Posted by: Macavity
September 27, 2015
“The next step in the evolution of money”
“A de-centralized trust network”
“Power to the people”
“Lives without borders or limits”
The Currency of The Future…
The above headlines have been taken from various articles and literary publications since the creation of Bitcoin. It’s indicative of the acceptance and affinity shown by the global community, towards the arrival of a currency with global usage potential.
Were there any realistic grounds to these sentiments and speculations? Are we still as optimistic about Bitcoin’s future? And more importantly, do we have any grounds to remain optimistic?
So, let us attempt to systematically attempt to answer these questions, with the least possible amount of dreary detail.
Functions that Bitcoin needs, in order to be considered as “Money”
Generally an instrument can be classified as money if it can serve as a medium of exchange, a unit of account and a store of value.
Medium of exchange would require that the currency be accepted as a payment method. This entails that a vendor accepts the currency as payment for his valued objects knowing that others would in turn accept the currency from him.
Originally, bitcoin exchange was limited to a small amount of online sites. The use of bitcoin has, however, significantly increased and spread to mainstream vendors. There are numerous practical drawbacks and advantages to the use on bitcoin as a medium of exchange, but it is accepted as such and therefore validly meets this requirement.
A unit of account, bitcoin’s use as a unit of account is a direct derivative from the fact that it is used as a unit of exchange, i.e. because of its supply and demand in the exchange of goods it is viewed as a unit of account. Bitcoin’s market value is however extremely volatile which makes its suitability as a unit of account less than ideal. The volatility of the currency does not necessarily influence the speculative value therein, but it does have an effect on the quoted unit price that a vendor of a value object can display. To circumvent this problem, vendors usually display prices in traditional currency values and the bitcoin price is determined at the actual time of purchase.
A store of value, bitcoin serves as a store of value for speculative investment. It is traded on a daily basis on most leading global markets. As previously mentioned, the market value of bitcoin is highly volatile which is attributable to the nature by which its value is determined.
Regardless of the difficulties, whether they be practical or inherent to the currency’s nature, bitcoin does seem to meet the general requirements to be regarded as money.
The next logical step would be to determine how the value of bitcoin is measured and what motivates an increase or decrease in this value.
Factors that traditionally influence the strength or weakness of a currency
In the modern currency exchange market there are certain factors which influence a strong or weak currency. Briefly summarised the main factors are; Inflation, Interest Rates, Public debt, A Country’s Current Account, Economic and Political Stability and Employment Data.
Bitcoin is a decentralised cryptocurrency, allowing for the ability to send and receive money independent of any central authority or the need to go through an exchange, gateway or intermediary. It definitely does not take much to ascertain that factors currently used to determine traditional currency value would not assist in determining the value of bitcoin. The value of bitcoin is unaffected by the fiscal or monetary policies of any government and unlike a traditional currency it is also completely removed from the potential influences of economic and political practises and conditions.
If the factors used to establish price in the modern currency exchange market doesn’t impact the price value of bitcoin, what does then? In simple terms, only the most basic factor that has driven economics since the existence of our race, Supply & Demand. The increased acceptance of the currency among market participants and the higher demand for the currency by these participants is seen as the driving force behind the value of bitcoin.
Besides the Supply & Demand for the currency, there are a few other factors which have shown a definitive impact on the value of bitcoin.
Economic crisis, due to distrust or uncertainty in the value or future of a certain currency investors have in the past opted to move their investments to bitcoin to avoid depreciation. This results in a significant inflow of cash into bitcoin and an increased bitcoin value. A recent example of this can be found in Europe due to the uncertainty surrounding Greece and their further use of the euro currency.
Media exposure, media hype and more people partaking in bitcoin exchange has significantly contributed the value swell of the bitcoin currency.
Hoarding, as with any other currency, many holders of bitcoin hoard their bitcoin which reduces the supply and in turn increases the exchange price. An increased exchange price in most cases leads to increased media exposure which further increases the market’s participation and places further buying pressure on the market.
Government intervention, growing fear of governmental interference could lead to a declining investment in bitcoin by the market. Some of the main advantages of bitcoin are found in the fact that it is decentralised and for the most part removed from governmental influence. There has of late been certain indication that global governments are considering greater regulation of the currency.
So there we have it, right? Standard evaluation points to bitcoin’s status as the currency of the future. It meets the basic requirements and all the new requirements expected by the modern consumer. It has immense global potential.
And yet, there are certain key developments which could derail the bitcoin revolution. So before you convert your net worth to holdings in bitcoin, there are a few developments that require some close monitoring over the coming months and years. In order for bitcoin to establish itself as an emerging global currency, it will have to overcome these main teething issues.
Trust and volatility, as stated before, bitcoin is arguably one of the most volatile instruments traded on the global market. The price volatility increases distrust among many users and investors. Volatility is further exaggerated by events such as exchange meltdowns, operational failures and security breaches. The recent “flash crash” has also further added to the speculation around the currency’s ability to enter mainstream commerce.
Some experts have argued that local governments can play a role in stabilising the price volatility through methods such as technology regulation and clampdowns on fraudulent bitcoin transacting. I for one believe that increased regulation is not the fix to this problem. Increased regulatory involvement could lead to a decrease in the general public’s interest and the overall allure of the currency.
In my opinion the volatility and trust issues can be addressed by educating the market on the technology that underlies bitcoin. The innovation can’t be ignored and the actual level of security, value and growth that can be accomplished once bitcoin outgrows its infancy, is the message that needs to be cemented into market participants’ understanding.
Block size capacity and potential forking, for the past months bitcoin developers have been debating the need to increase the block size. An increased block size would allow for a higher number in transaction capability at any given moment. Although the general consensus seems to be in favour of an increased block size, key developers are at odds as to the timeframe in which such an increase should be implemented.
The main concern for the bitcoin community in this regard is the potential prospect of a “fork”, which would mean a situation where bitcoin divides into two competing versions. The “fork” currently rumoured is brought about between Bitcoin Core advocates and the developers responsible for the release of Bitcoin XT.
The circulating rumours have done no favours for bitcoin in terms of increasing stability and trust in the currency. In order for the developers of bitcoin XT to succeed in increasing the block size it will require an adoption by 75% of users by January 2016. Thus far it is estimated that approximately 7.7% of users have adopted XT. The adoption of XT does look highly unlikely within this given timeframe.
Core and XT are however compatible and both currently exist in the same blockchain. In the long term, even if the XT version is not adopted by the specified date, the debate regarding an increased block size will continue. This, as well as previously mentioned factors, will continue to undermine bitcoin stability and trust.
In summary, bitcoin has proven that it is in fact the technology on which it is built which should be viewed as the true value of the currency. There are numerous issues found in the inherent nature of bitcoin which will be addressed over time and there is no reason to doubt that they will be addressed at some point. Whether it is in the current version that we’ve gotten to know and love, or in a version yet to be created or adopted, remains to be seen.
Once globally adopted and accepted, the potential benefits of the currency are endless. Taking all into account I remain positive that bitcoin will reach its potential, its volatility will stabilise and the broader commerce markets’ trust in the currency will improve, but until such time the only certainty is that we’re in for a bumpy ride…
Wanted for everything