Here's The Argument That Bitcoin Is Collapsing Before Our Very Eyes

Bitcoin is surging day after day, and believers in the virtual currency are feeling a sense of increasing vindication.

Further cementing the meme that Bitcoins are becoming "for real" are today's hearings in the Senate about their use.

But maybe instead of becoming real, Bitcoin is collapsing before our very eyes.

That's the provocative thesis put forth by Izabella Kaminska of FT Alphaville.

When she looks at the above, she doesn't see mass adoption: she sees a gigantic short-squeeze caused by a state of crisis in the world of Bitcoin.

Among her points:

• The price started surging after the Silk Road bust, and a number of Bitcoins went dark, creating an extreme shortage and a challenge for anyone who had Bitcoin liabilities.
• There's been a rash of Bitcoin thefts.
• There's been a computer virus spreading, demanding people fork over Bitcoins.
• And finally she adds, there's been some major breakthroughs this year in the "mining" of Bitcoins (Bitcoins are mined by setting your computer to solve math problems), which has crushed the margins for traditional miners, pushing them out of the market.

All of this creates a situation where the traditional players in the market are totally scrambling to either buy obtain Bitcoins (because of the shortage) or have been pushed out of mining.

On this last point, she writes:

To keep conventional miners incentivised to stay in the mining operation - at least until everyone transfers to the new technology - the price has to go up instead. However, as the chart above shows, prices are not yet high enough to keep conventional miners in the game. The consequences of that, we would imagine, are that the mining peer network may have been greatly reduced, creating something of a cartel-like effect, due to the lack of competition.

The super spike suggests the market is now evolving to somehow attract back conventional miners so as to defend the decentralised market from the destablising effects of miner concentration - more easily done now that there is a supply deficit which is potentially choking the system. This can only be done, however, with higher prices and/or the roll-out of the new technology.

Kaminska is one of the smartest thinkers in the game on this stuff. Go read her full post, and then read all of the other posts she's written about the subject.