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Why the Bitcoin Price Is Falling Today – January 2016

bitcoin priceThe Bitcoin price plunged as much as 16% today (Friday) as the market reacted to a blog post by a former Bitcoin developer that said the digital currency had "failed."

According to the CoinDesk Bitcoin Price Index, the price of Bitcoin was about $432 yesterday (Thursday), but news of the damning blog post sent it skidding below $400. The Bitcoin price dipped as low as $359 at one point.

News articles describing the blog post with little context added to the selling pressure. A closer look at this Bitcoin news reveals that it's not the catastrophe it appears.

The man responsible for inflicting all this damage on the Bitcoin price is Mike Hearn, one of the earliest Bitcoin developers.

How One Man Sank the Bitcoin Price

In his post, Hearn described several flaws of Bitcoin, including the increasing power of Bitcoin miners in China and how the software that controls it isn't capable of processing the rising number of transactions on the network.

Hearn also announced that he had sold off all of his Bitcoins and that he had resigned as a Bitcoin developer. It's easy to see why this would tank the Bitcoin price.

Much of Hearn's piece discussed the contentious debate over how to solve the transaction issue, something central to Hearn's disenchantment.

"Why has Bitcoin failed? It has failed because the community has failed," Hearn lamented.

Without getting into all the technical details, the block-size debate has split the Bitcoin community for more than six months. Hearn was a lead actor in the debate, even writing a piece of alternative Bitcoin software. His "Bitcoin XT" would have increased the size of the blocks to fit more transactions if adopted by 75% of those running Bitcoin "nodes" – the software that maintains the blockchain and verifies the transactions on the network.

Since its release in August, less than 10% of those running Bitcoin nodes have adopted Bitcoin XT. That's probably a factor in Hearn's disillusionment.

The block-size issue is a real problem, but Hearn's characterization that the Bitcoin network "is on the brink of technical collapse" is an overstatement. It's the sort of thing that can breed panic among those that don't have all the information.

And it's not the only reason Bitcoin investors need to pause before selling on this news…

Why Today's Bitcoin Price Drop Was an Overreaction

In fact, a laundry list of issues with Bitcoin contains several more exaggerations, such as "can't move your existing money," "is controlled by China," and "has wildly unpredictable fees that are high and rising fast."

If Bitcoin had issues this severe, it would be almost unusable. And, if true, that would surely be getting attention.

So why such a sharply-worded blog post?

In addition to some bitterness over the lost block-size fight, Hearn has a new employer that would probably be happy to see Bitcoin wither.

He just started working as lead platform engineer for R3, the startup backed by 42 of the world's largest banks to explore the potential of blockchain technology for the financial industry.

In any case, few seem to share Hearn's bleak view on the future of Bitcoin. In particular, other top Bitcoin figures weren't riled by his statements.

Gavin Andresen, who until two years ago was Bitcoin's lead developer, is one such figure. One of the most visible and respected members of the Bitcoin community, Andresen is also known as a Hearn ally.

So his reaction to a question on Twitter asking if Hearn was "overstating the magnitude of Bitcoin's crisis" is telling. "Yes, Mike is too pessimistic," Andresen replied.

Andreas M. Antonopoulos, host of the podcast "Let's Talk Bitcoin" and author of the book "Mastering Bitcoin," tweeted, "I disagree with Mike Hearn's analysis and concerns (see LTB show next week). I thank him for all his work and wish him all the best. Onwards."

But it was Barry Silbert, founder and CEO of the Digital Currency Group, who had the definitive tweet on the matter. Quipped Silbert: "Bitcoin is just so boring."

The muted reaction from several of Bitcoin's key influencers is optimistic for the Bitcoin price. In fact, several posters on the Reddit website predicted the price of Bitcoin would rebound to $430 within a week.

Unless more people line up behind Hearn, or the dire problems he talks about start to become reality, expect this drop in the Bitcoin price to be short-lived.

The Bottom Line: A negative blog post by a prominent Bitcoin developer took a 10% bite out of the Bitcoin price in a matter of hours. But the developer, Mike Hearn, exaggerated a lot of the problems he described. With other major figures in Bitcoin downplaying Hearn's criticism of the digital currency, it's likely the price of Bitcoin will bounce back within a few days.

 Follow me on Twitter @DavidGZeiler or like Money Morning on Facebook.

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  1. Robert | January 15, 2016

    Your post makes a lot of sense.. Not like all other media outlets that just are propagating the FUD that Hearn wanted to create by doing all of this. All of us knew the block size issues were being worked on and been patient on that.. If he has issues with China – there is a lot more opportunity for rest of the world to do mining. The same logic he throws on China control could easily be converted to say that since China does most manufacturing for rest of world, the whole world is under danger if there is a export ban from China..

    I am glad one rotten egg is out of bitcoin world.

  2. Jaylan | January 15, 2016

    Hearn is unbelievable. He criticizes large-scale miners for controlling the majority of the Bitcoin mining capacity then turns right around and joins R3 which is being pushed by the big banks, what a hypocrite. To make matters worse, because he WAS a core developer, what he says has an effect on everyone else's equity in Bitcoin. But here are the facts …

    What Robert said is completely true: what Mike Hearn did today changes absolutely nothing about where Bitcoin was, is and is going. And anyone who sells today is probably a speculator seeking to crash the price because they know what people are willing to pay for Bitcoin (~$500.00 or more; and they know that's likely to rise, with or without an increase in transaction volume on the Blockchain).

    We all understand that the transaction volume issue is here but with segregated ledgers and a likely resolution after the halving, this issue is about to be resolved.

    One thing is certain: Bitcoin remains the most secure PUBLIC blockchain, NOT controlled by large financial institutions and that is still accessible to the little guy. You may not be a miner but that doesn't mean that you can't partake in Bitcoin by investing. Miners are important to the Bitcoin network but they aren't the only thing that matters.

    Shame on you Mike Hearn.

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