The Future of Bitcoin

invest-rectangle-enBitcoin has been a roller coaster these last two years.

Rocketing up fast and then crashing down at least twice.

So what’s the future of Bitcoin?

The Future of Bitcoin

During the last few years we have seen Bitcoin thefts, Bitcoin break-ins, Bitcoin exchanges being closed. Some countries such as Thailand even banning Bitcoin completely.

Yet on the other hand there has been an increasing take up of Bitcoin by businesses.

And not just small businesses, or software, or online businesses. But also big name corporates including most notably Microsoft and Apple. More and more businesses are now accepting payments in Bitcoin.

Bitcoin hasn’t reached the price levels predicted by some people such as Max Keiser or Rick Falkvinge, founder of the Swedish Pirate Party who believed a Bitcoin price of $100,000 by 2015 was not unrealistic (makes you wonder what he must have been smoking).

So Where is Bitcoin Going?

In my opinion, to form an opinion of where Bitcoin is likely to go in the future you should not be studying price index charts, but instead you need to look at the fundamentals involved.

Partly this is because I believe in investing according to fundamentals instead of technical chartism.

But it’s also because with Bitcoin it is not “business as usual”. With an asset class like Bitcoin, charts can only tell you so much. Bitcoin is new territory, and so you need to focus on looking at the fundamentals and not the price charts.

So what are the aspects which make up Bitcoin’s fundamentals?

First there’s the infrastructure.

The Bitcoin Infrastructure

This means things such as the exchanges which enable you to buy and sell Bitcoins and move in and out of national currencies.

Also important parts of the infrastructure of Bitcoin are services such as online wallets.  Then there are the connections between the exchanges, the wallet agencies and the banks.

2013 and 2014 have in my opinion on balance been disaster years for Bitcoin, with all the exchange scandals, thefts, closures and bankruptcies.

Most notoriously there was the Mount Gox closure and bankruptcy, plus the theft or otherwise disappearance of millions of dollars worth of Bitcoins on that exchange.

All in all in my opinion, the Bitcoin infrastructure has been a mess.

Given that situation, if nothing else, 2015 can only get better. It’s hardly a positive situation. But I think it can only now improve.

Hopefully we will see more robust exchanges or at least one robust exchange emerge. Maybe an exchange established and operated by a big-name company and with more accountability.

Take Up of Bitcoin

The demand for Bitcoin depends on the level of acceptance for using the currency for transactions among consumers and businesses.

Initially, take up of Bitcoin is a “chicken and egg” situation. You need acceptance among businesses to win acceptance among the public. And vice versa.

More big name businesses, tax and government authorities and other organizations accepting Bitcoin will help increase acceptance and take-up of the currency among the public.

This take up will most likely continue to increase throughout 2015. It looks like we may be getting past the “chicken and egg” point.

Government Regulation of Bitcoin

Governments are now taking more interest in Bitcoin worldwide, with committees of inquiry being formed, tax and banking regulations being modified.

Government responses here are mixed. Some governments are pro, others hostile.

And together with government regulations…

Attitudes of Banks Towards Bitcoin

So far, banks have tended to be obstructive towards Bitcoin. Some banks have closed accounts where Bitcoin transactions to and from exchanges have been involved, or else simply refuse to permit transfers to or from Bitcoin exchanges.

There are concerns that AML or anti-money laundering laws, and KYC – “know your customer” regulations are not being properly enforced.

The banking connections to and from the Bitcoin system are an area which is crucial for the future success or failure of Bitcoin.

My view is that Bitcoin exchanges will be required to be fully compliant with government and banking regulations regarding these policies. I cannot see any way in which governments will be willing to excuse Bitcoin from these requirements.

Technical Dangers for Bitcoin

The Bitcoin world has been strewn with technical problems. Break ins, hacking, fraud, problems with digital wallets.

There is also the real risk of a so-called 51% attack.

The 51% point is where, due to the Bitcoin algorithms, any mining entity controlling more than half of the output is able to modify the blockchain. The blockchain is the self-managing node-distributed transactions ledger which contains details of all the Bitcoin payments and movements worldwide at any given time.

Once you have control over the blockchain, you theoretically have the ability to falsify transaction entries to your own advantage. This is not a good thing.

We already reached the danger point of a so-called 51% attack in the summer of 2014 when one mining pool Ghash very briefly reached the 51% point.

In the event, the Ghash pool voluntarily modified itself with some of the mining groups making up the pool quickly dropping out to reduce the mining volume of that pool.

But it shows there is a clear and ever-present danger in the way the blockchain system operates.

A 51% attack is a possibility and this has the potential to greatly unsettle the market for Bitcoin. Even if a mining pool reaches 51% control, and no fraudulent activity occurs as a result, the simple fact that it’s a possibility can be enough to unsettle the market and cause a panic and price crash and people avoiding using Bitcoin.

Alternatives to Bitcoin

What about competitor digital currencies to Bitcoin?  By the way, I prefer to call them digital currencies rather than cryptocurrencies. I don’t like the word “crypto” here. It suggests cryptic, secret, unfathomable. I don’t think it helps create acceptance among the public.

Second in popularity after Bitcoin is Litecoin. Then there is the newcomer NXT, as well as countless other currencies.  And more new currencies are popping up all the time.

There’s also Ripple, which is something different, more just a means of digital transaction.

With the exception of Litecoin I have never used any of these other currencies, nor do I follow them. There are so many small digital currencies out there and it’s too much of a jungle. For me, the king of the jungle right now is Bitcoin. It may not always remain so into the future, but for the time being it is.

I don’t really trust these smaller me-too currencies. If they prove themselves first and then see wide take-up and acceptance then it will be a different matter. But to me they are even more Wild West than Bitcoin.

And like in the days of the Wild West, there is only room in town for one or two big players. The other digital currencies will fall by the wayside.

Volatility is a Problem for Bitcoin

The price of Bitcoin is extremely volatile. It isn’t stable.

This means no business will actually set its prices in Bitcoin directly. They will only use a reference currency, such as US Dollar or Euro, with the option to pay in Bitcoin at the prevailing rate at the time of transaction.

Confidence and Sentiment Regarding Bitcoin

There’s also the issue of confidence and sentiment among the public regarding digital currency. This in turn also depends on media coverage and interest in Bitcoin – which in turn affects demand.

This is a sensitive area. Confidence and sentiment alone can easily make or break Bitcoin.

When it’s a currency we are talking about, confidence and sentiment are extremely important.

The confidence in and sentiment about a currency is really the sum total result of all the issues that impact on that currency: volatility, security, regulations, the technical infrastructure, take-up by businesses and the public in general.

So, to sum up, what will the Bitcoin price do in the future?

My Predictions for Bitcoin

In my opinion Bitcoin is just too volatile for anyone to make any meaningful predictions.

Bitcoin may go up – to say $1000 or $2000 or more.

Or Bitcoin may go down – to say $700  or even lower.

If the fundamentals for Bitcoin improve positively overall, then we can expect the Bitcoin price to rise.

If the fundamentals for Bitcoin worsen, then the Bitcoin price is more likely to languish and to continue to fall.

In other words… it all depends.

Hope that helps! 😉

Disclaimer and Disclosure

WARNING: The value of all investments can go down well as up. Always seek independent professional advice before making any investment decision. Never invest in any asset or scheme that you do not understand. Never invest more money than you can afford to lose.

DISCLOSURE: The author holds investments in currency, stocks, and Bitcoin at the time of writing this article.



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