Only two months ago the Bitcoin charts saw a massive price inflationary phase as speculation exceeded what the market could bear and the currency peaked June 8 at around $32 per BTC. Now charts have fallen to almost $7 as the June bubble evaporates and the market stabilizes once again—alongside a series of hacks to exchanges, losses of e-wallets, and similar punctures in the community confidence.

Timothy B. Lee at the Forbes blog Disruptive Economics has noted correctly that Bitcoin is seeing a massive devaluation crash after the bubble; and he asks the question, “where will the price decline stop?” After some discussion of other currencies and commodities, he compares the housing market and the USD and finally concludes that crash is terminal.

So far Bitcoin enthusiasts have been buying Bitcoins as the price falls, convinced that the price will go back up eventually. But as the hoped-for rally has failed to materialize, more have gotten discouraged or bored and cash out, pushing the price down further. This process has been going on for a couple of months, and now it appears to be accelerating. I suspect it’s terminal.

Of course, noting that BTC has declined from $32 to $7 in two months sounds dire, until you look at the charts and discover that two months earlier, in April, BTC was trading at near $1. This inflation of trade value happens to be an extremely recent event and even if Bitcoin trade were to return to its $1 range again, it wouldn’t signal the demise of the currency any more than when it traded at that value before. Assuming that Lee means that the bitcoin market can never recover from this crash.

Part of what led us here has been a fall in general confidence in the market in general, not a loss in the usefulness or use of bitcoins themselves. In fact, the sharp valuation and now sudden decline appear to have all the hallmarks of a market bubble; all of which coincide with a great deal of innovation, popularity, and spread of knowledge about Bitcoin. Hacks causing the loss of investments in exchanges such as the hit to MtGox and the technical error that hit Bitomat have obvious dire consequences on market stability. Furthermore, the recent vanishing-act of e-wallet service MyBitcoin that is estimated to have taken almost 75,000 BTC out of circulation has given more pause to traders.

MyBitcoin also acted as the go-to “PayPal” of Bitcoin, being a widely used bitcoin conversion tool that almost all the web shops used; until such time that someone replaces its loss, commerce will be down. The person (or people) who manage to replace that lost functionality will likely breathe new life into the markets and reap huge rewards as the market recovers.

Bitcoin doesn’t lack value, just momentary stability

Lee mentions that other currencies that have no intrinsic value, such as the dollar, maintain their liveliness through the fact that multitudes trade in them. It’s true that Bitcoin doesn’t have the sheer population of the USD; but bitcoins do exist in an underground culture that make good use of the commodity of scarcity and the sheer difficulty of making counterfeit currency. As long as black markets like Silk Road exist–and there’s so many other places that transactions occur–bitcoins will retain a sort of social value and usefulness.

In order to remain a viable currency, Bitcoin needs only stabilize somewhere. Guardedly, if that happens to be around $1 again then it’ll probably continue to do what it always did. What the currency really needs is more adopters and greater population. Having that will buffer bubbles of this sort in the future and build a foundation for innovation on its underlying technology.

What we’re seeing now is probably the end of the bubble, which is actually ideal for a market like Bitcoin. It’s almost been a very brief tulip mania.

Meanwhile, there’s been a lot of learning experience amid e-wallet users and exchanges. MtGox has been working on upping their security and maturing into an actual market exchange with better security and we’ve seen the emergence of Ruxum that promises to be a much more mature platform. The underlying nature of bitcoin has proven to be quite solid and mathematically functional; now it’s time for the community who embrace bitcoins to find their happy place and stay there.