Bitcoin Will Never Be Tamed

Bitcoin has a split personality. For the longest time, its extreme volatility made it a dangerous investment, where your holding could gain and lose as much as 10 percent in a single wild afternoon.

Yet that same volatility made it ideal as a trading vehicle, where you could buy on the dips and sell on the rebound, earning a solid 10 percent return in a matter of hours.

It has come to be hated by traditional investors, and loved by avant-garde online-traders. It is praised by modernists, condemned by traditionalists, feared by governments, welcomed by small businesses, abused by crime rings, mined by entrepreneurs, and not fully understood by almost any of them.

Amidst the controversy – from bans in China to arrests in America, from rejection by those who deem it a Ponzi scheme to growing support from those who consider it a legitimate currency – amidst all the fighting, something has been happening to Bitcoin that has escaped everyone’s attention… it has quietly grown in use worldwide, and its price has stabilized.

Might we be witnessing Bitcoin’s makeover? Even seedy Las Vegas transformed from a crime infested gambling, prostitution and money-laundering haven into a legitimate business and entertainment capital the whole family can enjoy.

Last week’s Bitcoin Conference in Miami Beach, Florida accomplished something exceptional in that regard – it got people seriously considering Bitcoin as a legitimate means of exchange.
How? With a little education for supporters and critics alike.

Knowledge For Supporters

The Bitcoin Conference was a strangely diverse crowd of “lawyers and business experts in suits mixed with entrepreneurs and tech-savvy developers in graphic T-shirts and sneakers,” according to the Miami Herald.
They came together to consider whether Bitcoin should be regulated by the U.S. federal government, something which doesn’t sit well with supporters of the electronic currency who want to keep it out of the government’s reach.

What Bitcoin supporters need to learn is that regulating the digital money would not only contribute to its wider-spread use, but would also offer its holders more legal protection, not less.

Moe Levin, the organizer of the conference, acknowledged, “Regulation and tax laws are not going to go away; they are an unavoidable part of the world in which we want to bring Bitcoin. We need to work with regulators and respect tax law for the currency to be trusted by governments and in turn to be accepted by the public.”

Supports may be sacrificing the defiant romanticism Bitcoin represents. But they would be getting something much more valuable in return, such as greater price stability, and access to the courts should they ever be involved in a dispute with a Bitcoin merchant or online exchange.

Knowledge For Critics

The conference also had ample knowledge to dispense to Bitcoin critics, the sceptics who see it as nothing more than a pseudo-currency whose sole purpose is to aid and abet criminals in the illicit trade of narcotics, weapons and prostitution.

The recent arrests of Bitcoin Foundation co-founder Charlie Shrem, and Bitcoin trader Robert Faiella on allegations of operating a money laundering scheme only heightened the conference organizers’ desire to educate the public, banks, businesses and authorities.

Carol Van Cleef, a partner with Washington D.C. law firm Patton Boggs, laments that the only publicity Bitcoin has received thus far has been bad. “What the banks and the bank regulators know after two years of intense publicity is that Bitcoin is used by criminals,” she addressed at the conference.

Jacob Farber, senior counsel with Washington D.C. law firm Perkins Coie, agreed that more education is required. “I don’t want to dismiss the problems,” he acknowledged, “a lot of education still has to happen with the regulators.”

But he remained confident that the campaign will eventually remove the stigma. “I don’t think we have to worry about Bitcoin going away here in the U.S. because somebody decides it’s too big a risk.”

The same can be said of any other paper currency in the world. Organized crime has used dollars to launder drug profits, purchase illegal weapons, bribe officials and build casinos. Yet no one has ever suggested banning the USD, since the currency does have legitimate uses too.

Growing Use Leads to Growing Stability

Yet the business community isn’t waiting around for any legislation, with more and more businesses from small coffee shops to retail giants like Overstock.com (NASDAQ: OSTK) already accepting Bitcoin as a source of payment for their goods and services.

The currency’s notorious price volatility – where it shot upward from less than $200 to over $1,200 in a single month last November, and then plummeted back down to $500 in two weeks in December when China barred its citizens from using it – has amazingly not deterred these innovative retailers.

But don’t they realize that Bitcoin’s lightening quick transaction system can incur huge losses through violent price swings?

On the contrary, it is the lightening quick system that benefits retailers, since Bitcoins can be sold for dollars in an instant once their customer’s transaction is complete.

This is vastly superior to accepting foreign currency, which retailers often hold in their cash register for hours or days before taking it to the bank for conversion. Over that period, moves in the foreign exchange rate can result in losses to the retailer of several percentage points, in addition to the bank’s exchange fees and commissions.
Bitcoin, on the other hand, can be converted instantly, often with no transaction fee at all, depending on the exchange used.

Such growing use has stabilized the currency from its previous wild swings. But even if volatility does return every now and again, retailers who immediately convert their payments have little to worry about.

What About Investors?

OK. So retailers are warming up to the idea of Bitcoin, and have some pretty clever means of protecting themselves from any potential re-emergence of volatility. But what about investors? Is it really wise to trade it as an investment?

To answer that we need to make a clear distinction between “trading” and “investing”. They really are two different things with two different objectives.

Simply put, the objective of investing is to benefit from the long-term price growth of your holding, while the objective of trading is to capitalize on short-term price movements. Where investing generally involves buying and holding, trading is more focussed on buying and selling, quickly jumping in and out.

If you ask any experienced investor or professional advisor whether Bitcoin would make a sound “investment”, the answer you will invariably get is, “No”. And they have one very powerful reason – Bitcoin has no intrinsic value.

Bitcoin is not tied to anything of tangible value, and is worth only what two people “believe” it is worth. Where a stock’s value is based on a company’s assets, a fiat currency is based on a nation’s reserves, and the deed to a home is based on its property and building, Bitcoin owns no business or property and has no reserves.

You can still take the investment approach to Bitcoin on the “hope” that someone else will come along behind you and offer to pay more for it than you did. But that is not in line with the concept of investing.

However… it is perfectly in line with the concept of trading. In fact, Bitcoin has been one of the best trading vehicles out there. Why? Because of its volatility (before it recently stabilized, that is).

Bitcoin is perfect for the “buy-and-sell”, “in-and-out” trading approach, where you buy every $50 down and sell every $50 up, locking-in a 5 percent return in a single day. An entire industry is based on the day-trading of stocks, bonds and currencies all over the world. Why not for Bitcoin too?

The only thing you need to be aware of if you take the trading approach to Bitcoin is that you might get stuck with a high-priced purchase for a long, long time before you can get rid of it for a profit. At some $900 per BTC today, everyone who bought above that is still waiting to get out.

You can earn a decent 2 to 5 percent per month overall if you scale purchases every $50 down and sell every $50 up (or at any other dollar spacing you prefer), using your successful trades to offset your losing trades and improve your dollar-cost-average over time.

You just have to understand that Bitcoin’s lack of intrinsic value can cause it to plummet down to $1 and stay there for years. Not to say it will. But you must understand how easily it can.

Bitcoin may experience periods of price stability. But its very nature as nothing more than a means of barter means it can never be fully tamed. Even if regulation eliminates fraud, no amount of regulation can give it intrinsic investment value.

Joseph Cafariello