There’s a long way to go before Bitcoin becomes a globally accepted form of currency, virtual or not, with some counties having outright banned the use of Bitcoin, though the number of countries are diminishing, with the wider issue being the lack of regulation on Bitcoin itself coupled with concerns over technology limitations.
Technological development over the short to medium-term will certainly influence the value of the markets and, as a global regulatory landscape develops, we would expect the usage and demand to increase, driving the value, the types of returns that are not apparent with cash, still currently maintaining its ’Cash is King’ status.
Whether investors consider Bitcoin as an alternative hedge or an investment remains to be seen. Either way, when considering the year-on-year surge in the value of Bitcoin, just shy of 200%, the only way is up should regulatory walls continue to fall and transaction volumes continue to rise.
Bottlenecks will undoubtedly limit transaction volumes over the near-term, leaving the door open for more traditional payment methods to compete, but it is only going to be a matter of time before payment systems are upgraded and Bitcoin has the opportunity to become a primary payment mechanism.
In the end, the success and evolution of Bitcoin across mainstream economies and beyond will likely boil down to the attitudes of Central Banks.
The PBoC earlier in the year had announced that it would be making a greater effort to regulate the Bitcoin market, including establishing a taskforce to inspect and ensure Bitcoin exchanges had the appropriate anti-money laundering systems, warning exchanges that they would be closed down if in violation. The actions of the PBoC led to certain exchanges suspending activity, resulting in Bitcoin losses at the time. Ultimately the fact that the PBoC is looking to clean up and increase oversight is a long-term positive and suggests that the use of Bitcoin will surge in the years ahead, despite the fall over the near-term attributed to the increased oversight.
The use of Bitcoin may remove certain roles of central bankers, but in the end Bitcoin will never be responsible for or even be in a position to influence monetary policies. Central banks will continue to ultimately to hold the fate of Bitcoin in their hands, regulation and acceptance at government level vital to its success and continued evolution cross border. For now, central banks appear to be diligently looking into the technology that Bitcoin has introduced, looking to use the decentralized method of record keeping, more commonly known as the blockchain or distributed ledger, the incentive being to complete and log transactions in a real economy more effectively.
The BoE and the PBoC are certainly advocates of the decentralized method that would allow the respective central banks to track their respective currency through the financial system in real time. The BoE has estimated that the use of a digital currency on a distributed ledger could add as much as 3% to a country’s economic output through efficiency gains alone.
FOMC members and the FED Chair have also talked positively on distributed ledgers, with voting-member Brainard having spoken on the benefits of the use of such innovative technology just last week.
Interestingly, the fact that Central banks are beginning to embrace the technology, which had been developed to dethrone them could ultimately cement the position and power of central banks, though it would be difficult for them to then attempt to unravel the very same technology in a bid to undermine Bitcoin down the road.
Bitcoin may have a mixed following at present, but there are a number of countries that are ultimately considered the Bitcoin friendly, with the list likely to continue growing as more governments acknowledge and legitimise the use of Bitcoin.