Bitcoin’s Trillion Dollar Challenge

Bitcoin is all the rage.  Heralded by some as the third wave of currency, this new P2P network+currency is being hailed as a disruptive force not only to the payments space, but as an existential threat to the idea of modern government.   And currency disruption is a big deal.   There are over 3 trillion US Dollar, Euro Coin and Yen in circulation today.  While Bitcoin represents a massive economic opportunity, ranging from trading to Bitcoin mining, the market has to overcome a fundamental hurdle before it becomes a real currency – volatility.

While there is undoubtedly fluctuation in currency exchange rates, major currencies – for the most part – are relatively stable.    This stability is fundamental to the idea of any currency.   You want to know that you can purchase an iPad today, for the same amount that you can purchase it tomorrow – right?   Today, it’s not uncommon for Bitcoin’s value (versus the US dollar) to fluctuate as much as 10% in a single day.   To put this in perspective, the US Dollar vs. EURO fluctuated a little less than 3% in the last month.    This relative stability in value is critical to the future of Bitcoin.

The rate of adoption of Bitcoin as a currency will be a function of the rate of acceptance of the standard by storefronts – both on and offline.   If the currency can fall, or rise in value dramatically, it will be exceedingly difficult for stores to charge using the currency as its relative value vs. standards such as the US Dollar will be flux for consumers.  If Bitcoin continues to realize any further traction, however, there will be more flux in this marketplace before there is less.   The total value of the market today is $1.4B US and growing.   It is an imperfect market characterized by a lack of liquidity.   This will attract hedge funds and other large institutional trading firms seeking mass-scale arbitrage opportunities to move the proverbial needle financially.   And as they enter, it will be nuts.  They will try every trick in the book to monetize this market.  Pumping and dumping the currency for example, might be a huge opportunity in the short run.  Or, perhaps, we will see them start to create and trade derivatives.  These markets are not regulated so it will be no holds barred.

There will be some rocky times ahead of the Bitcoin market.  Until the volume and value of this marketplace is sufficiently large such that it tends toward a more ‘perfect market’ in the macroeconomic sense, it will be difficult for the currency to hold water in the consumer retail ecosystem.  Moreover, it’s unclear that – even with time- it will be possible for an unregulated market to survive and thrive.

With that in mind, the major geographic markets where Bitcoin can likely burst out of the gates are those characterized by instability – third world countries.   Many of these countries are going ‘mobile-first’ in terms of their web infrastructure and have significant unbanked populations.   As a result, some countries – such as Kenya – already have a 1/3 of their GDP and growing running through mobile payments platforms.

In short, all the excited venture capitalists getting ready to pour money into Bitcoin-related opportunities had better buckle their seat belts – it’s going to be a bumpy ride.


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