A persistent meme amongst bitcoiners is the rollercoaster. There is nothing like holding a stash of bitcoins and watching the price to make you hold on for dear life (HODL – the cry of many a bitcoiner) or want to get off. Its volatility is also a draw for people who would never even consider such a thing to take a stab at day trading. The frequent swings up and down make it seem like it should be easy to simply follow the old rule of buy low and sell high. Most of those who try this, though, soon learn that it’s not so easy to predict the market, time it well enough to get a return, and make enough to beat the spread and the fees.
There is a lurid focus on price and volatility when searching the news for Bitcoin. Price and volatility are important, of course, and the price of a bitcoin is going to need to rise astronomically in price if it’s going to fulfill its role as a global asset and currency. But price is actually a feature of Bitcoin and not its make or break point. On any given day, the fact that the price is soaring on the seeming blessing of a hedge fund manager or crashing on some rumored meeting of the PBOC in a back room somewhere in China is actually fairly irrelevant.
When the IRS recently classified Bitcoin as a commodity for tax purposes, it may have actually gotten Bitcoin’s status as of right now right. Adoption is progressing, and for sure there are more and more sellers accepting Bitcoin, but many of the sellers I’ve been in contact with admit that they have gotten few, if any, Bitcoin sales. Merchants have natural reasons to accept bitcoins in payment, but it isn’t nearly as clear to consumers what the benefits to them are. The technical difficulties, bad press, and risk of theft are great enough to easily offset the advantages of saying bye bye to their bank accounts and credit cards.
No, Bitcoin’s time to act as a currency has not yet arrived. Right now it’s a commodity with an excellent appreciation outlook. And that’s how Bitcoin should be being pitched. Purchase one or ten or twenty bitcoins, put them in a paper wallet and forget about them; that small investment may be the same as buying Microsoft stock or Berkshire Hathaway stock 20 or 30 years ago. Bitcoin is designed to be deflationary, and as adoption increases, so will its value. Given the state of the political and financial systems, for those worried about their retirement, their kid’s university, or just the state of the economy, Bitcoin might be the best investment there is.
Eventually, though, the currency feature of Bitcoin is going to kick in. When demand to hold Bitcoin as an investment has risen sufficiently high that people stop looking at what a bitcoin is worth in terms of a local currency and start pricing things directly in Bitcoin, Bitcoin POS payments are going to take off. At this point, the fiat currency will be valued against Bitcoin rather than the other way around. At this point also, many of the concerns we currently have about regulation and taxation are going to become moot as the regulators and taxmen will have to recognize the reality on the ground and adapt or die.
Bitcoin is frequently being compared to the early Internet, and it’s an apt comparison. Bitcoin’s most famous feature is as a currency, but the blockchain itself is a powerful development. Right now there are companies and projects underway to create smart property (where you can prove or transfer ownership of anything with a chip by showing possession of a bitcoin ‘marked’ as that property), smart contracts (where you can encode the terms of the contract to fulfill automatically once certain conditions checkable on the Internet are met), distributed shares in companies, anonymous, verifiable voting, and much more. It’s possible that we are going to start to see some of these applications gain wide adoption before most people are buying a coffee with Bitcoin. People will come to Bitcoin, probably without meaning to, because of its simple usefulness. This will dispel some of the myths and fears associated with it. From there, people will start dropping their bank accounts and credit cards in favor of saving in their own (by this point easy and secure) wallets and paying for their coffee by keying in a PIN on their phone.
The challenges of changing fiat into Bitcoin and vice versa safely and easily, bad press, and security are going to dog Bitcoin’s development for the foreseeable future. But the trend lines are also easy to see. Bitcoin is developing, expanding, and gaining in usefulness every day. So the next time someone tells you they’re worried about their retirement or their kid’s education, let them know that they should do their own research and make their own choice, but that Bitcoin might just be the best investment they could make.
By Mark Norton of BitcoinWarrior.net 5/1/2014