In its short history of 6 years, Bitcoin has become a lot of things. It is “currency” for some, “digital gold/commodity” for others, and a “protocol” for some others. And all possible combinations of these as well. Now, it seems like the government too is unable to make up its mind about what exactly Bitcoin is, as various regulatory agencies seek the power to control and regulate Bitcoin and the ecosystem of companies around it. In the latest news reported by Bloomberg, the CFTC has claimed jurisdiction over Bitcoin.
The Commodity Futures Trading Commission, or CFTC, believes that Bitcoin is a commodity and should therefore be regulated by it. This isn’t very surprising, since the CFTC has already said in the past that it is looking towards regulating Bitcoin and the emerging financial ecosystem around it. Last year, the CFTC held open talks about Bitcoin, calling in industry experts to testify, and understand the nature of Bitcoin. The results were largely positive for Bitcoin, and the CFTC seems determined not to take a ‘stifle the innovation with excessive regulation’ approach that some other government agencies seem to take.
Still, this is new battleground, since Bitcoin is not really a commodity in the traditional sense, and is definitely a currency in many respects as well. The IRS famously ruled that Bitcoin is property, not a commodity or currency, and treats it as such for tax purposes. Still other branches of the government have ruled that Bitcoin is currency, like this federal judge who ruled in the infamous ponzi scheme of Bitcoin Savings Trust.
It doesn’t seem like these dilemmas will be resolved anytime soon, especially with the changes to Bitcoin that happen at a dynamic rate, such as the addition of multi-signature wallets, that upend the notion of custody on its head. There are state-level laws that are seeking to clarify these issues, with advocacy groups like Coin Center pushing for friendlier regulation that can let the startups thrive. However, it’s a tricky and challenging issue for lawmakers and others.
The waters are going to be muddied even more when Bitcoin, as a protocol, will be used as a ‘token’ system for other assets, like NASDAQ’s recent venture into the private share markets for non-public companies, using a colored-coin protocol to keeping track of these securities on Bitcoin. Now, the same Bitcoins could potentially be treated very differently by different agencies.
It will be interesting to see where and how this debate resolves. No agency would really like to give up its perceived power over Bitcoin, after all.
The last year has been a strange one for currency alternatives in investment. Often viewed as safe havens to simply holding onto currency, alternatives such as precious metals, Bitcoins, and various other commodities tend to operate with a somewhat inverse relationship to the world’s most influential economies. This is naturally a very broad statement and isn’t true at all times, or in strict detail but the concept is generally accepted, and BTC Geek covered it briefly back in December. As the U.S. dollar or the Euro struggles, investors look for more stable alternatives to basic currency, and many will buy stockpiles of resources with universally set prices, which are not quite as impacted by economic downswings.
For the better part of a decade, this meant that resources like gold and silver were pretty reliable. In its early days, Bitcoin may have caught the tail end of that wave with its initial spike in price in the latter half of 2013. But in the past year, a rebounding U.S. economy seems to have shaken up the picture. And in the process, the similarity between Bitcoin and precious metal, from an investor standpoint, has been cast in an interesting light. Basically, since January 2014, both Bitcoin and gold have faced significant drop-offs in price. While they hit their respective lows at different times, the general trend looks similar.
And frankly, this is a comparison we should all have been making more often. The similarities between Bitcoin and gold begin with the simple concept of each as a highly valued currency alternative. Although, Bitcoin differs in that it operates with a predetermined finite supply, while gold (though ultimately finite) is still being mined. But they also extend to how each resource is acquired. Just as Bitcoin can be bought or acquired online, gold now operates primarily at independent websites, to the point that it almost feels like its own version of digital currency. BullionVault, an online marketplace that deals with massive quantities of metal from around the world, demonstrates how this happens in that it stores gold in vaults without investors ever having to see it. To be clear, you have the option of withdrawing gold in physical form, but those who prefer simplicity can buy, store, and sell just as they might any given stock or, to the point, Bitcoins.
Taking things beyond simple acquisition and storage to the actual purpose of investment, Forbes contributor Michael Lingenheld also made the valid point that both Bitcoin and gold can help private investors to get around various risks and controls associated with ordinary banking. The most severe example was the possibility that a government can actually legally confiscate personal savings kept in a bank, whereas no such risk exists with digital currency or precious metal kept in a vault. While this example probably sounds dramatic, it does symbolize the very real uneasiness with which many view ordinary banks, and it’s this apprehension that can make currency alternatives appealing.
Where the two options differ greatly is in their respective futures. Bitcoin has the significant differentiating factor of being accepted as on-the-spot currency in an increasing number of venues and online stores, which in ways makes it a currency of its own, as opposed to an alternative resource. Whether this is an advantage or disadvantage remains to be seen. But for now, the similarities between the two go beyond the pricing charts. Gold and Bitcoin currently have similar purposes, similar methods, and even some similar trends.
This is a guest post by Max Crawford. Max is a private investor and freelance writer who contributes content relating to financial strategy, savings, and market trends.
As of this writing version 0.10 of Bitcoin has just been released. The network in Gavin’s words is now ‘over secure’. Over 50 exchanges have propped around the world since the demise of Mt. Gox and there are now over 10,000 projects in Github that reference Bitcoin in their implementation.
However, the primary use case so far has been Bitcoin’s value in relation to FIAT. i.e, Bitcoin is being used as a currency or its replacement.
If you have been following the developments with higher level meta protocols like Mastercoin (now called OMNI), CounterParty and Colored Coins, and as these protocols start to mature, we will start seeing a lot of non-currency uses of the protocol. In fact, when Bitcoin’s chief scientist was asked on his Reddit AMA a few months ago what he was most excited about in Bitcoin development? His answer, “non-currency uses of the blockchain’s ledger-ordering ability.”
So, here is one such non-currency use case:
Coupons
“Do you accept Bitcoin?” This is a standard question that many of us die-hard Bitcoiners tend to ask when shopping.
Even for the merchants that do show an interest in it, explaining what Bitcoin is, is not that easy, especially when there is a line behind you at the cash register.
“Do you accept these coupons?” — that on the other hand is a no-brainer.
Groupon’s success has shown just how viable this market is. Groupon, and other services like it, issue coupons on behalf of small merchants and besides doing the promotion and marketing, such services guarantee that
the purchased coupon won’t get counterfeited, and
the customer won’t spend the same coupon again (double-spending).
In return Groupon get’s to keep up to 50% of the revenues from the sales of such coupons.
In some surveys, up to 40% of Groupon’s customers don’t intend to use that service again. Primarily because they can’t manage the surges such promotions generate and the high costs don’t make it profitable.
These problems can now be tackled by Bitcoin’s blockchain much more efficiently.
Merchants can issue their own coupons on the Block chain and are much more in control of the quantity they issue and therefore how much they are able to redeem back. Since the issuers are directly in control of issuance, they can fine tailor the surges their promotions generate.
And what’s even better, the issuers keep 100% of the proceeds from their coupons. Groupon and services like it are completely dis-intermediated from this. The only cost to issuers would be the issuance of such coupons on the Blockchain and the transaction fees of the network. And in a future article, I hope to elaborate how these costs are negligible.
These factors alone make building coupons on the block chain an excellent value proposition. However, this is just a tip of the iceberg in the benefits realized from such an endeavor. In Part-2 of this series, I’ll introduce the idea of creating contracts between coupons, coupling coupons; that exponentially increase the value proposition of issuing coupons over the Block chain.
I don’t like dwelling on the price of Bitcoin, whichever way it finds its fancy. There are more important projects that, in the longer term, would determine the success of Bitcoin. However, since there has been quite a ‘panic’ in the markets, here are my thoughts on this:
We’ve been here before. No two bubbles/busts are the same, but seriously, this shouldn’t be news to anyone that Bitcoin can have wild swings. And by wild, I mean the kind of volatility that the stock market has in a year, we see that in the Bitcoin markets in a day.
Almost half a billion dollars has been invested in Bitcoin startups by venture capitalists. That means, the combined valuation of all Bitcoin startups is close to 3-4 billion dollars, conservatively (based on ~10% equity in a seed round – I understand valuation is far more complex) or about the market capitalization of Bitcoin right now. If push comes to shove, they will need to hold up their business and therefore need to support the price, to some extent at least.
Bitcoin ecosystem has never been at a stronger position than it is today, from adoption, perception and regulatory points of view.
Bitcoin isn’t going anywhere.
In short, stop panicking. Also, there’s nothing to see here. It’s a replay of a movie we’ve seen several times in the past. As they say, history doesn’t repeat but it rhymes. That’s my two cents on the recent Bitcoin price events.
Bitcoin’s price has been falling again as it enters a more serious bear market. The price has fallen more than 40% in the last 30 days and almost 10% in the last 2 days. Let’s take a look at some of the factors that are causing a price drop and what it would take to reverse this.
Bitcoin Mining
Contrary to the popular claims, Bitcoin isn’t deflationary, but in fact, has a significant inflation right now. It will become deflationary around 2140 when all the 21 million Bitcoins would have been mined. For now, the supply of Bitcoins is constantly on the rise through mining rewards. Justified or not, mining will always exert a downward pressure on Bitcoin’s price, as miners need to sell their Bitcoin to recoup their initial hardware investments.
It’s easy to do the math: currently, the mining rewards are 25 Bitcoins per block, with a block produced every 10 minutes, approximately. This means 25 Bitcoins every 10 minutes, 150 Bitcoins every hour or 3600 Bitcoins per day. This is a total of 1314000 Bitcoins every year! That’s a significant amount of inflation, and has been going on for quite some time already. At the current market price of around $300/Bitcoin, that’s a whopping $394 million!
The immediate catalyst is going to be around August 2016 when Bitcoin mining rewards halve. You can track this date with Bitcoin Clock if you wish. The current estimate is August 2016. Since it takes ASICs a significant time to provide a return on investment now, I anticipate an upward price pressure several months before this date, but it is still almost a year away.
Since the last block reward halving back in 2012, the network difficulty has continued on an exponentially increasing curve. It is hard to predict the effect of this significant date on mining (we might even see a drop in mining difficulty, something that has been very rare in Bitcoin’s 5 year history) but it is very likely to push up the price.
Silicon Valley Investments
Silicon valley has poured a lot of money into Bitcoin startups, almost being reminiscent of the 90s when a lot of money was poured into internet companies. Even though the ensuing bubble burst, it was healthy for the internet as a whole. More than $250 million has been poured into technology startups by venture capital funding. Even if a lot of them go bust and don’t live up to the hype, the few that end up surviving will become central to the growth of Bitcoin and the Bitcoin ecosystem.
It usually takes startups anywhere from 5 to 10 years to mature into serious companies, so this will have a longer term impact on Bitcoin and its adoption throughout the world. As these companies mature, they will take on the burden of promoting Bitcoin to a wider user base and should help in pushing the price of Bitcoin up as well. At this stage, the price of Bitcoin doesn’t seem to reflect the potential of these companies.
Merchant Adoption
Merchant Adoption is a double edged sword which helps Bitcoin grow in the long term but in the short term, exerts a significant downward pressure on the prices, as more and more merchants sell Bitcoin in the open market and convert them into fiat through payment processors like BitPay, Coinbase and GoCoin. Some companies like Overstock have promised to keep a part of their Bitcoin revenues in Bitcoin and not convert to fiat, while many merchants just look at Bitcoin as an easy way to gain some publicity.
In the longer term though, if Bitcoin becomes more mainstream, it could generate economic activity without being converted into fiat at all. The holy grail of course is to have an end-to-end economy operating completely within the Bitcoin ecosystem. This might take more time, but as more and more companies start accepting Bitcoin, more of them might like to keep a part of their revenue in Bitcoin and use it to do business with another entity that also accepts Bitcoin.
For instance, Bitcoin payroll is a promising use of a firm’s Bitcoin revenues. Employees have several reasons to get paid in Bitcoin, from investment to speculation to curiosity to financial privacy. They will be less likely to convert their Bitcoin immediately to fiat, as if that’s what their intention was, they wouldn’t ask to be paid in Bitcoin in the first place.
Merchant adoption gives Bitcoin legitimacy in the eyes of mainstream customers and is needed for the long term health of Bitcoin and cryptocurrencies.
Wall Street Involvement
There has been a lot of talk of Wall Street getting seriously involved in Bitcoin but only a few companies are even taking Bitcoin seriously at this stage. There are too many questions surrounding Bitcoin to the establishment of financial industry and they are unlikely to jump onboard anytime soon. However, that could change in a few years as they understand the cryptocurrency better.
Any Bitcoin financial instruments will be interesting to watch, and I think the Bitcoin ETF will be a significant price catalyst if it gets approved. In addition, an ETF will give other financial institutions an incentive to buy and trade in Bitcoin. The market potential with Wall Street is huge, but there remain many uncertainties as well, including regulatory.
Wild Cards
There are a few wild card events that could push Bitcoin’s price up. By their very nature, these events are hard to predict, but they are the low probability high impact events. I’ll touch on a few of them briefly.
Financial crisis: Another financial crisis is possible, or just a market crash/correction. It’s hard to predict the how it might impact Bitcoin, but it seems to be positive.
Hyperinflation: If some country experiences hyperinflation, Bitcoin can provide an substitute to be used as money.
Autonomous Blockchain Entities: Software entities that exist completely on the blockchain might provide useful economic activity that would provide a Bitcoin only economic zone (See Dawn of Autonomous Corporations).
Gone are the days when everyone in the Bitcoin community cheered whenever a new business started accepting Bitcoin. Today, there are tens of thousands of businesses all over the world that accept Bitcoin, and through gift cards and third party re-sellers, you can pretty much shop anywhere through your Bitcoin.
And why wouldn’t businesses accept Bitcoin? It offers lower fee solutions, no chargebacks, free publicity and a USP to sell to. It wouldn’t be surprising if the largest consumer businesses on the planet started accepting Bitcoin within the next few years – after all, they have absolutely nothing to lose and potentially something to gain (higher margins, especially in the retail industry).
The real challenge for Bitcoin to truly succeed as a currency though is consumer adoption. Not people within the community who currently use and evangelize Bitcoin, but the ordinary people who couldn’t care two hoots about how they pay for things. Why would someone want to use Bitcoin instead of just swiping their credit card, which takes as little effort as is humanly possible without Google glass? There are several reasons why consumers might want to go out of their way to use Bitcoin instead of credit cards –
Merchant Discounts: Now that merchants have tasted the sweet sweet paradise of no fee, no chargeback world, why would they not go one step further and encourage their customers to use Bitcoin? Merchants can end up saving significant bucks in the process (Charlie Shrem mentioned his EVR bar loses about 10% in chargebacks. That’s huge). Already, long-time Bitcoin merchants like Gyft give discounts on Bitcoin purchases. More merchants should jump on the bandwagon, and consumers can end up saving money when they pay with Bitcoin rather than through their credit cards.
International Travelers’ Heaven: The international tourism industry’s export earnings in 2014 reached $1.4 trillion. That’s a lot of currency exchange going on, with an average cost of anywhere from 3%-7% depending on the currencies involved. This is a huge inefficiency in the current financial system. Bitcoin solves this problem hands down, and doesn’t care about where in the world you live. As Bitcoin grows in popularity, international travels would be wise to travel with Bitcoin instead of cash, which is safer, more secure and cheaper.
Financial Privacy: This isn’t the biggest concern on people’s minds today, but it might be in the future, as big data grows and privacy becomes increasingly important to people. We are already seeing developments in Europe that value privacy above profits. As citizens of the world grow more aware, they would want better financial privacy tools, like cash. Bitcoin is the closest they can get in this regard. In addition to everyday purchases, privacy related to industries that are generally delegated to the ‘shameful’ category in society, like porn, can greatly benefit from using a currency like Bitcoin as consumers will be more likely to spend money when that spending is private.
These are just some of the ideas through which consumer adoption for Bitcoin will increase in due course of time. Know of any other?
What are some long term cryptocurrency investments? This is an important question because there are so many cryptocurrencies that are overnight pumps and dumps. So many of them have seen a return of over 1000% in a period of a couple of days, only to slump more than 90% in the subsequent days and weeks. It is a very volatile environment for people who think more long-term and want to steer clear of such pumps and dumps. Many in the community who are new lack the resources to learn everything about the markets and their history, and end up getting burned. So if you’re a long term cryptocurrency investor, what should you do? Where should you invest? This article is meant for those among us who see the potential in Bitcoin and cryptocurrencies in general but don’t know how to ‘diversify our portfolio’ so to speak, into the best ideas. Not every one of them needs to be a success – even if a small portion of them go on to become successful, the overall portfolio can perform very well. However, choosing these can be very challenging because of the immense amount of speculation that is rife in this space. Cutting through this noise and getting back to basics is hard but possible. I’ll give a few promising altcoins in the end, but first lets take a look at what makes a cryptocurrency successful.
Innovation: Bitcoin introduced the world to cryptocurrencies and the possibilities that lie within. It is open source and anyone can essentially clone the project and create their own version of ‘Bitcoin’, so to speak. Altcoins need some kind of innovation to distinguish themselves from the crowd. In most cases of success, the innovation is technical, from Litecoin to NXT. However, cryptocurrencies like Dogecoin have shown that sometimes this factor can be overriden by stronger forces, and innovation can always be social.
Community: Bitcoin, by far the largest and most popular cryptocurrency itself is a highly niche product with fewer than a million people even having a Bitcoin wallet. This means the community is very small, and it’s important for successful cryptocurrencies to capture the community’s interest. Perhaps the best example is Dogecoin which has seen a sustained success and has been in the top 10 cryptocurrencies by market cap almost throughout since launch. Almost the entire success of Dogecoin is based on the community (it’s just a Litecoin clone and doesn’t bring any technical innovation to the table). The predict the success of a cryptocurrency long term, look at the community around it.
Ecosystem: By ecosystem I mean all the ancillary products and services around the cryptocurrency. This can be a tough sell at times, because it is hard to predict what feature will be successful before trying. Blackcoin recently has done well on this front, from having a marketplace to being added on coinkite to the Blackcoin card.
Future Promise: Investments are forward looking. There is a lot of promise in ideas, and if they succeed, long term cryptocurrency investments can really pay off, considering it is so early in the game right now. Ideas like Protoshares held a lot of value for a long time just based on the future promise (which unfortunately hasn’t delivered anything yet).
I am providing a list of few coins that might interest you. DO NOT TAKE THIS AS INVESTMENT ADVICE. Instead, do your own research – this is just a starting point of information that you might or might not use. Long term cryptocurrency investments are very hard to predict by anyone, so don’t invest more than you can afford to lose.
Bitcoin – the first and most popular cryptocurrency with the largest community and development effort that started it all off. If there’s just one cryptocurrency you want to invest in for the long term, let it be this. Risks around centralization of mining, changes to the protocol based on the core-developer community, government intervention, etc.
Litecoin – the first successful ‘altcoin’ that uses a different mining algorithm Scrypt. Marketed as silver to Bitcoin’s gold. Most altcoin clones are started from Litecoin’s code base. Has been at the second position for a very long time, and a good diversification mechanism. Risks are that there are too many clones using the same concept, and there’s nothing special left in Litecoin anymore. In addition, mining can be an issue (e.g. Dogecoin exceeded Litecoin’s hashpower which makes it insecure) with respect to security of network.
Dogecoin – the dark horse of cryptocurrencies that succeeded despite all odds stacked against it. What started as a joke currency is now on national news from charity funding to funding people to the Olympics to Nascar drivers. The community is incredibly friendly to newbies and has a whole tipping culture built around it and might even become the defacto internet-tipping mechanism (Bitcoin has high transaction fees for this to work at Dogecoin’s scale). Risks are that there is no technical innovation in this coin and the community seems reluctant to experiment on this front too (e.g. they rejected Litecoin’s idea of merged mining to secure both their blockchains).
Peercoin – the first proof of stake cryptocurrency that introduced this idea. Risks include a bunch of clones, and proof of stake seems to be in vogue now among coin developers.
Namecoin – the first decentralized DNS system that can be used for other things as well. It is a favorite among developers and has a lot of potential to be integrated into the modern internet. Risks include creation of clones and easy access to Namecoin-based sites.
NXT – the first non-Bitcoin clone cryptocurrency to gain popularity as a 100% proof of stake and has lots of interesting features implemented, the latest being an asset exchange on the NXT network which is a big deal to achieve. Risks include community perception around unfair initial distribution and unproven longer-term reliability and robustness of the network/system.
Bitshares (renamed from Protoshares) – created the idea of profitable DACs and protoshares are supposed to give you a cut in each one of them. The idea gained a lot of popularity with their idea of a decentralized bank, called bitshares x and other project ideas in the pipeline. They have funding of millions of dollars from the community to accomplish their vision. Risks are that Invictus, the company behind bitshares has missed every single deadline it has set for itself without exception and still has no DAC in the marketplace yet. It’s hard to predict the success of the concept and whether it will work without a working prototype.
Other promising coins with technical innovation – MaidSafeCoin, Mastercoin, Counterparty, Darkcoin, ShareCoin
Other promising altcoins with a nice community – Blackcoin, Noblecoin
Proof of stake coins (reduced incentive to trade instead of holding) – HoboNickels, Mintcoin
