One of the things that have concerned me about bitcoin as I have become increasingly interested in the phenomenon over the last couple of years is that things were progressing too quickly. Bitcoin itself, along with the distributed ledger system that enables it, the blockchain, are drawing huge amounts of interest from entrepreneurs and financiers around the globe. In many ways that is a good thing, but in the glare of the publicity surrounding these developments it is easy to overlook one important thing: considering how revolutionary it is, bitcoin is still very young. There were signs this week though, that the little currency that could is growing up.
In the sense that it is a means of conducting online transactions, bitcoin is not young. Those have been around for a while now. PayPal and online banking with whoever controls your checking account enabled virtual transactions before bitcoin was even a twinkle in Satoshi Nakomoto’s eye. What is really still at the experimental stage, however, is the currency itself, and the concept of divisibility.
Its launch marked the first time since the general abandonment of the gold standard that there had been a currency whose production was strictly controlled and whose total issue was finite. We had become completely accustomed to an increasing money supply as the way of allowing for economic growth, so turning that model on its head was revolutionary.
The concept of divisibility was so alien that many people couldn’t grasp the idea despite its basic simplicity. Instead of issuing more coins as the global economy grew, the idea was, why not simply use smaller and smaller fractions of the existing coins? That solved the issue presented by growth while increasing the value of the existing currency of savers.
For the concept to catch on, however, bitcoin had to become more like other currencies in two ways. Firstly there had to be sufficient pioneers, early adopters if you will, to keep the currency moving around. A currency that doesn’t flow freely is better termed a commodity. Secondly, bitcoin’s relationship to existing currencies had to be defined and, to some extent, predictable.
That may seem anathema to some bitcoin purists who would love to see the currency exist completely independent of government issued money and then eventually to replace it, but allow me to explain.
I have pointed out in the past that for the use of bitcoin to really explode there will have to be at least one major corporation that not only accepts bitcoin as payment (there are plenty of those), but that also maintains a bitcoin account. The fact that, right now, every major corporation that accepts bitcoin immediately exchanges the coin for dollars or whatever hardly inspires confidence in the general public.
For that to change, the volatility that has marked bitcoin’s price until now has to be reduced. As anybody who has ever traded in a market will tell you, volatility is reduced by liquidity, so in essence, contrary to what many believe, more traders being attracted to bitcoin would be a good thing and would actually reduce volatility. It would be the first step towards greater stability, but it will not happen until the currency begins to behave in a more predictable way against conventional currencies.
That is where this week, specifically the last couple of days, give me hope that bitcoin is all grown up. The big news in forex this week was the weakness in the dollar caused by comments that suggested that the Fed may not hike rates again in March as the market expects. That caused the dollar index to do this…
And that in turn caused the Coindesk BPI to do this…
In other words, bitcoin behaved just like any other currency and strengthened against a weakening dollar. In the past that wouldn’t necessarily have been the case. Bitcoin has been so caught up in the dynamic of its own existence that it frequently forgot to behave like a “normal” currency. If this marks a real change rather than a flash in the pan then the ensuing relative stability will be a far bigger benefit to bitcoin than any number of venture capital deals.