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Bitcoin Has Done the Unthinkable: Gotten Boring

  +Follow January 14, 2014 9:07AM

At the conclusion of 2013 the wildly volatile digital currency bitcoin seemed destined for either the stars or the garbage can. The currency was capable of quadrupling in value in six weeks – and then losing half its value the next.

A currency, a commodity, or an outright fraud (depends who you ask), if there was but one thing you could count on concerning bitcoin in the last quarter of 2013, its that you couldn’t count on it to look anything like what it had the day before. To traditional economists, this merely reinforced the belief that bitcoin was unsuitable for anything save free market gambling. After all, why use a bitcoin to actually buy something when its value would be drastically different the following day, or perhaps even the following hour?

Bitcoin Grows Up

But then something interesting happened. The edges got shaved off of bitcoin. To be sure, compared to the euro or the dollar, bitcoin is still wildly unstable. But compared to 2013, 21014 bitcoin is a complete snoozefest. And that’s a good thing.

At the end of the year analysts were asserting that settling near a predictable price point is exactly what bitcoin needed to have to avoid crashout. Even during its wild ride-up in price bitcoin had absolutely nothing backing it, and was susceptible to major market manipulation. It still is, of course, to a sizable degree. But while it lacks a government or precious metal to back it up like most currencies, bitcoin now has shown signs of possessing the far greater asset of stability, or at least a ballpark idea of what a bitcoin “should” be worth.

Stability will help encourage usage, which of course is what bitcoin needs to leave the realm of pure speculation. That is, if bitcoin has stabilized.

Bitcoin Then and Now

From October 8, when we wrote our first feature on bitcoin until Dec 8 the price of bitcoin surged from $126 to $1133 and back down to $733. After another mini-bubble and bubble burst, between Dec. 26 and Jan 14 bitcoin has stayed between $730 and $900 apiece. Still a pretty wide spread, but far less so than 2013.

What’s to be gained from bitcoin approaching an agreed-upon price point? For one, it could help increase liquidity, as people will be less likely to hoard the bitcoins they have. That liquidity, in turn, could help fight off speculative binges, further stabilizing the currency and encouraging popular usage.

Despite the “to the moon” rhetoric of its Ponzi scheme-minded proponents, a limitless boom for bitcoin has always been complete fantasy. Much more likely has been the prospect that bitcoin follow the path of every other rapidly rising asset without something to back it up. That is, that it will eventually suffer an unexpected, massive bubble burst and become basically worthless.

But if enough people can begin to at least come to close to agreeing on a vague idea of what a bitcoin is worth, the unbridled speculation that causes frequent bubbles (the kind that scare off much of the investing public) can be tempered. And then 2014 might be the year we see bitcoin become established as an alternative wealth storage device people can really trust.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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  +Follow January 14, 2014 9:07AM



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