The Wild West has become a popular metaphor for the unregulated Bitcoin market. Like in old cowboy films, the world of Bitcoin has not only miners and modern a gold rush, but the requisite intrigue, volatility and power players that make a compelling story.
Bitcoin began 2013 at $13 a coin, only to ring in 2014 around $800 with worldwide fascination driving the 60-times gain. But according to Boston University Finance Professor Mark Williams the price has really been driven by an influential few. Just 47 people own 29% of all outstanding Bitcoins; 930 own 50%. Another 10,000 folks bring the total owned by the largest coin holders to roughly 75%, leaving a sliver to be split among about 1 million small-change Bitcoiners.
Williams, a former trader and bank examiner for the Federal Reserve, argues that in 2013 the 47 powers coordinated to push prices up. They counted on what economists call Greater Fools. Investors make money when someone is willing to pay a higher price for a security than you did — Greater Fool Theory states that there is always someone willing to pay a higher price. But Williams sees the broader market wising up to Bitcoin’s limitations and taking back control in 2014.
Bitcoin is not a stock, a bond or even a legal entity. No board or directors oversees it. There are not business plans or balance sheets. This lack of centralization is why the die-hards got involved in the first place, but even as they drown out negative sentiment, the original Bitcoiners are turning against their original vision.
“Understand how they acquired these coins,” urges Williams, “many of them were miners and they turned into speculators.”
Miners bring new Bitcoins into the world via a complex mathematical and computing process. So far 12 million Bitcoins have been mined. By 2140 there will be 21 million Bitcoin at which point creating more will become impossible. While most miners got into the space thanks to an interest in the technology and anti-institution philosophy, as the price of Bitcoin has risen they have begun stockpiling their coins gaining a tight grip on the market. Currently over 90% of Bitcoins are hoarded.
“If you hype demand the small incremental amount that is available for sale set the price,” says Williams. “That’s not an efficient market, that’s an inflated market, a market that is misled with false information. I think the market mechanism right now is being interfered with.”
As these facts and questions enter the wider consciousness, as they have begun to, Williams feels smaller Bitcoin investors will pull out. “When these million people stop buying at these high prices, that’s when the house of cards will start falling price wise.”
In the future, Williams sees the Bitcoin name living on as shorthand for digital currency at large – like people call tissues Kleenex and photocopies Xeroxes. While Bitcoin proper may maintain a small amount of value as a virtual commodity, he expects smaller local tenders to dominate the digital currency space. Others will learn from the flaws of Bitcoin to make something with a greater chance of adoption and less volatility. “There is a very low, to no, barrier to entry,” says Williams. “[Bitcoin has] provided open source. It’s a decentralized system, and because it’s open it’s free. They have actually given the technology away.”