For any bitcoin (BCH) bull, May is ending with some decidedly bearish price action. After nearly tripling from April to May from $632 to $1,818, most of those gains have since evaporated, all but confirming that we are not going to see $4,000 again any time soon. Segwit (BTC) for its part has been a bit less volatile, but the parabolic rise is clearly over. This may not be so great for bitcoin as a speculative asset, it is a good thing for bitcoin as a money.
What makes something a good money, among other things, is its relatively stable value over time relative to most other goods. Without relative stability, a good like bitcoin cannot function as a money, but only as an intermediary to money. People use money, final money, to calculate important things and take accurate measurements of profits and losses. You can’t measure profits and losses in a good whose value fluctuates wildly. And without knowing if you are operating at a profit or a loss, an economy, whether that economy by a single person or a nation, cannot allocate resources properly. The economy breaks down. See Venezuela for reference. The money there does not have a stable value, the economy cannot allocate resources properly, and people die.
Let’s face it. If bitcoin enthusiasts really tried to treat bitcoin as a full on money and record their transactions in bitcoin terms instead of using bitcoin as an intermediary but ultimately calculating in dollar terms, then their households, companies, or whatever they operate would not function.
Bitcoin appears to now be moving out of the mass recognition phase, The next step is to build the mass adoption phase. In the mass recognition phase, most of the cryptocurrency crowd consisted of speculators looking to make dollars on a quick trade. A lot of them get in and by December we were at the biggest parabola in human history. It appears that the last of the speculators are drifting out of the market, giving up on another parabolic run for now. When they are gone, or at least when they are at a minimum because there will always be some speculators, then the bulk of bitcoin owners will be either long term holders or those who actually use it as it was intended to be used, to buy things.
Neither long term holders nor those who use bitcoin to actually buy things, will affect the price all that much. That’s why currency values typically don’t move very much, because the vast majority of currency holders are either long term hoarders (savers) or those who use it to buy things. Currency speculators still exist and the price moves a little bit here and there, but it’s basically stable.
John McAfee, one of the world’s most notorious bitcoin fans, came out with an interesting video tweet where he admits that if cryptocurrencies are not used for their intended purpose, then eventually their value will be zero. “They won’t be worth 8 cents. “
The purpose of cryptocurrency pic.twitter.com/LSRtkgBHpY
— John McAfee (@officialmcafee) May 27, 2018
Nobody knows where the prices for any cryptocurrency will ultimately settle at once speculators are flushed out and only users and savers are left, but that is what will have to happen if bitcoin or ethereum or any other coin will eventually graduate to money status. If and when it does, the dollar value, or speaking in terms of the ultimate goal—the goods value—of bitcoin will be proportional to the amount of people that use it as money. The more people that use it as money, then by definition the more goods are being offered in exchange for the same number of bitcoin. The value of each bitcoin unit goes up in terms of the goods it can buy, not because people are buying it to trade it at higher nominal values for some other currency for the purpose of selling it, but because more goods are on offer for your bitcoin.
Could there be another mass recognition phase? After all the 2013 BTC top at $1,150 wasn’t the end of the recognition phase, though it sure looked like it. It’s possible, but I wouldn’t bet on it. The reason I believe the recognition phase is over is that bitcoin isn’t catching a bid in Argentina or Turkey, two countries in the midst of currency crises. Bitcoin is still falling in terms of the peso and the lira. It’s not acting as the hedge against inflation it was designed to be. If cryptocurrencies were going to have another speculative bull run this would be the time for it in these countries, but it’s not happening. In order to fuel the next bull run, we don’t need speculators. We need users, and that could take a long time.
It ultimately doesn’t matter where exactly bitcoin bottoms from here in terms of the next phase. It would obviously be more encouraging if support at BTC $6,100 or BCH $600 held, but it might not, and certainly not all cryptocurrencies currently available will survive at all. Some will become worthless. The important thing for the future of blockchain crytpocurrencies is not that all of them or even most of them survive, but that the leaders find a support zone wherever it may be and then start creeping slowly higher as more merchants except cryptocurrencies. Then they will slowly start rising like non-inflatable currencies should behave.
Even if bitcoin eventually becomes a money and its price movements start behaving more like a currency and less like a penny-stock, there is still that big problem of government. When Western debt starts falling apart (this appears to already be starting in Italy) and bonds and currencies start losing value fast, just as is happening in Turkey and Argentina right now, that’s when governments will come after bitcoin pretty hard, I fear, looking for lost tax revenue or just blaming every owner for money laundering.
Before we get there though, the best thing cryptocurrency owners can do for now is use their coins as they were intended, as money, to buy things with them. If you are a believer in this sector, shop at stores, online or brick and mortar, that accept bitcoin, segwit, ethereum, ripple or whatever. If you want to hold a chunk of your coins that’s fine, too. But it seems that the era of bitcoin as a quick trade may be over, and we’ll be all the better for it.