2015 is proving to be a bad year for Bitcoin investors. Since January 1, the virtual currency's price has fallen 40 percent, from $320 to $190. And that's on top of big losses in 2014.
This price decline will inevitably spark a wave of stories about how Bitcoin is doomed. But we shouldn't read too much into it.
Remember, people were astonished when Bitcoin's price first broke into the triple digits in early 2013. The high price meant that thousands of people were — irrationally, perhaps — betting that the technology had a bright future. Maybe you think they're crazy, but today's price of $190 is no less a vote of confidence than it was two years ago.
And Bitcoin has recovered from major price declines before. The worst crash in Bitcoin history, in percentage terms, occurred in late 2011, when the value of one bitcoin fell from $32 to $2. People — including me — wrote stories about how Bitcoin was stuck in a downward spiral from which it couldn't recover. But we were wrong. The price stabilized and then began rising again in 2012.
That's because the value of Bitcoin-the-currency doesn't have much to do with the usefulness of Bitcoin-the-network. If you want to send someone $1,000 over the Bitcoin network, you can do that when one bitcoin is worth $100 or $10 as easily as you can when it's worth $1,000. You just buy and sell a correspondingly larger number of Bitcoins.
Ultimately, Bitcoin's success or failure depends on whether someone finds a "killer app" that will make the technology useful to a large number of people. Maybe that won't happen, and recent price declines may reflect growing pessimism by Bitcoin supporters. But this year's low prices don't prove Bitcoin is failing any more than last year's high prices proved the opposite.