Liquidity and Stability - Bitcoin as Currency and Asset
The recent massive run up in Bitcoin and other cryptocurrency prices has led to a bit of a debate regarding the very nature of Bitcoin, and the question of whether it has the potential to replace other fiat currencies.
Bitcoin’s ever-volatile prices have reignited the debate about its usefulness as a currency. Most Bitcoin enthusiasts tend to think of Bitcoin in currency terms, calling it “cryptocurrency,” or “digital currency.” Concern over Bitcoin’s usefulness as a currency has led to conflicts over the very nature of Bitcoin.
In some ways, Bitcoin suits the definition of currency quite adequately. It allows for the creation of secure and transparent transactions, therefore proving adept at transmitting value. Yet, as most enterprise-level financiers have pointed out, the volatility of Bitcoin greatly decreases its usefulness as a currency.
Further, currencies must be liquid, and current regulatory and technical barriers to entry, along with thinly traded markets, make Bitcoin much less liquid than fiat currencies.
Others argue that Bitcoin is an asset, like real estate, gold or other stores of value. This argument centers around the nature of Bitcoin as a commodity that can be purchased and stored with safety and confidence. Gold, for example, can be purchased and stored, and while the price of gold may fluctuate, gold has intrinsic value because of what it is - an asset.
So the question remains--is Bitcoin a currency or an asset? Let’s dig a little deeper.
Bitcoin as an asset
Bitcoin can function well as an asset. It can be stored securely and cheaply. In fact, cold wallets make Bitcoin storage relatively hassle-free. Bitcoin is also easily transferable and doesn’t require an armored car or shipping service to transport as precious metals do.
As a store of value, Bitcoin is far more simple and secure than other real assets. For example, real estate is a store of value, but all property requires maintenance and handling in order to produce return. Even vacant land requires some ongoing costs, with property taxes, upkeep and legal requirements.
Bitcoin as a currency
Despite what critics may say, Bitcoin also has potential as a currency. New companies have been created to allow Bitcoin to be used in a much more user-friendly, currency-like fashion than was previously possible.
One simple solution is a Bitcoin ATM machine, often called a BTM. Many BTMs do exist, but deployment is slow due to the cost of producing, placing and marketing the machines. The Kuna cryptocurrency exchange recently promised to install 150 new BTMs in the country of Ukraine. However, BTMs are still a cumbersome solution, since they require a customer’s physical presence, often require identity information for KYC/AML purposes and are still dependent on fiat currencies.
Another solution is the use of debit cards linked to Bitcoin wallets. One of the earliest companies to offer this solution was Cryptopay, who saw the need for liquidity in the cryptocurrency market. Founder George Basiladze recently stated:
"Historically, consumer spending was the driving force of the economy and liquidity of the market. With the emergence of crypto debit cards, the value that was locked in digital currencies has become much more liquid. More and more coins change hands - this supports the market, brings more certainty and liquidity.”
Other companies like Monaco and BitPay have seen the light and joined the debit card marketplace. Bitcoin debit cards are an excellent solution to the liquidity problem since consumers are already familiar with cards and comfortable with their use.
The volatility problem
Of course, as either asset or currency, Bitcoin remains volatile. However, Bitcoin’s dual nature as both an asset and currency may be responsible for the volatility. When prices increase or decrease, those who view Bitcoin as an asset are incentivized to sell rapidly. These large transactions cause substantial market swings in short time periods.
Small scale transactions, like those usually made with fiat currency, create stability in price but require liquidity. As the market begins to shift toward new and better ways to provide liquidity, market stability should increase.
However, for volatility to be controlled via liquidity, users must feel comfortable enough with Bitcoin as an asset. Users must also be assured that they will be able to use Bitcoin whenever they want for ordinary transactions. For this to occur, values must continue to increase.
As value increases over time and Bitcoin’s market cap grows larger, volatility should gradually be dampened. Likewise, as consumers grow more confident in spending their Bitcoin on ordinary transactions, perhaps by using Bitcoin debit cards, the market should stabilize as well. It seems the very nature of Bitcoin itself both creates and solves the problem as Bitcoin continues to appreciate in price.