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Predictions, so they say, are hard; particularly those about the future. Additionally, in any tech-related endeavor, to look back over a year is to look at ancient history. It is, however, that time of year when those of us who give our opinion for a living look back on the last 12 months, and attempt to peer into the future and predict what will happen in the next 12.
I have no illusions about my ability to do that. As somebody with a trading room background, I understand that even the smartest minds in the world can be made to look foolish by financial markets. That is why, for anything with a long term slant such as a stock portfolio, diversification is key. As I said, though, ‘tis the season, so let’s take a shot...
For Bitcoin, 2014 has been a year defined principally by two clear trends: increasing adoption and acceptance, and declining value. Big names in commerce, from Overestock.com (OSTK) in January to Microsoft (MSFT) earlier this month, have begun to accept Bitcoin in payment for goods and services. This has resulted in a slow but consistent increase in the number of Bitcoin transactions in the second half of the year.
Chart from Coinbase.com
This is obviously, for those of us who believe Bitcoin has a role and a future, good news, but it has been accompanied by a more worrying trend; a falling exchange rate. This chart from Bitcoincharts.com tells that story.
To some these two trends may seem contradictory; how can Bitcoin become more popular and more widely accepted, yet decline in value relative to the U.S. Dollar and every other currency? The answer to that question is quite simple. The merchants who accept Bitcoin in payment accept it, but don’t keep it. They immediately exchange the coins for Dollars or another fiat currency. Put more simply: they sell the Bitcoin they receive, putting increasing downward pressure on the market.
My first prediction for the coming year is that there will be the first evidence of that cycle being broken. At the pace of change that surrounds Bitcoin at the moment it seems likely that this year will see a major company that accepts Bitcoin actually decide to keep some. Most already have some currency exposure, so holding money in one more currency actually reduces the risk rather than increases it. This seemingly small change will be a huge leap forward for the virtual currency.
Once businesses begin to maintain accounts in Bitcoin, then business-to-business transactions in virtual currency become possible and at that point the advantages of the blockchain come into play; payments, including international transfers, can be made just about immediately and with minimal cost. Increasingly cost-conscious businesses will see the competitive advantage of those things.
In addition to the removal of fees, the interest on the 1-3 days that it now takes a bank to post payment will no longer be lost. It will take time, but saving money is always an incentive and once confidence begins to build, growth will be rapid. Bad news for banks, maybe, but I doubt many outside that industry will shed a tear.
Of course, for this to happen there is one prerequisite; there has to be some stability in the Bitcoin exchange rate. No business will hold a currency with enormous volatility; it makes planning virtually impossible. That is not to say that the value cannot fluctuate, it is just that it must do so in a tighter range and in a more predictable manner than is currently the case.
The last three months or so has seen BTC/USD settle into a range roughly defined by $300-$400. The longer that range persists, the better the long term prospects are for Bitcoin. An increasing number of traders, rather than increasing volatility, actually makes that more likely. Traders act on clearly defined ranges, placing orders just inside previous highs and lows. This creates support and resistance, encouraging others to do the same and naturally strengthening and narrowing the range. Stability, therefore, breeds stability.
My prediction for 2015 is essentially that volatility in Bitcoin will decrease in the first half of the year. That may happen even as the price falls into a new, lower range, but the moves will become more gradual. As that happens, business-to-business transactions denominated in Bitcoin will become more common. That, in turn, will decrease the selling pressure in the market, resulting in a gradual increase in BTC/USD in the second half of the year.
Of course, as I suggested in the opening paragraph, that could all be completely wrong. One major shock, either external or from within, would see extreme volatility return to Bitcoin. In a young market, that is always a possibility and there are no certainties when it comes to markets in general and currencies in particular. Well, almost none...Bitcoin does offer one sure thing. Whatever happens next year, debate around crypto-currencies will remain lively, intelligent and informed, and that, if nothing else, will make for a happy New Year!
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.
