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The 3 critical factors about Bitcoins


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The 3 critical factors about Bitcoins

  1. 1. The 3 Critical Factors about Bitcoins
  2. 2. 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.
  3. 3. 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.
  4. 4. 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.
  5. 5. 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.
  6. 6. 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 wealthy.
  7. 7. 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.
  8. 8. 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.
  9. 9. 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.
  10. 10. 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 steps nonetheless.
  11. 11. Sources: