Doubts About Bitcoin’s Appeal May Lie Behind Its Price Dive Since New Year’s Day

No one can say for sure why the price of Bitcoin has dived sharply since the turn of the year, but that doesn’t mean market observers don’t have theories. These range from rampant short selling to the hack last week at Bitcoin exchange Bitstamp, in which crooks siphoned out $5.2 million worth of the currency and shut down the exchange for a few days.

But some experts say the real causes of the price swoon lie deeper. Buyers and sellers, they say, are beginning to realize Bitcoin may not, after all, appeal to a mass market. “It is dawning on investors that there will never be a mainstream market large enough to sustain the number of [Bitcoin] startups,” notes Nathalie Reinelt, who follows digital currencies for Aite Group LLC, a Boston-based consultancy. “They’re just cutting their losses.”

Certainly, incidents like the breach at Bitstamp don’t help when many consumers are trying to figure out whether Bitcoin is something they should try out. Says George Warfel, another digital-currency watcher who is also a director at payments consultancy Edgar, Dunn in San Francisco: “It’s hard to say someone needs Bitcoin when there are other [payment methods] that are safer.”

Bitcoin was trading at just over $225 late Tuesday afternoon, down from the day’s opening price of $267 and from $350 a month ago. The price was well above $300 until approximately New Year’s Day, when it took a sharp downward turn and has more or less continued sliding since.

Reinelt argues the problem could ultimately be worse than a failure to attract the mainstream market. Even some of the currency’s core enthusiasts may be peeling away, she says.

Since its emergence six years ago, Bitcoin has largely drawn tech devotees, libertarian-leaning consumers, and, to some extent, criminals. The latter two groups were attracted by Bitcoin’s anonymity, Reinelt says, a quality that’s slowly eroding as state and federal government officials consider regulation to expose Bitcoin to the light of day. New York, for example, is developing a so-called BitLicense to regulate trading by companies in that state and protect consumers from potential fraud.

“They know that in order to play in the mainstream, they have to play by mainstream rules,” Reinelt says of the Bitcoin backers. “So a lot of loyalists are moving to other [alternative currencies] pre-emptively.” Even as jury selection began Tuesday in the trial of Ross Ulbricht, the alleged leader of Silk Road, an online bazaar that took Bitcoin in trade for illicit drugs, a new version of the black-market site, called Silk Road Reloaded, has launched and is trading in other digital currencies.

The result is that Bitcoin traders see the “core user base” drifting away, Reinelt says. Techies will likely stick with the currency, she says, but libertarians who cringe at government monitoring and users who crave anonymity for shady reasons won’t. Reinelt won’t predict where Bitcoin’s price will bottom out, but her outlook is bearish. “I feel strongly [the price] will keep going down,” she says.

Indeed, trying to predict the future price of Bitcoin—even only a few days out—may be all but impossible. The Bitcoin market “is the ultimate dark pool,” says Warfel, making it hard to pinpoint causes for price movements. And that’s compared to ordinary stocks, he says, which are hard enough to forecast. “Why is my Boeing stock up today?” he asks.