Jun 16, 2014

Can Bitcoin Become a Major Currency?

Source: Wikimedia Commons. Author: Web-dev-chris
With the help of innovations from entrepreneurs, it could. 
From a paper by William J. Luther & Lawrence H. White  
At present, bitcoin is held mostly as a speculative vehicle, little used to pay for goods and services. Its value has been unstable, which impedes bitcoin’s wider use as a payment medium. We explain why the value of bitcoin has been so unstable. Then, we discuss entrepreneurial efforts that might enable bitcoin to become a more commonly accepted payment medium.
The authors argue 
Bitcoin can be called a bubble in the sense that its value derives from nothing but expectations about its future value, but the same could be said of irredeemable government-launched monies. p. 1
The value of bitcoin climbed from around $13 on January 1, 2013 to a high of $1132 on November 28, 2013.3 But during the months of April and May 2014, it averaged roughly $463 with a daily closing price ranging from $363 to $530. Large daily fluctuations in value make it a dangerous way to hold the rent money that is due next week. p. 2
With a supply and demand framework in mind the authors say that the supply of bitcoin will reach a limit (it will not exceed 21 million) and they provide some calculations: "a conservative estimate for the potential range of the value of bitcoin is $0 to $98,462.5." p. 3 

When something so new arrives it takes time to be defined. With bitcoin there is the discussion of it being a currency or an investment. What we see suggests that it is both. Some big companies like Expedia or Virgin Atlantic do accept bitcoins (and bitcoins are also used in donations); but of course, accepting bitcoins is not a common practice. Howerver, as the authors claim, if bitcoin were not a currency it probably would would not be an investment either. 
To be sure, bitcoin is not evil, and it is not the only cryptocurrency in town, in fact digital currencies compete against each other. Bitcoin has been more successful than the others and its use is on the rise:
The evidence suggests that virtual currencies – Bitcoins and others - will be play an increasing role in payments system, not just in the U.S., but worldwide. According to CoinDesk, they are being used in North and South America, Europe, Africa, and Asia. The number of companies accepting Bitcoins November 2013 soared from 552 to more than 1,000. “useBitcoins.info” reported more than 2,000 businesses using Bitcoins worldwide. p. 9
Of course the expectation of enthusiasts is that more and more individuals and businesses will accept bitcoins. 

The volatility of bitcoin is obvious, and stability is good for a currency (or so we are told) but bitcoin has not had it. The authors argue that the price of bitcon is volatile because the demand is volatile. But the puzzle remains. 

The main risk Bitcoin faces is regulation, and some companies might not be happy if bitcoins gain popularity as currency (think about traditional credit-card companies, for example). 

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