In thinking through a framework to interpret what will
be an eventful 2014 for bitcoin, here are the three
points – we’ll call them Bitcoin Buckets for a touch of
alliterative flair – to guide the discussion.
Bitcoin Bucket #1 – Regulation.
Since those little Lydian coins in 600 BC, issuing currency
has largely been the domain of governments. Granted, the
U.S. itself only followed that guideline after the formation of
the modern Federal Reserve 100 years ago. But in general to
issue currency you need some bureaucrats, a standing army,
a bank, and some borders on a map. Bitcoin has none of
that, which makes it the currency equivalent of a “Stateless
person” at the end of World War II or a White Russian after
the 1917 revolution.
Initially, there was concern that governments – especially in
America – would choose to squash bitcoin for fears over money
laundering and illicit activity. That was, after all, an early use case
for the currency and one that continues to this day. Then in the
back half of 2013 two regional Federal Reserve banks published
papers commending bitcoin for its low-cost facility of moving
money, and it became clear that the U.S. central bank saw some
value in the online currency.
We’ll have another data point on government’s take on bitcoin at
a hearing next week in New York City, courtesy of the New York
State Department of Financial Services. The early buzz, from an
interview on CNBC with Superintendent Benjamin Lawsky, looks
promising. He seems to see the potential for bitcoin and related
services to provide much-needed competition to the U.S banking
system. Should merchants have to fork over 3-4% for credit card
transactions? Should credit card holders have to wait a day (or
more, in the case of a weekend) for payments to post to their
accounts? Bitcoin-based competition – within the confines of
modern anti-money laundering and “know-your-customer” laws –
could help drive those charges lower.
In the end, bitcoin really isn’t competition for national
currencies – at least not for quite a while. It can be
competition here-and-now for national banking
systems. It is a disruptive technology for transferring
money cheaply, by virtue of the online system’s dual
mandate of solving those puzzle and keeping track of
all transactions as a requisite for a seat at that table.
Bitcoin Bucket #2 – Adoption.
One of the side benefits of getting on the bitcoin story early
last year was that I had a lot of very entertaining conversations
with computer nerds who had been early bitcoin adopters. By
virtue of their early “Mining” efforts – solving those puzzles in
the core algorithm for bitcoins – many of them found
themselves quite wealthy. Not a few hundreds thousand
dollars well off, mind you, but serious seven and eight figure
At least on paper, that is… But they were reluctant – and still are –
to sell those bitcoins on a still illiquid open market. And that’s
where capitalism comes in. Bitcoin millionaires are a ready-made
customer base for a wide range of luxury and near-luxury goods
and services. If you want to peruse a list, look here:
The bottom line is that bitcoin adoption by merchants is just going
to accelerate. There’s a reason why Rodeo Drive and Madison
Avenue have all the chic shops; that’s where the money is. And
now the money is in bitcoin as well.
Bitcoin Bucket #3 – Volatility.
You can’t make an omelet without breaking some eggs, so it
should be no surprise that bitcoin was both a big winner in
2013 and extremely volatile. April saw the largest exchange
melt down on huge volume. Later in the year we had a similar
selloff as the Chinese government sought to crack down on
asset laundering. None of this prevented bitcoin from ending
the year near enough to $1000 to prove there is some level of
organic global demand.
To succeed as a method of wealth transfer – which we believe to be
the cornerstone of bitcoin’s long term success – price volatility will
have to decline. Yes, that is a tall order for asset with very little
issuance and no convenient way to short it. We have no doubt that
merchants will adopt bitcoin simply to access newly minted high net
worth individuals. But to keep them in the fold and increase the
usage of bitcoin in other parts of their business, they will need to see
some greater stability in the price.
To end on a cautiously optimistic note, this appears to
be happening already. The decision by the Chinese
government to curtail bitcoin exchange activity could
have sent the currency into free fall – the growth in
demand inside that country was a big part of the bullish
case for bitcoin. And drop it did – to $600. But not
$100. Or $10. Since then it has bounced back to $800900. Baby steps on the road to lower volatility. But