Bitcoin seems to have a problem with its identity, and it is that identity crisis that may be its undoing. Bitcoin supporters seem to want to have both their libertarian ideals and speculative capitalism all at once. In order for Bitcoin to work at all there has to be a certain degree of cooperation among the Bitcoin community. The value of Bitcoin as a commodity used as a means to transfer value depends on Bitcoin’s value as a commodity used as a speculative investment vehicle and vice versa. Bitcoin will have no value as a value transfer device — a way to pay for things or send money, if the speculators on the currency exchange believe the dollar value of Bitcoin will fall precipitously. Conversely, the speculators will not give any value to Bitcoin if there is no demand to use it as a way to pay for things.
The long list of companies now accepting Bitcoin as payment are all treating it as a ‘hot potato currency’ — they all want to exchange the Bitcoins they receive for dollars, as quickly as possible, before they might realize a loss in dollar value. It is understandable that those companies make such an effort to accept Bitcoins given that in so doing they will likely receive new customers from the loyal and enthusiastic Bitcoin community.
I actually would love to see some way of being able to pay for something electronically without going through Visa or MasterCard — I think those companies must be making money hand over fist on all those transaction fees for each and every purchase. But as a consumer that does not own or manage a business, I think I am in a minority in terms of being bothered by the transaction fees charged to the vendor with each purchase made by a credit card. Yes, those large transaction fees are avoided by Bitcoin, but how is that an incentive for the average consumer that doesn’t give much thought to macroeconomic principles and philosophy? It is the average ‘Soccer Mom’, or ‘NASCAR Dad’ or company softball league player that goes to the sports bar after the game that needs to adopt Bitcoin in a widespread fashion for virtual currency to become commonplace. But there is little incentive for those outside of the Bitcoin believers to adopt the virtual currency. If the consumer gets ripped off they can’t get a charge back like they can with a credit card. And if Bitcoin loses value relative to the dollar the holder of the Bitcoin is out that value with no recourse there as well. Given those facts, why would the average consumer be expected to adopt Bitcoin as their regular method of payment? And if widespread adoption never happens, then what is the long term outlook for the value of Bitcoin?
Looked at from the perspective of the speculative trader, there are some vulnerabilities to Bitcoin. Perhaps the biggest vulnerability on the value as a commodity end is its lack proprietary value. While there may be some inherent value that is ingeniously built into Bitcoin, as far as I know, there is no exclusive license to the mathematical and computer science technology that make the transfer of value utility possible. There are currently at least 500 different virtual currencies in existence, and I’m sure most if not all of them use the same mathematical and computer science principles as Bitcoin. While Bitcoin may have, by far, the most widespread use of all the virtual currencies, I don’t believe any contracts exist to insure and assure that will continue to be the case in the future. If another virtual currency were to come along as the new favorite, then is there any written or unwritten understanding among the current Bitcoin community that they wouldn’t, after seeing their Dollar to Bitcoin ratio plummet, cut their losses and bail from Bitcoin and hop on the next virtual currency bandwagon?
A problem arises of potentially either inflation or deflation occurring with cryptocurrencies given their lack of government control and oversight. So, it is the very quality of being outside of government and central bank control that leaves virtual currencies vulnerable to inflation or deflation. If Bitcoin were to remain the only predominant virtual currency, given its built in mining limits and reductions, then deflation becomes a potential problem. Indeed, deflation appears to have already set in with Bitcoin, whereby for any given product fewer bitcoin or smaller fractions of a bitcoin are needed to buy that product. Deflation happens when there is a reduction in the money supply relative to the quantity of goods or services on the market. The problem there is that an incentive is created for the consumer to delay spending their money as it gets increasingly precious and less of it is needed to acquire any needed or wanted goods or services as time goes by. For instance, if someone sees a product that they can buy today for one bitcoin, that last year required two bitcoins to purchase, the consumer sees a trend telling them that waiting to buy the product is advantageous. If they can hold off their purchase for a while, the consumer may think that in a few months they can get that same product for just a half a bitcoin.