What's in store for bitcoin in 2014?

Friday 31 January 2014

Whether they like it or loathe it, everyone who knows anything about bitcoin agrees that 2014 will be a make-or-break year for the cryptocurrency. Seeing as how we’re just about still in January, I figure this is the last time I can get away with making a few predictions for the rest of the year – with a month of hindsight to get me started.

All of these deserve a post of their own, and I’ll hopefully be unpacking some of them in more depth in the weeks and months to come. For now, here are five of the top things I’ll be looking out for in 2014. Of course, it’s in the nature of nailing your colours to the mast that you could be proved wrong in short order – so if you disagree with any and want to put it on record before that happens, get in touch or tweet us (@bitscanner).

1. The bubble will deflate – then the price will rise again
That’s deflate, not burst, and that won’t be the end of the story. Using the logic of ‘if it looks like a duck, walks like a duck and quacks like a duck, it’s probably a duck’, I think 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. Allow me to explain...

We know from ad nauseam media warnings that speculators pushed the price of bitcoin through the roof in 2013. Since the end of last year, the price has gently been falling overall, with the occasional temporary sharp dip and recovery when particular headlines hit it. (The trend is easier to spot on Bitstamp, where it’s easier to shift cash in and out than MtGox and so prices aren’t distorted.) By definition, that means there are more people selling than buying. For one reason or another, many speculators are getting out. That means the price is getting closer to the uninflated ‘real’ one. As the year progresses and proportionally more and more people invest in bitcoin as a medium of exchange rather than an instrument of speculation, I’d expect that to rise again.

2. Regulation will hit it, but also help mainstream it
We’ve already seen the impact of regulation from China, Scandinavia and the US, amongst others, and there will be more to come as different countries 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.

My assumption is that there’s no such thing as bad news. In the same way that every negative headline last year only served to push bitcoin further into the public consciousness, so governments being forced to think about how to deal with it now only brings it further into the public eye. It’s the maxim of ‘What doesn’t kill me makes me stronger’. 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.

3. Stability will increase as people actually use it
Linked 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. We’re now seeing the end of that vicious cycle – witness the volume of bitcoin-accepting businesses registered on Bitscan alone. Clearer regulation and public acceptance of the cryptocurrency facilitate a virtuous cycle, where the price of bitcoin is more closely linked to its intrinsic worth.

4. Better apps and awareness will help people understand and use it
Bitcoin is still the preserve of the few (just how few is a topic I plan to explore next week). It’s 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. That will likely be driven by some big players who are prescient enough to know an opportunity when they see it. Overstock has paved the way – will Amazon or eBay be next? There are few things I can think of that would raise bitcoin’s profile more than integrating it with one of these leviathons of the web. But herein, I believe, lies a real problem - hence prediction no. 5.

5. A challenger will arise
Not to sound (too) apocalyptic, but going mainstream will be the biggest threat to bitcoin. Why? Because widespread public awareness and use opens the door to a real challenger. I don’t mean Litecoin, Dogecoin or any one of the 70-odd cryptocurrencies built on roughly similar open source technology to date.

Rather, it will be the big corporates that can’t resist getting in on the action. And why wouldn’t they? 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).

Or how about Facebook? The value of users mining ‘Facebucks’ to make in-app purchases can’t have escaped them – again, locking them further into their platform in their continuing quest for market share. Naturally, any of these big hitters who release their own cryptocurrencies into the wild can be expected to create and retain a large slab of it for themselves.

Will they be successful? To some extent, yes: when you have the money and clout of these giants, even your worst ideas gain some traction. But look at the likes of Google+, which struggled hard to carve out the space it now occupies. The existing social networks were too well established to displace, let alone topple. And bitcoin has a serious head-start, with a lot of people investing a lot of time, money and intellectual property in making sure it succeeds. There are reasons for optimism as well as caution.

To conclude: 2014 will be rocky at times for bitcoin - but it will also be an exciting, coming-of-age year. By the end of it, bitcoin will have gained adoption and acceptance beyond anything that seemed possible even 12 months ago. Verdict: there’s everything to play for.

 

By Brandon Hurst


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