We believe 2015 will be another tough year for bitcoin and the price will continue to decline for the following reasons:

Mining is dying

There is no intrinsic value

Cryptocurrency is an open market

It is not a medium of exchange

Using Bitcoin with merchants drives the price down

There is no incentive to use bitcoin

It doesn't help the 'unbanked'

Mining is Dying

In one of our previous articles, we expressed our opinion that difficulty is causing centralization of mining. During the 2013 meteoric rise of Bitcoin prices, there was a mad rush for mining power. Bitcoin is designed to become more difficult as the hashrate grows, it was intended to be supported by individuals using their personal computers.

The synthetic growth in the hashrate during the mania stages of this bubble, caused the difficulty rate to increase beyond the capacity of the natural market. Mining has reached the point where it can only be done with specilized hardware which costs several thousand dollars to purchase, and is likely to be obsolete before without generating any real profit.

We read the original Bitcoin.pdf released by Satoshi. We believe that the difficulty algorithm was designed to grow at a pace which matches the growth in the size and use of Bitcoin. It was intended to be supported by individuals on home computers, who would 'donate' computing power to support the network.

Bitcoin is no longer a p2p network, it is supported by a small number of large players. You may argue that the mining pools are made up of individuals, but this is no different from my money making up the balance of the funds on deposit with a major bank. At the end of the day, the owner of the pool has all the decision making power.

With price below USD 300, (it is $220 at the time of writing), even the big players are finding it tough to turn a profit. As we noted above, there are rumors that one provider of mining hardware and cloud contracts, is on the brink of liquidation, and another is going to pause their cloud mining due to lack of profitability.

In the current market, even the large players with their expensive equipment can't turn a profit. As they start to drop out, this will help stabilize or even reduce difficulty, however this will not save miners from falling Bitcoin prices and the next reward halving (forecast to occur in mid 2016)

Without miners, Bitcoin can not exist, and without a return on their investment, miners will continue to disappear, either by choice, or due to financial failure.

There is no Intrinsic Value

The price of Bitcoin is entirely speculative in nature. Bitcoin exists only in the virtual world, and trades in a synthetic market, there are no underlying assets to give it an intrinsic value. With no underlying assets, in a falling market, the value could go all the way to zero. The currency would simply be erased from existence.

In times of high inflation and low interest, people with cash savings may see the purchasing power of their funds decrease. Basically your money grows at a slower rate than prices, so while you have more of it, you can buy less. To protect against this, investors often move their savings to 'a store of value', (historically Gold has been a popular store of value).

A store of value, is an investment which can be purchased near or at it's intrinsic value. These investments carry more financial risk than cash, but investors expect that their value will increase at a rate which is at least equal to that of inflation, therefore protecting their purchasing power. A good store of value will have a reasonably stable price, and will be underwritten by assets which will continue to have use for the foreseeable future.

We do not see bitcoin as an effective store of value. The price is extremely volatile, and it does not have any underlying assets.

Cryptocurrency is an Open Market

There are already several imitators on the market. None of them have significant market share so currently none pose any real threat to Bitcoin. The fact that alt coins can be created so easily, is a point of concern. Bitcoin may be the top cryptocurrency today, but that does not guarantee the will hold this spot into the future. If that were the case, I'd still be playing video games on an Atari 2600

We feel that if cryptocurrencies have a future, it will be with a new generation coin, which will cater more to mainstream users. For example a coin which can trade on a blockchain using either their created coin or normal money, would have potential to oust Bitcoin as the cryptocurrency of choice.

Bitcoin is not a Medium of Exchange

A medium of exchange is used to help markets function efficiently. A fiat currency is designed to replace the barter system. When we work, we earn a salary in dollars, when we shop, we buy things which are priced in dollars. Dollars are the medium of exchange which we use in order to transfer wealth and trade with each other. The value of a $1 note is fiat and has no intrinsic value. A fiat currency has value 'because we say so'. As a society we have agreed to recognize and accept the value of cash.

We do not believe Bitcoin is a medium of exchange. It can be bought, but not earned, and while there are merchants who let you buy goods with bitcoin, the prices are set in fiat currency. In the present market, bitcoin is acting as a service provider for transactions in fiat currencies, but is not itself a medium of exchange.

Using Bitcoin with Merchants Drives the Price Down

The growing number of merchants who accept Bitcoin is an encouraging trend. It is an important step toward acceptance of cryptocurrency. The way in which Bitcoin is being accepted, is less encouraging, and will add to the downward price pressure on Bitcoin.

If for example you go online to Dell and decide to buy something from them using your Bitcoin. The first thing you will notice is that the prices are all in US Dollars, so the price in Bitcoin will fluctuate with the USD/Bitcoin exchange rate. When you make your payment, your Bitcoin will go to Coinbase, who will instantly sell it for USD and transfer the agreed US Dollar amount to Dell. Since Dell signed up with Coinbase in July, the value of Bitcoin has more than halved. It's no surprise that they prefer to be paid in cash.

This is how most merchants operate. They have no interest in receiving or holding any Bitcoin. Merchants are not accepting Bitcoin, they are allowing you to pay them in cash by selling your Bitcoin on the open market. Companies who have become Bitcoin merchants have done so as a way to market themselves to the Bitcoin community. Spending Bitcoin with merchants is no different to selling it for cash. It causes a sale on the market which moves the exchange rate in a negative direction.

There is no Incentive to use Bitcoin

I understand that it is possible to use Bitcoin to pay for things from Microsoft, Dell, and a whole bunch of other places. The question is, 'If I already have cash, why would I want to use Bitcoin?' There is no added benefit for me to use Bitcoin rather than pay with a credit card or with an online cash payment. Cash is convenient and fast. Cash is federally insured, why would I want to fix a system that isn't broken?

Let's look at some of features of Bitcoin one by one and see if any of them appeal.

There are less fees - It may be possible to transfer Bitcoin without paying fees, but right now I have cash. In order to use Bitcoin I'd first need to buy some. That's easy enough, I can do that online, but wait, the act of buying bitcoin would trigger the same fees I would incur if I just made the purchase online with cash.

Bitcoin offers anonymity - this would be a great feature, if I had something to hide. Do I really care if my bank records show that I paid for a copy of Microsoft Office? No, it doesn't bother me at all. If I really wanted to spend money off the record, I'd use actual cash, or the visa debit gift card my mother gave me for Christmas

Transactions are irreversible - So if I pay for something, there is no way that the money can be sent back to me? Wait how is this a benefit? If a merchant is worried that customers are going to reverse their purchases, then maybe they should focus on the quality of what they are selling, rather than try to find a way to prevent this.

The open book ledger and blockchain offer added security - Well it didn't stop $5 Million from being stolen from Bitstamp.

Bitcoin does not help the 'unbanked'

The market for micro transactions may be huge, and there is no doubt enormous potential in servicing the 'unbanked' of the world. It's true, you can send these people small amounts of bitcoin, which they can receive without incurring costs, but how does that help them?

Think about it from their point of view. Imagine an underprivileged person who lives in a war torn country and is 'unbanked'. You decide to help them out by sending $100 worth of Bitcoin to them. Now try and answer these questions: How are they going to access the bitcoin? If they can access it, how can they spend it?

We are looking at a portion of the world's population who, among other services, also lacks access to quality education. They don't have a bank account because they either have no access to a bank, don't trust the bank, or don't have enough savings to justify opening an account. You send them some Bitcoin. To receive it, they need to first obtain a wallet. Someone who is either unable or unwilling use a bank, must now find access to the internet, create a wallet, and remember the 34 character alphanumeric bitcoin address and tpasswords which we all know make bitcoin so great. If they do manage to open a wallet, it is safe to assume that a large number of these wallets will become zombies due to loss of phones, or the information required to access them.

If we look at the portion of the unbanked who are able to open a wallet and retain access to it. The next question is, how will they use it. The market for pure bitcoin transactions in the developed world is minuscule. In the developing world, it will be non-existent. So now that the 'unbanked' person has bitcoin, the only way it can help them, is if they find a way to convert it to cash. Not having any banking services makes this quite a challenge as there are no bitcoin ATMs in the developing world. Even if they find someone to help them convert their Bitcoin to cash, they will do so using the banking system, and will pay banking fees. They could go online and spend their $100 worth of Bitcoin on Amazon, but I'm not sure any of the products there are of interest, and I can not confirm if Amazon ships to this part of the world.

When reading about the 'unbanked', and micro payments, I frequently come across the success of M Pesa as a case study for the potential of Bitcoin. There are similarities between the two systems, but there are also some key differences, and these differences bring attention to some key flaws in the Bitcoin system.

M Pesa, which is owned by Vodafone, was first launched in Africa in 2007. It is a bank account for your phone. It is available to all Vodafone prepaid and post paid account holders over the age of 18. Opening the account requires the provision of proof of address and photo ID.

M Pesa is an app for smartphones which operates like a bank account. M Pesa is more secure than cash because even if your phone is stolen, your funds are protected by a password. Customers have the ability to:

Make deposits

Transfer to other mobile accounts

Transfer t.o bank accounts

Make bill payments

We agree that the above structure resembles something which can be created with Bitcoin, however there is one key difference, which we feel is the underlying key to their success. M Pesa, does not try to replace cash, it is an alternate way to use it. That's right the balance of your M Pesa account is held in fiat currency. This is why it is so easy for customers to use it, and it is so easy for merchants to accept. It also means that the value of funds held with M Pesa, does not fluctuate, if you put in $100 today, then next week it will be worth $100, even if the dollar drops...M Pesa does not have any problems with price stability because there is no price of M-Pesa, it's just a different way to store ordinary money.

We are assuming that M Pesa, conforms with any regulations relating to deposit taking institutions within the respective countries in which it operates. That means that funds held with M Pesa qualify for the same federal protection offered to banks (if this exists in these areas).

The accounts are managed by Vodafone. If you lose your phone, or forget your password, you can still go to them, prove your identity and gain access to your funds. If you lose your Bitcoin account key or password, the funds are simply inaccessible. Your funds will always be accessible with M Pesa accounts, and we have not found any cases of hackers stealinusing the internet to steal millions of dollars from M Pesa.

If anything M Pesa is a case study as to why Bitcoin will fail. Bitcoin is trying to replace cash, rather than work with it. There is no point having a state of the art transaction system, if it's for a currency which nobody uses or wants.

Bitcoin advocates will vehemently disagree me on the above point. Despite how they feel about cash and the existing money system. The vast majority of us have no problems using cash, and keeping it in a bank. Convincing me that cash and banks are the cause of all the economic problems of the world, is a tough sell.

The only value we see in Bitcoin, is in the infrastructure and services it can provide as a financial intermediary, and provider of low cost banking services. If the existing banking system is going to be disrupted by a cryptocurrency, it will not be Bitcoin. It will be a system which works with existing fiat currencies. It is unlikely that such a system would offer anonymity or irreversibly of transactions. This may be bad news for the criminal and paranoid elements of society, but for the rest of us, it's loss of a feature we never wanted and adds no value.