So That Was 2014

Wednesday 07 January 2015

Well, that was 2014. A fresh new year awaits, but before we hurl ourselves into another 365 days of crypto mayhem, let’s take a look at some of the highlights and lowlights, trends and surprises of last year. Here are a just few things from 2014 that stick in the memory, and one or two you might want to watch in the coming weeks and months...

The bear market lasted all year

It’s not been a great year for holders, with two-thirds of the price of a bitcoin evaporating from its China-fuelled boost up into the $1100 range. After that impressive run up in November 2013, we saw the predictable double-top that indicates sentiment is switching from irrational optimism to disbelieving panic. Then the bubble well and truly burst. China ‘banned’ bitcoin not once but many times over, and traders gradually came around to the idea that downwards was going to be the fashionable direction for a while. And so it continued ever since, with one or two false starts in the other direction.

Now? Well, who can tell? Over the holidays nothing much has happened, with low volumes taking the market nowhere in particular. Bitcoin is, of course, about far more than its financial or speculative value. Yet the sad reality is that falling prices drive people out of the market and discourage new adopters from entering it. The good news is that with the new year, we might finally gain some sense of how this ends.

As an aside, that’s one thing to watch for this year: developments that address the volatility inherent in bitcoin, whether they do so by pegging the value of a crypto to a real-world asset (a centralised solution) or by some clever decentralised mathematical wizardry. Both are on the cards.

Mt Gox finally imploded
Yes, no summary could be complete without the mention of bitcoin’s most infamous moment: the day Mt Gox finally collapsed. On 24 February it finally went offline after months of trouble, never to return. It subsequently transpired that some 850,000 bitcoins had mysteriously disappeared, perhaps due to the transaction malleability bug that was causing some minor waves at the time. 200,000 bitcoins were later discovered in an ‘old format wallet’ - the bitcoin equivalent of finding change down the back of the sofa – but customers still lost hundreds of millions of dollars worth of coins.

To be ‘Goxxed’ has now passed into the crypto vernacular as a synonym for being scammed or ripped off, and the associated legal cases continue. However, a recent report suggests that only a tiny fraction of coins were lost by hacking, with the vast majority being the result of ‘internal system manipulation’ (or what is known as an ‘inside job’ in the vernacular). This news is likely to surprise precisely no one...

Hashrate rose and rose and... rose?
For the past two years, miners have flocked to bitcoin in ever-greater numbers. The hashrate – the amount of mining power being brought to bear on the network – has consistently risen every fortnight in that period. The result is that bitcoin’s Difficulty (which is adjusted every 2,016 blocks, or roughly every two weeks) has also risen exponentially.

Mining is a kind of barometer of confidence in bitcoin. If miners believe they won’t see a return-on-investment for the cost of their rigs and energy use, they turn them off and stop ordering new ones. It’s simple supply and demand. That’s why it’s interesting that the Difficulty dropped for the first time in two years back in December. It spiked back up again, so may be no more than an odd wobble – but it’s one to watch.

The other thing of note was the centralisation of mining, into industrial outfits and large, popular pools. This prompted concern over the possibility of a 51 percent attack more than once. Centralisation of mining may also partially explain the drop in hash rate and Difficulty. Mining has become incredibly competitive; the days of the easy profits from CPU or even GPU mining are long gone. ‘Professional’ miners often can’t afford to hold their coins in the hope of better days; they have bills to pay. They are less likely to be hobbyists and those interested in securing the blockchain and playing with the protocol. As soon as they stop breaking even, economics dictates that they shut down their rigs.

Regulation and respectability started to catch up – finally
Throughout 2014, a number of countries and jurisdictions either made up their minds or clarified their positions on bitcoin. Few have banned bitcoin outright (even China simply hamstrung the exchanges’ relationship with the banks, making it harder to move funds in and out of them), but many have set out the tax position and generally brought a burden of bureaucracy into the lives of those who wish to run bitcoin-related businesses. So be it; it may not be popular, but it was inevitable and it’s a necessary step towards bitcoin’s mainstreaming.

Until last year, bitcoin’s utility had been predominantly associated with dark markets. Sure, there were ‘legitimate’ users, but the Silk Road provided the lion’s share of the publicity. The Silk Road bust by the FBI made some waves, and ironically brought bitcoin to greater public attention than ever – arguably kicking off the great bubble at the end of 2013. Interestingly, though, that infamy paved the way for its future respectability. The coins seized by the FBI from Silk Road were publicly auctioned; a seal of approval doesn’t get much clearer than that. Venture Capitalist Tim Draper bought the lot, some 30,000 coins, at prices rumoured to be around the $600-700 range – though no information was publicly provided.

Behind the scenes, adoption continued
That legitimisation continued with the stories of adoption by a handful of big companies through the year – including Dell, Overstock and even PayPal (within certain limited activities). Most recently, Microsoft announced they’d be accepting bitcoin.

bitcoin accepted here

The likes of Microsoft might make for good headlines, but the real story remained out of the limelight: the quiet and steady adoption of bitcoin as a payment medium by thousands of new small businesses. These businesses are the grassroots of the bitcoin movement, entrepreneurs and early adopters learning how a new technology can help them and how they can push it into public consciousness at the same time.

Assets and alts exploded
Lastly, the space became a lot more crowded, for both good and ill. The number of altcoins exploded, and there are now well over 600 cryptocurrencies out there. Most simply tweak one or other of bitcoin’s parameters and are, essentially, worthless. But a few offer real innovation and great promise for the future, and no doubt you’ll be hearing more about them over the course of the year.

The other big development was the coming-of-age of crypto assets. It is no longer just decentralised currencies that trade on exchanges. It is now possible to launch and trade stocks in dividend-paying companies, on platforms such as NXT, Bitshares and Counterparty. Many of these assets now have market caps well into seven figures. Moreover, these cryptostocks offer something very different to cryptocurrencies. Their growth and market caps are dependent on revenues, not just adoption and speculation. There is, for the first time, a way of valuing crypto, based on tried and tested P/E ratios and other standard tools. And crypto companies, often existing in cyberspace alone, can be extremely lean. With so few overheads, their profit margins can be 90% or more.

Money talks. Many investors have been intrigued by bitcoin but have held off putting money in because they don’t understand it and don’t know how to value it. That’s just one of the reasons that cryptostocks are a very big deal: they offer real utility, real advantages and some very real and attractive profits. Expect to see more of them in 2015 – a lot more.

Brandon Hurst

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