Bitcoin ()
To say that bitcoin has been volatile over the last year or two is, of course, a massive understatement. When I first started writing about and recommending the digital currency, it was around $250, then climbed to just short of $20,000 a couple of weeks ago before dropping back to just over $12,000. That decline has now been arrested and the market is showing signs of a bounce. That halt in the drop, making it look like a correction, can be seen as a positive sign over the next few weeks or months, but it could also do damage to bitcoin’s longer-term future.
When I first started writing about bitcoin back in 2014, I viewed it almost entirely as a trading instrument, more akin to a commodity than a currency. That was out of step with the majority of people interested in cryptos at that time, who were what I referred to a few times as “true believers.”
Over time though, as my familiarity with bitcoin and cryptos in general increased, I became increasingly fascinated by its intended role as a peer to peer currency. The idea of a monetary instrument that turned convention on its head appealed to the contrarian in me.
Bitcoin does that in two essential ways.
First, it is not issued or controlled by any central bank or government. Instead, what governs the issuance of the currency is math, making it, at least in theory, immune to the potentially malign influence of people, and in particular of politicians. In addition, transactions are recorded by the blockchain, which is essentially a network of the computers of the currency’s owners, negating the need for users to trust an institution.
Moreover, bitcoin operates on a disinflationary principle, as opposed to the inflationary principle that we are used to. Economies grow over time as populations and productivity grow, and the traditional way of dealing with that is simple. The government, or, more accurately in most cases, the central bank, prints more money. That makes the overall economy larger, but makes each individual unit of currency (such as a dollar) worth less. That is in part why a house that would have cost around $17,000 in 1970 will set you back close to $200k today.
Bitcoin, however, works in the exact opposite manner. The total number of bitcoin that can ever exist is predetermined, as is the rate of their release. As the economy grows, rather than issue more, you simply use smaller fractions of one coin for each transaction. Thus, coins owned and saved increase rather than decrease in real value and purchasing power over time.
That is fascinating on an intellectual level, but the certainty of increased value of savings has some real implications, particularly for the banking industry and third world countries. It makes the whole concept of interest rates unnecessary and negates the use of banks for storage, both of which threaten the banking industry existentially. At the same time restores faith in money as a concept in the world’s poorer countries, and by doing so encourages entrepreneurial activity.
In that context, the recent price action in BTC/USD can be seen in two ways. The surge and drop back followed by consolidation is a good sign for the near-term. The fact that the sharp drop looks more like a needed correction rather than a collapse will encourage buyers even further, and create a potential support level. The price may therefore benefit, but what does all this mean for the long-term utility of the currency?
On that front, the outlook is not quite so rosy.
As I mentioned, when I started writing about bitcoin, looking at it from a trading perspective was rare and most interested parties were true believers. Now, that is reversed. It seems that everyone is now into it, with many, based on their public pronouncements, having no real understanding of what digital currencies are. They see it as a commodity to be traded and nothing more. That results in the kind of volatility that we are seeing now, and that in turn harms the long-term prospects of bitcoin and cryptos in general.
For them to be truly successful and fulfill their potential, they must become actual currencies that people use for transactions. That depends initially on wide and increasing acceptance by retailers, and the kind of volatility that produces regular double-digit percentage swings makes that increasingly unlikely. Why would you accept a payment when you have no idea what that payment will be worth in real terms after just a few days?
Despite the damping effect on real progress for bitcoin as a currency, the massive gains in price over the last few months, and even over the last few years, have been good for everyone who holds it, but for those who do so out of faith in the concept rather than as a trade they are a double-edged sword. It is hard to escape the feeling that all the Johnny-come-lately guys will bail at some point, but the recent pullback and bounce probably delays that point somewhat, which is good for everyone’s wallet.
What it also does, though, is remind retailers thinking of beginning to accept cryptos that volatility is a two-way thing, and that dollar based returns on a bitcoin transaction are therefore unpredictable. At the very best, that delays the long-term utility of bitcoin, and at worst could put its value and even its very existence at risk. There is therefore both good and bad in the recent BTC/USD moves, and long-term investors should be hoping for some semblance of stability from here above all else.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
