Bitcoin’s Future: Compare and Contrast


If, as output and incomes grow, the supply of Bitcoins is unable to efficiently increase to sustain the increased volume of commerce conducted, then the exchange value of Bitcoin will always be appreciating relative to real things.  The continual appreciation will bring with it extreme bi-directional volatility as individuals come to expect continual appreciation, and attempt to speculate on it in pursuit of an investment return. Consequently, “money illusion”, the conflation of money in the mind of the user with the things that it can buy, will not be able to form.  Without “money illusion”, no one is going to be inclined to measure the commercial world in Bitcoin terms, and therefore nobody is going to be comfortable storing wealth in the currency.


Which brings us to the “death blow.”  It appears that legislators and policymakers are already a few steps ahead.  The New York State Department of Financial Services, for example, recently issued a set of proposed virtual currency regulations.  Among them:

“b) To the extent a Licensee secures, stores, holds, or maintains custody or control of Virtual Currency on behalf of another Person, such Licensee shall hold Virtual Currency of the same type and amount as that which is owed or obligated to such other Person.”

That line right there, if put into regulation, would be enough to conclusively end any hope of a Bitcoin monetary takeover.  It effectively sets a 100% reserve requirement for Bitcoin banks, and thereby makes it impossible for the supply of Bitcoin to expand in the ways that would be necessary for the cryptocurrency to displace fiat money.

This would certainly be more than just a complication on the assumption that the regulation, banking and financing norms, and the nature of Bitcoin (including its usage and purpose) remain the same in the future.

In contrast, from,

But today, in reality, the majority of Bitcoin-enabled services are basically still in the oven, in the labs, in development, or in the works. It means they will take longer to get realized. So, why should Bitcoin’s price be so high while Bitcoin-enabled services have yet to come to life? This is like having a wonderful new paradise where the blueprint and sketches are really attractive, but when you want to book your ticket, or buy some land, you realize the prices are totally out of reach, and very few people end-up going there, despite the theoretical attractiveness. Then, developers start pulling the plug on their projects because not enough prospects are coming to check out what they are building. A similar scenario was looming on the Bitcoin horizon, and thanks to the recent Bitcoin price fall, more users will be able to afford that cheap ticket into the cryptocurrency promised land.


What are the benefits of lower Bitcoin prices? For one, it gives developers some room to breathe. It gives them more time to continue developing and dreaming-up the possibilities without undue pressures on their deliveries. And two, it gives consumers a chance to start tasting the Bitcoin magic without having to fork a fortune to get into it. And these are 2 good things.

The price of Bitcoin itself shouldn’t matter in the long term, because it’s not supposed to be a speculative currency. It’s a new method for money management, money services, and all sorts of financial and non-financial transactions.

Bitcoin’s volatility is not very different than what I observe in small cap companies when their true value still evoke a lot of debate. If you are wondering where I stand on this issue, I have some tweets here that might give some clue.

The thing is, it’s difficult to picture any usage for phone apps in the 1990s when phones used to look like this:


But now in 2014, when phones look like this,


…phone apps do not sound so ridiculous after all.

To put it in another way, in terms of payment we are at the stage of Compuserve and dial-up AOL – slow and expensive with weak outside connectivity. The open internet quickly rendered these closed networks redundant. Could the payment industry be set for a similar disruption?


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