An accurate estimate of where the value of Bitcoin will be a year would be difficult, but one thing is fairly certain; Bitcoin is not going anywhere.
Before discussing Bitcoin as a currency, it is critical to first define what currency is:
1. Money in any form when in actual use as a medium of exchange.
2. Transmission from person to person as a medium of exchange.
Any clearly identifiable object of value that is generally accepted as a payment for goods, services or repayment of debts.
Throughout history, there have been many forms of currency. Gold and Silver are the most common examples, but they aren’t the only ones. Roman Soldiers were paid in salt (the word salary is derived from the Latin word salarium or ‘salt money’) The bottom line, however, is that money was a more efficient means of purchasing than the original system of bartering.
So why would anyone accept Bitcoin as money?
To understand why Bitcoin is accepted as having value, you need to understand why a dollar has value. The original forms of currency had some intrinsic value beyond their use as a coin. Salt was valuable because it could be used to preserve meat, while the use of gold and silver for jewelry was a great sign of wealth. Iron coins could be melted down and turned into a sword or armor. A US Dollar theoretically at one point in our history could be turned in for a $1 worth of gold. That was called the Gold Standard.
Once the US Dollar (and many other currencies) went off the gold standard, its value simply became what people thought it was. That’s right. The paper dollar bill has no actual value. Being backed by the “full faith and credit of the United States” just means that people are hoping the US government doesn’t allow hyperinflation by printing too much money and that the US Treasury creates currency that is very difficult or impossible to counterfeit. You can’t turn in a bunch of USD and ask the USA to give you some Tanks or Ships or some other assets of the Federal Government. Dollars are only worth what people and countries are willing to give for them.
The concept of Cryptocurrency has been around since the 1990’s after Al Gore invented the internet, but it really didn’t gain attention and effort until after the 2008 Financial crisis. Many blamed the big banks and institutions as being the cause for the crises. Groups of individuals called “Cypherpunks” began looking for serious alternatives that would exist outside the same rules and regulations that were believed to have caused the crash in the first place.
And this is where Bitcoin comes in:
1. No Hyperinflation
As of this article, there are approximately 16,800,000 Bitcoin’s in circulation. Bitcoin was created to have a cap of 21,000,000. Unlike governments, Bitcoin will not “print money” to get out of debt. Contrast this with the example of Robert Mugabe, a leftist dictator in Zimbabwe, who started printing money to fund his regime in the 1990’s. Below is a chart of the inflation caused by the Zimbabwe government.
Bitcoin is a currency. It is not attached to any government or political ideology. Ask yourself this question: Would you rather have Bitcoin or the Venezuelan Bolivar? If Greece goes back to the Drachma, would you feel safer with that or with a Bitcoin?
2. Distributed Ledger
Without getting too much into the technical aspects of Bitcoin, one point is important to understand. There is no central location for all the Bitcoin transactions. What made Bitcoin different than other currencies is that it uses a blockchain which means that the ledger (or record for transactions) is spread out all over the world and across thousands of computers. The end result is that unlike a large bank or retail outlet, Bitcoin cannot become the victim of a single hack. Network nodes verify and record a transaction which everyone can see. What is not visible is the entity on each side of the transaction.
3. Regulation can only go so far
Most of the regulations that have been created to “control” Bitcoin have centered on the exchanges that people use to convert conventional currency to Bitcoins. While this can have an impact on its exchange, it can never be taken out of circulation. There is no government that owns Bitcoin nor is there an individual who has control over it. Fun fact: The inventor of Bitcoin, Satoshi Nakamoto, has never been found.
4. Bitcoin is business friendly
The software for payments is much easier to use and less expensive then a conventional POS (point of sale) system. Credit Card information does not need to be stored and therefore cannot be hacked (no PCI compliance issues). But most of all, no consumer chargebacks. All transactions are final.
Current Uses for Bitcoin and Limitations
Overstock.com, Microsoft, Dish Network, Expedia.com, are all just some examples of companies that now accept Bitcoin. But that doesn’t mean everyone should jump on the internet, grab a credit card and start their journey into the world of cryptocurrencies.
- Transactions can take a long time to validate through the distributed ledger.
- There are no consumer protections. If you make a purchase using your American Express card and the vendor is fraudulent, you can call Amex and they can reverse the charge. With the anonymity of Bitcoin, that does not exist. All transactions are final.
- The price of Bitcoin is volatile when compared to the world’s major conventional currencies.
- Currently, the user needs to have an above average technical savviness to protect their Bitcoins.
One of the major problems that Bitcoin is having is financial people are being asked to explain a concept that is basically an Economic one. Economics makes understanding Bitcoin easy, but most financial professionals do not have an Economics background, they have a financial one. The question that I hear most often asked about Bitcoin by financial professionals:
Q: How does Bitcoin make money?
A: It doesn’t…
… It is money.
To date, there are no initial coin offerings that have been registered with the SEC andthe SEC also has not approved listing and trading any exchange-traded products(such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. There is substantially less investor protection than in our traditional securitiesmarkets. Unlike traditional currencies such as the USD, there is no governmentbacking or protection. Due to the anonymous nature of transactions, there are more opportunities for fraudand manipulation. Price swings can be substantial and quick, which pose an inherently greater risk ofloss to investors. Liquidity is not guaranteed! Once purchased, there is no assurance that you will beable to convert your cryptocurrency to cash. There are risks of cyberattacks and hacks, which could disrupt markets and cause aloss in value.