The China Crash, Altcoins, Playing the Long Game

Not surprisingly, the currently high BTC and LTC prices simply aren't able to be sustained, especially in light of all the speculation by Chinese investors who have now been told that Bitcoin is basically persona non grata. This has been a relatively large bubble from the $150 range up to around a $1200 high, and now we're back in the $550 range and potentially still have a bit more to fall before we bottom out and start rising again. We've seen it before, and we'll see it again -- and we'll see it with pretty much every popular Altcoin worth mining! While BTC had about an 800% increase from mid to late November, Litecoin was actually even more impressive, going from less than $4 to a high of nearly $50 -- around a 1200% gain. I suspect Litecoin is going to see single digits again very shortly, but if you can, keep your coins and just wait for the next bubble, because it's inevitable.

The reason for China and other countries fearing Bitcoin and these other digital currencies is simple: it makes it too easy to move money out of the country! Oh, you can already do that in a variety of ways, but with Bitcoin/Litecoin/etc. it's trivial -- assuming you can buy the coins in the first place, of course. That's probably a large part of what has sparked this latest tumble, with China making it more difficult to buy BTC and investors getting spooked, but that's just it: governments may not like these digital currencies because they can't fully control them, but long-term this is the future.

Related to this is a comment someone made to me recently when discussing Frozen Coin (FZ). He said in effect, "Well, it's not like all of these digital currencies can survive -- most will fail." I disagree, because just like the distributed computing nature of Bitcoin makes it powerful and useful, the altcoins are just another way of distributing things. Bitcoin is the biggest name by far -- I heard a statistic that something like 45% of Americans have heard of Bitcoin -- and so it's going to be the biggest target for the governments. Heck, maybe they even succeed in shutting BTC down in some way. But if BTC fails, there are dozens of others, and some of these are working to make them even more difficult to kill off (e.g. Peercoin, PPC).

Consider this: governments and corporations have been trying to kill off illegal file sharing for years now. Eventually, they more or less realized that it's a fruitless endeavor and what they really needed was to embrace new technologies. And so iTunes went from heavy DRM music to basically go-anywhere music, Blu-rays now come with free digital copies and even a DVD, etc. And guess what? Not only did they not kill piracy, but piracy didn't kill them either -- arguably the movie industry is as healthy as ever! DRM isn't totally dead, but after all the hand-wringing and fear-mongering ("Please, somebody think of the children!"), technology marches ahead.

Bitcoin, Litecoin, and the other various cryptocurrencies are all marching ahead, some more quickly than others. While some governments are sitting back and just watching Bitcoin happen and China is actively trying to fight against Bitcoin, still others are talking about Bitcoin in a positive way. Big names in the US are discussing Bitcoin, and millions of dollars has been invested, with billions more waiting to come.

So if you bought BTC at $1000 or Litecoin at $40 and are feeling like a fool, just sit back, relax, and go find something else to do for a while. Sit on those coins and check back in five or ten years and you'll be able to laugh with others when you tell how you bought them at $1000 or $40 or whatever and thought you screwed up. Then they'll congratulate you on your good fortune and ask you to take them to a nice place for lunch -- because after all, you can afford it.

Or sell what you have, try to cover your losses in other ways, and bemoan your fate for a few years. Then move on and some day you'll be kicking yourself. Mark my words: you'll be sorry twice!

Disclaimer: This is a blog and is full of my own opinions, based on my experiences with Bitcoin, Litecoin, technology, etc. Could I be wrong? Sure. If you invest your life savings into BTC right now and lose it all, don't come knocking on my door. Be responsible and spread out the risk some. This is why I buy and mine coins rather than just buying $2000 worth of coins on a big drop like today -- I'm bad at day trading! Don't invest more than you can afford to lose, and don't go into massive debt because BTC/LTC look like a major opportunity. Grow your cryptocoin portfolio/mining farm slowly, over time. Start with $2000 and when you've recovered that cost, invest the future profits into more hardware. That's how I'm doing it!

News from China: Banks and ISPs Told to Not Use Bitcoin

Many have speculated that much of the current Bitcoin (and Litecoin) pricing bubble has been caused by wild speculation in China. Well, that bubble may have just burst, so plan accordingly. Long-term, the outlook for Bitcoin and Litecoin is still good -- in fact, the outlook in some respects is even better now. China is telling banks not to accept Bitcoin because they are afraid of the inherent power in an unregulated (meaning, not controlled by the governments) currency that can be used without their consent.

Remember when someone stole 25,000 BTC from an account and BTC prices took a dive? Remember when the US came down on MtGox and closed Dwolla withdrawals, seized a bunch of money, and made wire transfers to/from the US very difficult? The price of BTC took a short-term hit and then recovered. Remember when Silk Road got closed down and the price of BTC plummeted, followed by a rise to new heights? Remember the previous two bubbles?

We've seen this all before. If you want to play the market, by all means: sell now while prices are high and hope to buy in at a lower price. How low will we go and when is the right time to buy back in? That's the real question.

As I've said before, we're going to see $1000+ BTC again at some point, probably within the next three months, but almost certainly in the next year. Given there will only be 21,000,000 BTC ever, I'd even go so far as to say we're likely to see BTC hit $50,000 USD or more within the next decade -- that would represent a market cap of $1 Trillion, which sounds like a lot but given it's potential use as a global currency free from government regulation, I'd say it's looking more and more likely. Every government that ends up in a debt crisis (Greece, Italy, etc.) is just lending more power to the idea of cryptocurrencies, and as the two most prominent citizens, BTC and LTC are set to reign supreme.

LTC for Free

Bitcoin and Litecoin Bubble, November 2013

If you've been following Bitcoin and Litecoin at all, you'll have noticed a massive spike in pricing over the past couple of weeks. I wish I could say that I had called this one, but honestly: it's all just speculation. Plenty of people are patting themselves on the back for buying in at $150 or even $250 on Bitcoin, but if you read around you'll probably find the same people talking about how even $800 was a "great price" -- right before we dropped $200 to $300.

There's still a ton of turmoil in the prices, driven almost entirely by the rampant speculation. People are trying to guess if we're just pausing before another meteoric rise to $2000+, or if we're about ready to take another plunge into the <$200 range. My take: either is possible, short-term. Long-term, though, I'd be far more likely to bet on the increase in price of Bitcoin, and as the top Scrypt-based cryptocurrency, Litecoin as well. Here's why.

First, China has been going crazy, and there are a bunch of real businesses beginning to accept Bitcoin as legal payment. But the reasons for China and other places going crazy might have as much to do with the US government shutdown as anything, as the shutdown illustrated just how fragile our governments can be. If the US goes through hyper-inflation, Bitcoins could skyrocket in value relative to the USD -- and if the USD has serious issues, let me tell you, the rest of the world's currencies aren't going to be far behind, as most of them are at least significantly linked to the USD (in the short- to medium-term).

There are other factors at play as well. Silk Road, a site dealing with the trading of illegal goods (mostly drugs) was closed by the FBI earlier this year in a sting operation that seized a good chunk of BTC (potentially 500K). That caused a short-term panic, but overall the closing of an illegal business has established BTC as a tool with many legal uses.

We've also seen ASICs (Application Specific Integrated Circuits) start shipping in quantity, which has basically driven the difficulty of mining BTC up 200X or more just in 2013. That has killed off the potential for mining BTC with GPUs (all of my computers and GPUs would currently 0.125 BTC per month, with a power cost of $325 or so), but the ASIC pricing has dropped tremendously. The ASICMiner Block Erupter USB sticks for instance were priced at $300 early this year when they first showed up. Last month before this bubble they were even down below the $20 mark, and now with the price increase they're back at $40. Those little USB sticks can do around 330MHash/sec, while drawing less than 5W, leading to a net profit of $5 per month or so. At $20, I should have bought 50; at $40, I'm not so sure, but if the price does go up to into the five digit range and I just sat on all the coins, it would be a guaranteed win.

Let's go back to China for a moment, now that I've mentioned ASICs. With pricing of $40 for a USB stick in the US, it probably costs less than $5 to build one of those over in China. Imagine a bunch of people using ASIC miners in China to get BTC to pay for their Internet service and whatever else, which is very likely already happening. How many Bitcoins does China need to support such services? There are 1.4 billion Chinese, so if each of them happened to hold $100 worth of Bitcoin for purchases, Bitcoin would need at a minimum a market capitalization of $140 billion.

For those that aren't familiar with Bitcoin, there will only be 21 million BTC ever created -- it's part of the design of the currency. Right now, there are roughly 12 million BTC in existence, so a bit more than half of the total. If BTC needed to have a market capital of $12 billion, then each coin would need to be worth $1000; for the capital to reach the $140 billion above, right now we'd need to have coins worth roughly $12,000 each!

Pie in the sky? I thought so too a while back. If I had been a bit more daring, I wouldn't have sold most of the coins I mined prior to the start of 2013 (around 1000BTC). My total costs for mining all of those coins, including power and computer hardware, are around $8000, and I've more than covered that now. But, could you imagine if I had saved them all? I'd have over half a million -- enough to pay for my house and another just like it, plus plenty of other items as well. Of course, if BTC tanked and disappeared, I'd have $8000 in additional debt (expenses) to deal with.

We've now been through this bubble mania three times. The first bubble in May/June 2011 peaked at just over $30, and it was followed by BTC dipping all the way to just under $2. At one point, I had computers that were mining over 5 BTC per day, but my power costs were roughly equal to the value in BTC and I covered those in the interest of being "better safe than sorry". Then in the buildup to April of this year, when we hit $266 or so, we had a crash back to $60. Now we've spiked as high as $900 and have fallen back as low as $450. Perhaps we'll continue down until we're in the $200 range, but there's still an upward trend.

The LTC side has been a bit less chaotic, but it's still interesting. There was a massive bubble in May 2013 where LTC hit roughly $6 before falling into the $2 range, with a dip even into the $1.25 range (when Silk Road was shut down). Last week it spiked up to nearly $10 and it's now down in the $7 range. How many Litecoin have I mined, just since April or so? Over 1600, which if I had kept them all would now be worth over $11,000. I could have purchased four mining rigs in April for around $6000 and already have double my "investment" -- but again, I got a bit scared with those $1.50 coins and panicked.

Now, after several hard lessons, I think I might be seeing the way forward with more clarity. It's time to stop selling coins when we look to the long-term. Short-term is still a guess, but if you're willing to take a chance, I wouldn't be surprised if right now is merely a short-term pull-back before we see another substantial jump in value. In fact, I'd bet heavily that before the end of the year we'll see $1000 BTC, if only for a few of the big investors to say, "I told you so." Litecoin usually stabilizes around 0.012-0.025 BTC, so if that holds we might see LTC go as high as $25 before 2014 rolls around. I sure hope it does, because when I'm sitting on a few hundred LTC in 2014 I suspect I'm going to be looking pretty darn smart.