What's in store for bitcoin 2014: state of the nation

Tuesday 22 July 2014

Back at the end of January, an article titled ‘What’s in store for bitcoin in 2014’ made five predictions about how the year would pan out for our favourite cryptocurrency. Since it’s now six months later, it’s time to revisit these and see the state of play – whether we’re on track, where we seem to be heading, and whether any of the predictions needs adjusting.

1. The bubble will deflate – then the price will rise again
bitcoin bubble BitScanThat’s deflate, not burst, and that won’t be the end of the story... it’s pretty clear that bitcoin currently represents a huge speculative bubble. However, just because something is overvalued at present doesn’t mean it is worthless, and it doesn’t mean it won’t one day have real value.

Right. So far, so good – sort of. Bitcoin lost around 60 percent of its value over the course of five months, not taking into account intraday highs and lows. It wasn’t a violent crash, more of a slow, prolonged downtrend – a deflation, not a pop. We bottomed out in the low $400 range and since then there’s been a nice recovery into the low $600s. If you timed it right there’s a good 40 percent profit there. (If you caught the falling knife then it’s more like 75 percent, but few did!)

What we don’t currently have is any prospect of a return to those four-figure highs, or even the $800 range just yet. Life moves fast in bitcoinland and anything can happen, but at the moment there just doesn’t seem to be the appetite for real movement upwards. Volumes on the exchanges are anaemic, a shadow of their former selves. The loss of Gox and a large part of the Chinese market account for a lot of that.

But there’s some hope for the medium term. We know that large amounts of coins are being bought off-exchange, for the precise reason that volumes are low and slippage would make purchasing a few thousand at market price impossible. The US government sold the Silk Road haul of 30,000 bitcoins at above spot price – though just how much, we may never know. So there is plenty of interest and activity, but it’s not happening on the exchanges. Supply and demand says that when those off-exchange coins dry up, there will be movement upwards. Much has been made of the potential of the Winklevoss ETF and regulated exchanges in opening new markets, though timescales are uncertain.

2. Regulation will hit it, but also help mainstream it
bitcoin banksDifferent countries [will] figure out how a thoroughly 21st century technology fits into creaking regulatory frameworks that never envisaged fast, secure money transfer outside of the control of banks and governments. Some, like China, will shut it down. Others will embrace bitcoin... Once they have a viable framework within which to understand and approach bitcoin, governments will lose much of their anxiety about it – and that can only be a good thing for businesses and users.

Right. The loss of most of the Chinese market was a serious blow. Russia has essentially banned bitcoin. Other jurisdictions have been more positive. Scandinavia is far more pro-cryptocurrency, and London has indicated its interest – though the position of the UK banks makes this harder than it needs to be. Moreover, the positioning of offshore havens like Jersey and the Isle of Man as cryptocurrency centres is encouraging. Such a move would have been unimaginable a year ago, when bitcoin was still a fringe currency, mostly used by speculators and Silk Road customers.

The US has also clarified its position, essentially considering bitcoin as property. Although this leads to unnecessary accounting complications, it means that individuals and businesses now know where they stand. The US' largest state economy, California, also recently changed the law to make bitcoin "lawful". It’s worth mentioning those Silk Road coins again: the US government has essentially put its tacit seal of approval on bitcoin, because it can hardly now legislate in a way that will make them worthless.

3. Stability will increase as people actually use it
bitcoin volatilityLinked to the first and second point is the positive reinforcement between real-world application and stability of price. To date, this has been a chicken-and-egg scenario. Not many stores took the risk of accepting bitcoin while the price was so volatile, but volatility would only calm on widespread adoption.

Wrong. Sadly, volatility shows little sign of calming. Whilst it’s true that the last few months have seen long periods of ‘stability’, these are doldrums in between sharp market movements on higher volume.

The upshot is that few stores are using bitcoins as a payment method in their own right. Dell are the latest in a list of companies that have announced they will accept bitcoin, but the reality is that they accept US dollars: bitcoin is simply the transmission mechanism. Companies like BitPay have made it easy for businesses to accept bitcoins and convert them immediately to fiat. Few accept bitcoins and keep them.

Volatility remains a serious concern for businesses. As a unit of account and a store of value (two of money’s purposes), bitcoin has some way to go. The larger volumes brought about by regulated exchanges and ETFs may help that, but we’re not there yet. If anything, exchange volumes are worse than they were six months ago.

4. Better apps and awareness will help people understand and use it
Bitcoin is still a little too technical for the person on the street, and the concept is a little too weird to explain easily. That will change as new apps and interfaces are developed to make sending money as easy and familiar as using online banking, PayPal or a credit card to buy goods over the web. By the end of the year, market penetration will be far closer to that of other money transfer services.

Right and Wrong. Again, we’ve made some progress but we’re not there yet. Adoption by merchants is increasing; popular adoption is still hampered by security concerns and a difficulty in obtaining coins. Circle has promised to make buying bitcoin fast, convenient and free – which is sorely needed at a time when your fiat deposit to an exchange can take days and come with a hefty fee. They are currently in beta, but you can request an invite. This is a space to watch. Again, regulated exchanges and ETFs will provide ways for retail investors to buy bitcoins without having to worry about their money disappearing, Gox-style. That can’t happen soon enough if confidence is going to return.

5. A challenger will arise
Google has already expressed an interest in bitcoin, whilst making it clear they’re not ready to dive in just yet. But what’s to stop them developing their own version – using all the processing power, cash and influence at their disposal? Surely they would not pass up the opportunity to lock people further into their monopoly on all things virtual (and goodness knows, the clunky Google Wallet could do with an overhaul).

Wrong. There has been plenty of innovation, and many coins offer features that bitcoin doesn’t – and perhaps never can. But none of the altcoins has come close to challenging bitcoin, thanks to its cast-iron network effect.

What about the corporate challengers that represent a greater threat, due to the resources they could throw behind their own proprietary protocols – the likes of Google, Apple and Facebook? Or the banking sector, which could learn a thing or two about saving costs and speeding up international transfers using blockchain technology?

So far, we have heard little more than a few rumours that different multinationals have expressed an interest in bitcoin-like technologies, or that they are considering developing their own solutions. But there’s very little concrete information out there. The narrative is all about openness to bitcoin itself, not about creating a rival.

Once again, it’s likely that the explanation is network effect. If the likes of Dell, Overstock and hundreds of others are using bitcoin, a company would isolate itself by creating a separate platform. Instead, it seems that something else may be going on.

Regulation is bringing bitcoin into line with existing financial institutions and ways of working. At the same time, large numbers of coins are being bought up off-exchange. Second Market and the Silk Road auction are just two examples. There is anecdotal evidence of hedge funds and other interested parties having contracts with miners to ensure a steady supply of coins.

A year ago, even six months ago, bitcoin was still something subversive and fringe – a threat to the established order. Now, it is becoming part of the established order as the government and financial sector owns an increasing proportion of it and sets the context within which it operates.

This will be met with howls of anguish from those who believed bitcoin was the answer to the injustices of our financial system. Nevertheless, it seems that if there is a challenger to bitcoin’s anarchic, subversive, libertarian incarnation of 2009-2013, then it’s bitcoin in 2014.

 

Brandon Hurst


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