resolve key problems like the 1MB transaction limit resolved the question negatively. If true, then that question remains unresolved and the future cycles will remain "stuck" until the developers address these critical issues to make bitcoin ready for the masses.
Other
- On August 8, the two week window for this cycle's prediction period will have ended and I plan to publish a comprehensive review of all predictions and their outcomes.