Bitcoin in 2014: Bad Investment for Speculators, Good Investment for VCs

Journalist:
December 16, 2014

Compared to other investments Bitcoin has been a bad performer of 2014, losing 52 percent against the US dollar, The Verge reports. But that’s good news, because the less Bitcoin is seen as a speculative currency, the easier it will be for Bitcoin to gain momentum as a technology.

“{i]f you’re more interested in the disruptive innovation that the blockchain technology behind Bitcoin might enable, the price of each coin is actually immaterial. What matters most is that the currency stabilizes, avoiding massive changes in value that might scare off the merchants and consumers who have yet to adopt it. So the less attractive of an investment, the better. And as 2014 progressed, Bitcoin has actually seen far fewer rapid, massive swings in price.”

In fact, the Bitcoin price has been oscillating with relatively moderate swings in the last couple of months, staying between $300 and 400. From the point of view of a consumer or a merchant, knowing that the Bitcoin price stays around $350 with moderate swings one or the other way stimulates adoption. And indeed, the numbers of consumers paying in Bitcoin and merchants accepting Bitcoin have skyrocketed in 2014.

“[T]he issue that was holding back the adoption of Bitcoin was volatility driven by speculators and the financial press. It could continue to be the worst performing investment class, and it’s likely Bitcoin will still boom as a sector for venture capital investment. What matter to them is that the number of transactions using bitcoin keep rising, and when viewed through that lens, 2014 was very healthy year.”

2014 Has Been the Beginning of the Real Bitcoin Economy

Indeed, Bitcoin transactions have been steadily rising in 2014, and the trend continues to point upward. That means people are starting to use Bitcoin to do things, buy more and more goods and services, as opposed to holding Bitcoin for speculation. As CCN observed in September, use drives down price. If everyone wants to buy and nobody wants to sell, the price skyrockets. If more people want to sell, the price goes down. This basic principle of economy applies to everything, including Bitcoin.

The “speculation phase” of the Bitcoin economy has been terribly important because it has put Bitcoin on the map and generated a lot of press coverage. As a result, today we have a critical mass of Bitcoin users, and we see the beginning of the first “real phase” of the Bitcoin economy. That’s why we see more and more venture capital and corporate investments in cryptocurrencies.

We pay merchants in Bitcoin, and sometimes they use bitcoins to pay their suppliers, but at some point in the chain somebody will convert the bitcoins to fiat currency, and that will pull the value of Bitcoin down. But the Bitcoin economy is growing, and someday soon there will be huge numbers of users who keep their bitcoins in a closed-circuit economy and never convert them to fiat.

Also read: Will Bitcoin Price Continue To Go Down?

The next huge, closed-circuit phase of the Bitcoin economy is what venture capitalists want to see, and that’s why they keep investing in Bitcoin startups.

What do you think of the state of the Bitcoin economy? Comment below!

Images from Shutterstock.

Last modified (UTC): December 16, 2014 12:38

Giulio Prisco @giulioprisco

Science writer, software developer, Bitcoin/crypto enthusiast.