

Bitcoin prices since the start of the month. ( Bitcoincharts.com

In recent weeks, some Bitcoin critics have been rethinking their initial Bitcoin skepticism. But others are as convinced as ever that the cryptocurrency is doomed. One of the harshest critics is Mark Williams, who teaches finance at the Boston University School of Management. He predicts that in the first half of 2014, bitcoins will lose almost 99 percent of their value, falling below $10. We spoke by phone on Monday. The transcript has been edited for length and clarity.

Timothy B. Lee: What informs your thinking about the future of Bitcoin?

Mark Williams: I used to be the senior vice president of a commodity trading firm in Boston. I'm very familiar with commodity prices with high volatility. For example, energy prices would have swings of 400 to 500 percent in a year. That's significant price movement.

But Bitcoin is in a universe of its own. Right now Bitcoin is looking at price movements as high as 8000 percent since January. It moved from $13 per bitcoin to a high of $1200. So what we see then is considerable risk associated with Bitcoin.

At least with a commodity like power, natural gas or oil, there's an underlying value. That product can be used for something. With Bitcoin, it's a virtual commodity, so there's no backing. In essence, Bitcoin is worth something as long as you or I are willing to sell things for it. But if you say I'd rather have $1,000 than a bitcoin, Bitcoin is going to drop like a rock.

That's what we've seen. Just in the commodity exchanges today [Monday], we've seen a 30 percent swing from the low to the high today. Many advocates for Bitcoin have said hey this currency is a virtual currency, but when you have a 35 percent fluctuation in a given day, that can never be a currency.

Another way of looking at it: the most the U.S. dollar fluctuates is about 10 percent on an annualized basis. This is 30 to 35 percent fluctuation in a given day. It just shows how toxic and how dangerous this is.

There was such sentiment against central bankers in their mismanagement of the economy by 2009. This whole concept of creating this virtual currency, moving away from the central bankers of the world, had a real populist feel to it. Reality is in the execution. That's why last Thursday, when the central bank of China, the second largest economy in the world, warned its member banks not to accept Bitcoin as currency, that was the collapse of this dotcom bubble.

This isn't the first time we've seen the price of Bitcoins skyrocket. There were previous "bubbles" in June of 2011 and April of 2013. Yet in both cases, after falling, the price rose again. What makes you think that won't happen again?

Bitcoin has had a number of mini-bubbles. In 2011, it hit a high of $30. Then it dropped dramatically: 80 percent in two months. Then it took a hiatus. Then in 2013, it went to $200. [With any asset bubble, there are three stages, growth, maturity, and pop.] When you think about this bubble the maturity stage really hit in November and December of this year. As more information comes out about whether this is truly a virtual currency or a virtual commodity, you see that it's really a virtual commodity.

With increased volatility is downside risk, and now they're experiencing it. What we're seeing in the market on Friday for example, the amount of people who are trying to exit Bitcoins caused up to a 45-minute delay in being able to execute orders. Many people trying to run for a very small exit.

Talk to me about Bitcoin's fundamentals. You've predicted that Bitcoin will be below $10 before long. But if Bitcoin isn't a viable currency why wouldn't it go all the way to $0?

Optionality. I view that there's always a chance that a Bitcoin could be adopted. Could be used potentially as a basis for virtual currency. And so that would have some upside. An option premium of $5, $7, $10 seems reasonable. Look at where it was. If you and I had this conversation a week ago, the price would have been $1,200. At that point, it looked like this was being widely accepted by retail organizations, Google's equivalent of China [Baidu] was allowing payment in Bitcoin, and now just in three to four days, we've seen that the second largest economy in the world said "your money isn't good in our house any more."

I look back in the history of these coins. When they were first mined they were sold for pennies. Even through to 2012, they still sold for single digits. That reflected the optionality, the chance that these would be the future in regards to virtual currency.

But if virtual currency does take off, there are 35 currencies out there. Bitcoin has what we call the first mover disadvantage. What we've learned is that "the nail gets the hammer." When Bitcoin came out, it had some warts. It had some weaknesses. Other [electronic] currencies popped up.

What kind of disadvantages do you have in mind?

Initially Bitcoin was supposed to be a very democratic process. We could just open our laptop and start mining Bitcoins. Now to mine Bitcoins after 11 million have been mined, you have to have super computing power. It isolates the majority of people who can actually mine.

If we have a decentralized system, but yet there's concentration risk, there's a greater chance of market manipulation. Exchanges, they're telling us this is the spread. How can you and I be sure because it's not regulated. As bitcoins increase in value, there's greater incentive to try to manipulate the price.

But there are also first-mover advantages, right? People want to use currencies that others will accept.

The name recognition is there. But also the reputational damage. Silk Road itself has hurt their reputation. We think about the fact that they were the purveyor of drugs and prostitution and guns. If you think about some of these other e-currencies that have popped up, there's not an association [with drugs].

Interestingly enough, you had Ben Bernanke, who said there may be an opportunity for increased efficiency [in Bitcoin]. Conservative central bankers are not saying it's not an innovation. It just needs to be controlled. Name one country with a decentralized currency. The euro is decentralized [with multiple fiscal policies]. If you're Greece or Germany you're having second thoughts [about joining the euro zone].

Sovereigns want to be able to control their destiny, and that means controlling their own currency.