Bitcoin and cryptocurrencies are expected to be subject to further price falls as mainstream adoption proves elusive and governments begin to crackdown.
The price levels of Bitcoin have been shaped by two forces; first, the expectation of its wide adoption, and second, the speculation based on its deregulated nature.
However, the second force is actually driven by the first, meaning that bitcoin would not survive without the expectation of a wider adoption as currency, since it is worthless as an asset.
But that expectation cannot be met as it is against the interests of any government that wants to retain its money-supply power, as the loss of that power would have a devastating effect for most countries’ economies.
As a result, it is reasonable to say that governments would crush Bitcoin if it ever truly becomes a threat.
Bitcoin has no intrinsic value
Bitcoin is still an asset, not a currency, as its limited adoption constitutes that status.
However, unlike other financial assets, Bitcoin has no fundamentals to be based on. Its value is entirely based on the pure confidence for that value per se, being perfectly compatible to an asset bubble. The crucial point though is that this confidence for its value is derived from the expectation of Bitcoin becoming a widely adopted currency.
This entails its transformation from an asset to currency, but there have not been any encouraging signs of that happening.
In fact, it seems that investors have been biased to interpret neutral events as positive signs – namely the introduction of Bitcoin to the futures trading market – in order to feed their optimistic preconception for its expansion as a currency.
Governments will never allow cryptocurrencies to have an institutional role
At the time of writing, Bitcoin was tumbling by 10.75% from its opening price on January 11th, as news leaked about the planned government ban of cryptocurrency trading in South Korea. The South Korean cryptocurrency market is one of the largest globally, but the deeper implication is that governments are taking action against cryptocurrencies before they seriously threaten the economic system.
Indeed, the institutional adoption of Bitcoin in the form of a currency standard or as an officially circulated currency would impair the effectiveness of monetary policy of governments, as they would yield money-supply power.
Governments would never agree to abolish their control of money supply as this would have devastating effects for their respective economies.
For instance, it is unlikely that the US government would ever abandon its capacity to print money based on demand for dollar as a global currency reserve, as that would undermine its economic power.
Moreover, those who even support the vision of Bitcoin (or any other cryptocurrency) as a global currency, are not aware of its destructive implications for the global economy, or at least are ignorant to the harmful effects of a single currency for weaker economies in the Eurozone.
Particularly, the Eurozone sovereign debt crisis stands as an example of the trade imbalances that inherently arise from the adoption of a common currency by diverging economies.