Bitcoin in 2014 – Ready for Prime Time?

By Kyriba January 10, 2014

In the middle of last year, we wrote a post on Bitcoin1. At that time, it was just entering the mainstream psyche, but since then, it has garnered countless column inches of news and opinion. It’s also spun off a number of other cryptocurrencies, based on things as bizarre as Shiba Inu-based Internet memes2 and rappers3. Given this huge increase in popularity, it’s certainly worth revisiting Bitcoin (BTC), to see if it’s matured enough as a currency to be seriously considered as an alternative business currency.

The first point to make is “if only I’d known how much it was going to go up…” Between June and December 2013, the value of BTC increased tenfold, to almost $1,200. Some people, who’d bought a handful of BTC when it was in its infancy, got very rich, even to the point of buying apartments with their savings4 (turning $27 to $886,000 in three years is a pretty impressive feat in anyone’s book). In the U.S., a man paid for a brand new Tesla from a California dealership5 using BTC. There are also signs that governments are starting to take it seriously – in fact Singapore just clarified its tax policies on Bitcoin6.

While all of this may sound great, and point to BTC become more accepted, it remains the fact BTC is still way too volatile to be seriously considered as a currency, and acts more like a commodity bubble. Even though its price continued to increase steadily over the course of the year, it remains incredibly volatile. After the Chinese government recently banned financial services companies from dealing in BTC7, its value plummeted 20 percent in a day, and fell almost two-thirds in a few days before it recovered much of its value.

And there’s the rub. Although more and more smaller, independent companies are accepting BTC for low level transactions (such as pizzas8), no cash manager would allow their organization to be exposed to the volatility of having millions of dollars of BTC on hand. Losing $2 on a $10 pizza is one thing, but losing $20,000 on a $100,000 car is something completely different. Realistically, cash managers would have to exchange their currency multiple times per day to minimize this exposure.

If you read past all the hype stories of the man buying the Tesla, although he may have paid for it using BTC, the dealer didn’t actually accept his BTC as payment and then hold onto it themselves. In fact, they agreed a price in BTC and then transferred the price into dollars using an app9. They never held the BTC themselves, so never had any exposure. It’s certainly a complex way of making sales, and while it makes for a great PR story, it’s hardly practical. Accepting a currency that could lose a huge amount of its value based on a single rumor or hack isn’t good business sense.

Even if you do accept the risk of holding onto your BTC in the hope it will continue to rise, your worries don’t end there. It’s also very insecure. One online (black) marketplace was recently robbed (or rather “hacked”) of over $100m in BTC10. With there being no regulatory authority or oversight, recovering any of this money is likely to be impossible. Unless a government entity steps in to develop and / or regulate BTC exchanges – which is the opposite of what most BTC advocates want – it will remain somewhat of a Wild West situation, where thefts can’t be tracked and there is no recourse or legal protection. It’s really no safer than having all of your cash in $100 bills sitting in a safe in the middle of nowhere. While it should be secure in there, if someone can crack the safe and take off with your money, you have no way of knowing who did it, nor will you likely see it again.

So, while if you have the nerve to let your company accept (and hold) BTC, you could see huge returns, the risk of owning anything more than a minimal amount of the currency is just too much for any self-respecting treasurer to bear. Until its volatility has declined significantly and it has become more secure to hold, you shouldn’t keep any more BTC than you would be willing to lay down on the roulette wheel in Vegas.

References

1Bitcoin as a serious business currency: good, bad, or who cares? 

2Dogecoin overview on Wikipedia

3Kanye West inspired Bitcoin alternative to launch next month

4Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k

5Man Buys $103K Tesla Model S With Bitcoin

6Bitcoin regulation, here we come: Singapore clarifies tax policies

7China Bans Financial Companies From Bitcoin Transactions

8A New Startup Lets You Buy Pizza with Bitcoins, But the Dollar Still Rules

9Buying a Tesla with bitcoin? Not so fast

10Bitcoin Heist: Millions Vanish from Online Black Market

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