The last few weeks Equities.com has been covering various facets of the digital crypto-currency bitcoin, detailing an average investor’s process into buying bitcoin, to looking at its market fluctuations, to the different ways to get bitcoin, postulating that the currency’s success could signal the demise of money transfer exchanges like Western Union unless they failed to adapt. Bitcoin is a fascinating phenomenon, and it’s been interesting to cover it and delve into the market that, at a scant four years from inception, often felt like an undiscovered subculture.
It’s fitting, then, that as we conclude this series on bitcoin mainstream media coverage of the currency began popping up everywhere. The New York Times ran a tech piece on it on Oct 30, followed by pieces in the New Yorker and Slate the day after. The cat’s out of the bag, so to speak: bitcoin isn’t just the domain of government-averse libertarians, techies, and emerging market speculators. Bitcoin has had its Ed Sullivan moment, and is poised to become part of the lexicon.
The question is: what now for bitcoin?
From Speculation to Circulation
As part of the Equities.com series, we bought one bitcoin on Oct 8 for about $126 USD. We sold it 11 days later for right over $194, representing a gain of nearly 55 percent.
We’re not here to pat ourselves on the back, and play like “look how smart we were.” At this stage in its development, bitcoin is still incredibly volatile, and the swing could have just as easily gone the other way.
As the Atlantic pointed out in an article on bitcoin during its April 2013 bubble, bitcoin is 19 times more volatile than the US dollar. In its nascent stage the currency remains prone to rapid fluctuation. And, as the Atlantic points, out, bitcoin’s tendency to spike in price – its current valuation that is more than 20 times what it was at the beginning of the year – makes it susceptible to hoarding.
And of course, has attracted the traders, lured by prospects of big gains – say, 55 percent in just over a week. Then again, bitcoin’s goal (if an inanimate object can be said to have one) is to be less fodder for traders and more a legitimate currency free of governmental oversight or constraint.
Bitcoin Goin’ Legitimate
This isn’t to say the currency is doomed for another series of booms and busts, and is not, as the Atlantic put it, “the ultimate dotcom stock.” Bitcoin has several attractive features that make its usefulness wholly apparent: anonymity, ease of transfer, and unlike emerging markets, lack of an unstable backing government. You’re never going to read an article about how the Empire of Bitcoin just experienced a coup, and now your money could be worthless.
Bitcoin certainly has its roots in the deep web, and infamously the Silk Road black market. Now that the Silk Road is shuttered (until its inevitable replacement pops up) bitcoin’s success as becoming less a bubbling tech stock or a rapidly moving commodity like gold, and more like a currency is, simply, people need to be able to spend it.
Curio to Currency
Simply put, to forestall a crash, bitcoin needs liquidity. It needs people spending it on everyday things, or it is bound to keep increasing in value, as more people buy in and hoard, and less spend and sell. In short, people need to use it, regularly.
Think about it like this: in the world of vintage clothing, the most expensive, most valued finds from the last 50 years aren’t usually things like fancy coats or purses that people bought then stuck in a closet.
For the last several years, the big finds in vintage clothing have been things like Converses and Levis from the '50s. In short: the most popular clothing items of the time. What’s most valuable is not what people hoarded, but what everyone used regularly.
This is why things like Beanie Babies and baseball cards become ultimately worthless. Everyone buys them, and then sticks them in a closet, waiting for the value to go up. When everyone does that, the commodity becomes worthless.
Contrast with something utilitarian like a pair of sneakers or jeans, something that can be “used” quite easily. Those are the real finds in vintage clothing, because very few people saved them. Most used them immediately.
Bitcoin needs to abide by similar properties. In short, it needs to be less like a commodity to be stashed, and more something whose usefulness is wholly apparent, and not just from a speculator’s standpoint.
It’s Getting There…
Much of the mainstream media attention has focused on just this factor, as bitcoin becomes, to be frank, “useful” like a currency and not a speculator’s commodity. The first bitcoin ATM has opened in Canada. Several businesses in the UK have begun accepting the currency. Even dating website OKCupid now accepts the cryptocurrency as a payment option.
But it still has a long way to go. If bitcoin is to fulfill its promise (if an inanimate object can be said to have a promise) it must be used, regularly, to keep the hoarding and over speculation down.
That is: act less like Beanie Babies, and more like jeans. Or, more aptly, act like money.
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. To read our full disclosure, please go to: http://www.equities.com/disclaimer