As 2014 draws to a close I find myself not just recalling the events of the past year but also looking ahead at the year to come. 2014 was a mixed year for Bitcoin; the ongoing post Mt Gox decline has fuelled the arguments of sceptics like Warren Buffet who “warned investors to stay away from Bitcoin, calling it “a mirage,” saying that, while it may be a better way of transmitting money, the “idea that it has some huge intrinsic value is just a joke.”
On the other hand merchant acceptance of Bitcoin has gone from strength to strength. This is no longer a collection of niche enthusiasts that accept bitcoin as a political statement; we have the “Standard Bearer” of merchants, Overstock integrating Bitcoin with their online payment systems as well as Microsoft, Expedia and Dell accepting Bitcoin as a way of increasing market share and accessibility to their customers.
There can be no doubt that Bitcoin is rapidly becoming an accepted form of transaction processing but where does it go from here? Most merchants who “accept” bitcoin do so in the same way a US company might “accept” EUR or GBP as a way to attract additional business. The transaction immediately converted into the base currency of the merchant. While this is a good first step towards the general acceptance of Bitcoins into the mainstream, we need to go further.
2015 needs to be the year that Bitcoin becomes more than just a transactional currency that is converted immediately into fiat to avoid value fluctuation risk. People and merchants need to have the confidence and ultimately a reason to hold onto their Bitcoins; and that reason shouldn’t be the hope of the value going up (nice as that is).
So what is needed to help Bitcoin make that leap from Transactional Currency to Investment Currency? Here are my 2015 predictions of the new developments we are likely to see over the next year.
- Deposit Capabilities. Holders of Bitcoins need the facility to place their bitcoins on deposit and get a secure return on that deposit in the same way holders of traditional currencies can deposit their cash in a savings account and receive interest on that deposit. (Low at the moment, but still a return).
- Investment capabilities. Holders of bitcoin need institutions where they can choose to invest their money in instruments or assets that carry a higher return than bank deposits, though obviously these investments will carry a proportionally greater risk. This is not exactly a prediction as these opportunities do exist though they are currently few and far between. But the facility to invest Bitcoins for a return needs to expand to include a range of opportunities that will suit the tastes of various investors. When the ability to invest Bitcoins exists, holders are less likely to run for the exit at the first sign of trouble.
- Bitcoin denominated Bonds. While there have been sporadic attempts to launch various “Bitcoin Bonds” they have been limited in scope and appeal. We need, as a community, to establish a viable framework where companies can issue bonds denominated in bitcoin (and interest repaid in bitcoin). For this to be successful there needs to be a viable aftermarket where bonds can be traded so holders are not tied in for the full term of the loan.
- The publication of the Bitcoin interest rate curve drawn from multiple sources so it can be used as a reference to structure deals and issues.
Many members of the Bitcoin community still see these developments as the unnecessary intrusion of traditional financial doctrine into the world of digital currency – I would frame it differently. Without these developments Bitcoin will never evolve into a method of exchange, fully independent of Fiat currency.
Having the majority of transactions undertaken in Bitcoins immediately swept into Fiat currency becomes a self-fulfilling prophecy that keeps bitcoins transfixed at the ‘tool’ stage; a low cost way to affect transactions that circumvents expensive bank charges – but not a true currency.
Only when companies can securely invest surplus digital capital and raise funds in bitcoins will people see a reason to hold their wealth in Bitcoins. Then we will see Bitcoin take its place as a genuine independent Investment Currency alongside Government controlled Sovereign Currencies.
So will the community take that leap and develop the infrastructure needed to take Bitcoins to the next level?
First, we need to move away from the simple “exchange” model as the only way of generating profit from Bitcoin investment. Speculators are a necessary part of the financial eco-system but this should only form a small part of the overall picture. Other opportunities need to be made available so holders of bitcoin can generate a return without rapidly moving in and out of the currency, promoting volatility and short holding periods. We should be encouraging longer term holding and stability rather than aggressive speculation.
Second; we need companies involved in the bitcoin finance industry to come together and develop a framework that will give customers the assurance they need that they can safely invest their capital – this is not a call for external regulation, on the contrary, the shambles left by the mainstream financial industry over the last five years is ample demonstration that external regulation is not the answer. It would be far better if we could transform the idealism of the Bitcoin community into a self-regulatory framework focused on long-term profitability, not just a quick grab at short-term profits. If this can be achieved it will put us in a good position to maintain only “light touch” controls from regulators.
Third; companies that are serious about moving Bitcoin forward from a transaction currency to an investment currency need to start working together to provide investors with a consistent point of comparison. Not everything is a zero-sum game; by co-operating and offering standard benchmarks we can start to build confidence in the marketplace and allow customers to make informed decisions between the products on offer.
At First Global Credit we have started discussions with a number of partners about how we can merge services to provide something of more value to our combined customer base and provide consistent benchmarking and security. While we may miss out on some potential in the short term we believe this will grow the overall size of the market and benefit everyone in the community as standards are adopted.
One thing we can all be sure of, 2015 will see dramatic developments in the Bitcoin marketplace; some great innovations will be introduced and further progress made. I am passionate about the potential of Bitcoin, but my belief is that for that potential to be realized Bitcoin must become more than a mechanism of trade, it must become an investment currency. I am equally sure that this is not something any single company can bring about on its own – Bitcoin financial service companies need to start working together for the good of the overall Bitcoin community and the security of their customer’s investments.
Have a great 2015.
CEO First Global Credit