Bitcoin slumps amid Apple Pay competition, Alibaba IPO buzz, and lingering regulatory doubts

By Michael Carney , written on September 19, 2014

From The News Desk

The price of bitcoin is in a bit of a free fall this week, after blowing through its prior floor of $450 in early morning trading. The CoinDesk Bitcoin Price Index currently sits at $396.91 as of this writing with no signs of the decline abating.

There are numerous theories swirling that seek to explain this sudden downtrend, but the reality is that it's unlikely to be a single smoking gun and rather the conflation of multiple factors, each of which independently may be viewed as innocuous, but together have resulted in a precipitous drop in price over the last 48 hours. Add this to a steady decline down from the $600 to $650 range in June and it might be fair to say bitcoin is in a slump.

So what of those factors?

The most persistent and systemic of these issues is the imbalance in buying and selling volumes resulting from the rise in merchant adoption. When merchants begin to accept bitcoin, they typically elect to convert most or all incoming BTC into USD immediately. Some of this volume can be offset within the private networks of bitcoin payment platforms Coinbase or Bitpay (in the US), but the net result is downward pressure on BTC prices. The antidote to this problem is increased buying demand, and/or merchants deciding to hold bitcoin rather than converting immediately – something that will require more practical uses for bitcoin like paying vendors and employee salaries. PayPal founder Peter Thiel spoke to a similar issue in a recent Reddit AMA saying:

PayPal built a payment system but failed in its goal in creating a ‘new world currency’ (our slogan from back in 2000). Bitcoin seems to have created a new currency (at least on the level of speculation), but the payment system is badly lacking.

I will become more bullish on Bitcoin when I see the payment volume of Bitcoin really increase. But sell-side pressure isn't new. What is new is increased competition in the payments landscape.

In the last week, Apple set the mobile payments landscape on fire with the announcement of Apple Pay, a potentially disruptive, secure, low-friction NFC-powered platform that may make credit cards obsolete. Apple Pay doesn't solve the existing payment and remittance fee issues as well as bitcoin and other crypto-currencies, but it does offer many similar security and privacy benefits. And while it may not be enough to sway true bitcoin believers and early adopters, the emergence of this new payments solution could certainly dampen the enthusiasm for bitcoin adoption among mainstream consumers.

Not everyone agrees with these fears, including bitcoin über-investor and Facebook "co-inventor" Cameron Winkelvoss who told CNBC he doesn't see the two platforms as competitive. But it's no surprise that Apple Pay would lead to selling pressure from speculative bitcoin investors.

There's also some conjecture that today's Alibaba mega-IPO could be weighing on prices by enticing some people to sell bitcoin in favor of buying stock in the Chinese ecommerce giant. Cryptocurrency News offers as evidence increased trading volume on Chinese and European bitcoin exchanges in recent days, combined with strong buy ratings on Alibaba's stock that it says support this theory. It's hard to parse whether that's in fact why people are selling, or whether people are simply seeing prices plummet and heading for the nearest exit.

Finally, there remain uncertainties around the regulatory landscape in a number of jurisdictions, most notably the state of New York, which is seen as a bellwether for the United States as a whole. The response to initial NYDFS draft regulations has been tepid at best with many companies promising to avoid doing business in the state if passed as written. Until institutional investors have clarity around these regulations, there will remain billions of dollars in capital sitting on the sidelines. And despite the best efforts of bitcoin industry leaders, the wheels of government move slowly and often without much regard for innovation.

The good news for bitcoin bulls is that the market has a habit of correcting, at least somewhat, after most major selloffs. The challenge this week, as in any trading market, will be in calling the bottom. When the Alibaba and Apple Pay news cycles run their course over the next several day, two of the above four factors weighing on BTC prices will be gone, at least from top-of-mind awareness. Whether prices will can claw their way back up to pre-summer levels, however, remains to be seen.