On Jan. 6, 2014, one Bitcoin (BTC) was valued at approximately U.S.$951, according to Coindesk, and has not rebounded to that level. On Dec. 29, BTC was valued at approximately U.S.$312, down by $639, or 67 percent, from its Jan. 6 high.
Despite the dramatic decline in value, there is still much reason for optimism in the Bitcoin world.
Though the 2014 fluctuation is extreme, it isn’t the first time Bitcoin’s value has declined. Bitcoin’s value was halved overnight on Dec. 18, 2013, from just above U.S.$1,000 to U.S.$500 per BTC. The decline was due to a policy decision from the government of China to ban payment companies from providing financial clearing services for BTC and other virtual currencies.
Bitcoin recovered from the 2013 China policy decision, and its value rebounded in January 2014. But a new crisis of confidence emerged in the Bitcoin world. The crisis, which had nothing to do with an external nation-state, was initially driven by Bitcoin’s largest exchange, Mt. Gox.
Until February 2014, Mt. Gox was the world’s largest Bitcoin exchange and one of the best-known brands in the space. The first signs of trouble at Mt. Gox appeared Feb. 7 when the Bitcoin exchange began to experience withdrawal delays for its customers. That day, the full extent of Mt. Gox’s troubles were not yet known, but in the days that followed, a twisted web of facts emerged that would spell doom for Mt. Gox.
On Feb. 10, Mt. Gox blamed the withdrawal delays on a protocol flaw with Bitcoin that was identified as “transaction malleability.” The flaw could have allegedly been used to alter a user’s transaction details to make it seem as though BTC were not sent to another user’s BTC wallet when, in fact, the coins were actually sent. The Bitcoin Foundation disputed the allegations that the protocol was at fault and blamed Mt. Gox’s own software implementation.
By Feb. 28, three weeks after the first reports of trouble at Mt. Gox, the truth emerged and the full extent of trouble became known. Mt. Gox revealed that it had suffered a technical breach, and 750,000 Bitcoins valued at $473 million were stolen.
The catastrophic failure and theft devastated Mt. Gox, resulting in the once-leading Bitcoin exchange to declare bankruptcy. Mt. Gox customers have been trying to recover lost coins over the course of 2014. The most recent meeting of Mt. Gox creditors was held in Tokyo on Nov. 26, and the next meeting is scheduled for April 22, 2015.
Bitcoin is a distributed system that relies on the power of the many to validate and process transactions. There is a theoretical risk in Bitcoin that one group could potentially control 51 percent of the processing power and, thereby, somehow hold undue influence. This risk was of particular concern in June when the Bitcoin mining collective, known as Ghash.io, achieved 51 percent of the Bitcoin mining power. To date, there have been no public reports of any sort of 51 percent attack.
Despite a Tumultuous 2014, Bitcoin Still Has Value
Another shadow cast over Bitcoin in 2014 was the bizarre stalking of the person one publication had identified as the mysterious Satoshi Nakamoto, the inventor of Bitcoin. On March 6, Newsweek claimed that the Bitcoin founder was Dorian Prentice Satoshi Nakamoto. Dorian Nakamoto disputed the claims, even as journalists chased him around looking for comments. To date, the real Satoshi Nakamoto remains unknown and has not revealed himself or herself to the public.
The spectacular failure of Mt. Gox, the 51 percent attack risk and the race to find Satoshi Nakamura, were all events that created some drama in the Bitcoin world. Stepping off the dramatic stage, there were many events in the Bitcoin world that served to strengthen the viability and legitimacy of the cryptocurrency, even as the actual value declined.
In the United States, several levels of government took interest in Bitcoin over the course of 2014. On March 26, the Internal Revenue Service provided guidance on how Bitcoin should be treated for tax purposes. The IRS does not consider Bitcoin to be legal tender, but rather as property that can be taxed.
In New York State, a proposed framework for Bitcoin regulation, known as the BitLicense was announced in July. The purpose of the BitLicense is to help protect consumers against fraud.
From a commercial perspective, use of Bitcoin and interest in its value has continued to grow over the course of 2014. In April, Bloomberg, one of the world’s leading financial news organizations, began to track Bitcoin pricing values.
The acceptance of Bitcoin as a form of payment was a key trend in 2014. Technology vendor Dell began accepting Bitcoin in July. In August, Dell CEO Michael Dell announced that his company had a $50,000 server order that was paid in Bitcoins.
Microsoft, which announced its embrace of Bitcoin on Dec. 11, is working with Bitcoin payment processor BitPay, which also works with PayPal.
Don’t Count Bitcoin Out
Although the value of the cryptocurrency has declined over the course of 2014 and it has had its share of troubles, the Bitcoin movement persists and will likely continue to survive for the foreseeable future.
On Jan. 29, before the Mt. Gox collapse, venture capitalist and Internet browser pioneer Marc Andreessen explained why he was bullish about Bitcoin. For Andreessen, leveraging the power of distributed computing for transactions without the need for a central authority offers an advantage. That benefit has not changed over the course of 2014, even though the value of Bitcoin has. It’s that opportunity that Andreessen sees in Bitcoin—to disrupt and reinvent the way transactions are performed that will keep Bitcoin relevant.
Markets move on supply and demand—just ask any oil trader. The price of crude oil has also fallen dramatically over the course of 2014, from a high over $100 a barrel to settling in just above $50 in December.
Bitcoin has value because there is demand and there is opportunity. While demand may grow or wane over any given period, it is clear that after a year of great challenge for Bitcoin, the opportunity remains for 2015 and beyond.
Sean Michael Kerner is a senior editor at eWEEK and InternetNews.com. Follow him on Twitter @TechJournalist.