Bitcoin Ends October Down Nearly 10%, Still Up 137% YTD 2012

For the month of October, 2012 the closing price of $11.20 USD was down more than a dollar from the previous month’s close resulting in a nearly 10% drop for the month. For 2012, where the price opened at a $4.72 level, the price rise from January 1st is now at the level of 137%.

It might not be surprising for there to be a down month after there was more than half a year of continuous month-to-month gains.  What might be surprising is that the month ended down just 10% after the disaster that October 2012 essentially was for the Bitcoin ecosystem as a whole.

The choke point for the digital currency remains where it intersects with banks — the Bitcoin currency exchanges.  October brought way more than one month’s share of disappointment from most every Bitcoin exchange.

Those in the UK were nearly desparate enough to call in a request for bitcoins to be airlifted in, as both BTC/GBP markets remained essentially idled throughout the month.  These two BTC/GBP markets remain unusable following Intersango’s loss in August of their UK bank, Metro, and Mt. Gox’s loss in September of their UK bank, Barclays.  Though some options like Blockchain.info/wallet’s new Pingit purchase method helped to prevent a complete logjam, these options are still considered suboptimal.

A promise of relief arrived with the announcement of Bitcoin-Central’s BTC/GBP market.  Further relief arrived with Blockchain.info/wallet’s Instant Online Bank Transfer which is now available in the UK and elsewhere in the EU.  And seemingly out of nowhere came a new entrant, Bit2Brit — though vetting of the service by the community has just begun.  [Update: They didn’t pass the community vetting process.]

There continues to be increasing demand for methods to purchase bitcoins using cash without having to provide identity.  This was made easier in October when VirWoX began to accept UKash vouchers as a method for adding funds to a VirWoX exchange account.  VirWoX also expanded the list of countries from which another cash voucher product, the PaySafeCard, could be used for adding funds.

A market that closed in October was Intersango’s BTC/USD market after the trading volume there remained too low for Intersango to be able to justify continuing the service.

Another BTC/USD market, BitFloor, had resumed trading following its massive September security breach, but in October the service lost its ability to provide cash-out via ACH (direct deposit) as well as its ability to accept cash deposits at two large national banks.

This alone was bad but compounding it was the sudden, unannounced halts that occurred simultaneously at several U.S. exchanges that provide service in the U.S. — BitInstant, FastCash4Bitcoins.com, Bitcoins Direct, and a relatively new exchange, BitMe.com.  Those services have all since reopened after making modifications to their operations.

Emerging during the darkest part of the shutdown storm was Coinbase’s launch of its BTC/USD exchange.  This allows a Coinbase user to make bitcoin purchases paid for with funds drawn from the user’s bank account.  This transfer method is already familiar to PayPal users who have a linked bank account so Coinbase’s approach is already proven.  Coinbase users can also sell their bitcoins and the proceeds of the sale are sent as a direct deposit (ACH) transfer.

Further assurance that Bitcoin would muddle through October’s problems was Paymium’s disclosure that it now has more than 20,000 active users for its services.  Released in October was the redesign of Paymium’s Instawallet which at the same time became the first Bitcoin implementation in Apple’s Passbook.  Paymium also operates the EWallet service Paytunia as well as the exchanges Bitcoin-Central.net and Instawire.

Banking issues were just one challenge for the exchanges as heavy distributed denial-of-service (DDoS) attacks took many exchanges down at one point or another during the month.  A relatively new but quickly growing exchange, Bitcoin-24, had its wings clipped when a security breach in October resulted in the loss of funds.

While Bitcoin currency exchanges continue to paddle against the current, another form of exchange, a cyber-equities stock market known as GLBSE was scuttled by its captain.

Bitcoin critic Stanislav asserts that “Bitcoin users have been doing a thorough job of [discrediting Bitcoin] all by themselves”.  With the embarrassing circus sideshows surrounding Bitcoinica, BS&T/pirateat40, GLBSE and numerous others one can hardly argue with Stanislav’s point.

While the bitcoin exchange rate might temporarily be impacted with the ebb and flow of multiple currents, these developments do not have much of a long-term negative impact for Bitcoin.  Bitcoin is simply a protocol and it does not have a filter that would allow intervention to permit its use for some purposes but not for others.  Bitcoin cannot discern between “good” and “bad” — just as it is with cash.  People do stupid stuff and the world continues moving forward.

Development

What Bitcoin brings to the world is a combined store of value and payment system that is based on math rather than regulation and trust in people for its survival.  The Bitcoin protocol has the potential to be used to solve a wider range of problems but the current development focus is on resolving the immediate scalability issues that exist when running a full Bitcoin.org client node.  Significant progress with this occurred in October when the ultraprune capability was merged into mainline — a prerequisite to it being included in a future release.

Mining

The 230,400 bitcoins issued which Bitcoin miners took in during the month is valued at $2.70 million using the average daily valuation for the month of $11.72.  Miners fared less well in October as the result of a rising difficulty — 15% higher at the end of the month versus the level at the beginning as well as the decline in the exchange rate.  The mining profitability computation normally changes solely due to the combined changes in difficulty and the exchange rate.  Later this month, at block 210,000, the block reward mining subsidy drops by half.  This halving of the amount of currency issued means miner’s revenues will drop in half as well.  Many miners were speculating that the lowered issuance would result in a spike in the exchange rate — but since the halving is no surprise to investors, this event appears to already have been priced into today’s exchange rate.

Traction

It is generally agreed that the primary demand for bitcoins comes from those speculating that there will be a future increase in the exchange rate.  But the herd-like mentality of speculators means that demand can disappear in an instant and a deep selloff can result.  Twice during October were cliff dives of 15% or more.  But Bitcoin is continuously expanding in breadth and depth — so the market’s reversal means that either it had previously gotten too far ahead of itself or that it might be using the wrong rear-facing indicators when evaluating which direction Bitcoin is headed going forward.

If Bitcoin were a corporation it would have certain target markets it would pursue while skipping over others less strategic to its success.  Bitcoin isn’t a corporation and doesn’t have a marketing function that pursues certain types of business.  So it is encouraging to see the many ways in which Bitcoin is gaining traction from the bottom up.

One such revelation occurred this past month showing the ways that Bitcoin is being used by online pharmacies to counter the Big Pharma racket.  Bitcoin has been discovered by Forex exchanges as a method for customers to fund their accounts.  While the major digital currency exchanges AurumXChange, WM-Center, and Lillion Transfer started providing bitcoin exchange long ago, smaller firms serving geographic niches are discovering Bitcoin as well, with so many more prospects as well.

That a student in Canada was able to obtain cash in hand just an hour after his Iranian mother purchased bitcoins thousands of miles away is an example of how Bitcoin meshes well regardless of the circumstances.

A significant indicator that Bitcoin has the potential to become much more widely used surfaced with the European Central Bank (ECB)’s policy brief on Virtual Currency Schemes.  The 55-page brief describes Bitcoin as having the potential to have a negative impact on central banks.  Paraphrasing a conclusion from a post by Erik Voorhees, this very well could be the ECB’s first steps towards regulating Bitcoin.  If Bitcoin wasn’t gathering steam, why would they even bother?

What is quite clear is that Bitcoin is quite hard to define, measure, adjust, or react to even.  A problem was identified where prepaid debit cards need not be declared as cash when crossing the border.  Fifteen years passed before legislation finally addressed the issue but even the regulatory response is now being questioned.  That’s for this well understood, locally issued “stored value” financial instrument used by a highly regulated industry in which financial regulators have absolute control.

Compare that to trying to regulate a peer-to-peer decentralized ledger system stored globally which functions thanks to messages signed cryptographically using a private key that may exist nowhere but in your mind.

In other words there is no way to know where Bitcoin will fit in the puzzle, or if it is even a puzzle piece at all.

The Bitcoin investor and entrepreneurial community is the 15,000 pound elephant that is unaware of the beautiful world that awaits if it would simply stop worrying about that little wooden peg of resistance and just keep moving forward.

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