In 2012 Bitcoin entered the mainstream like Kanye at a New York Fashion show: everyone noticed, but nobody really knew what they were looking at.
Since then, the mainstream media has tried to quantify Bitcoin’s value and quote the price of the token as an indicator. The problem is that Bitcoin is unlike anything we've ever seen before and looking at the value of the token doesn't really tell us anything. We need to correct this logic and look at the underlying ecosystem for answers.
Bitcoin is not a currency
When we speak of Bitcoin we’re really referring to two components: Bitcoin the protocol and bitcoin the token. Notice the punctuation?
Bitcoin is a revolutionary protocol that enables the exchange of value more efficiently than ever before. To perform that exchange, one uses bitcoin tokens as the medium.
Fiat vs. Bitcoin
A fiat currency’s value is quantified by its utility: as a store of value and medium of exchange. This is generally quantified in comparison to another currencies, such as CAD/USD. This relative price difference is our measuring stick, since the relative strength of one currency over another has macroeconomic impacts to trade between the two nations. As one currency strengthens, holders of that currency now have more purchasing power, which shifts the flow of trade. This is a perfectly acceptable approach for fiat currencies but is currently invalid for Bitcoin.
Bitcoin has the potential to act as a medium of exchange and a store of value but at this time doesn’t, because it is volatile and lacks utility that may be realised by the economy. The coins are hard to acquire, hard to spend and any interaction requires a decent amount of technical expertise. Very few value-adding services exist for using Bitcoin, and almost all existing services merely enable the exchange of the token between parties. It won’t be until well into the future, when Bitcoin contributes significantly to the global financial system, that we’ll be able to compare the tokens value to fiat currencies like the USD.
The short-term price of the token is defined by speculation, not intrinsic value
Bitcoin is only 6 years old and has been in the mainstream for 2. Those who got in early may be spectacularly rich; those who jumped in late are not. It was, and still is, the Wild West. It’s like investing in a company with no revenue, except a company would actually have assets to support the price.
Bitcoin’s volatility comes from a combination of speculation and imagination. Speculators have significant control over the price as there’s limited liquidity in a $4 Billion market. Price swings of 10%/day are normal and will continue to be so until the market capitalization is orders of magnitude greater.
Many holders of bitcoin do so because they believe in the potential of the Bitcoin ecosystem to disrupt a wide array of archaic business models, from financial services to voting, however, we are far away from realising many of these ideas. In front of us are significant political and regulatory hurdles that must be overcome for mass adoption to take hold.
True value is tied to growth and adoption
True value is tied to growth and adoption of the ecosystem: In the short term, we require immediate adoption of the protocol for payment services, which will require both merchant and user adoption. We also need smart minds to build on the blockchain so that the pace of innovation increases.
Our current best proxy of Bitcoin is Pantera’s BitIndex:
BitIndex is an index calculation attempting to model the medium-term value of Bitcoin, not an indicator of future pricing of the token. The beauty of this calculation is that it factors in many of the real aspects of the expanding ecosystem such as , market size, merchant adoption and developer activity. Visit Pantera’s site for more details.
The tree is blooming. Let’s wait until the fruit ripens
In the long term, we need to look at what is going to be built on top of blockchain technology, both as an extension of the Bitcoin ecosystem, or as separate innovations like Ethereum..
For now, we can look at venture activity for further insight. In 2014, $314 Million was invested in Bitcoin-related startups, with the biggest single round ever going to Coinbase in January 2015 for $75 Million. This capital will have a significant impact on how blockchain technology evolves and more importantly how seriously we consider a decentralized world. In the meantime, hold on to your coins, forget the price, and watch carefully!