The last 12 months have solidified bitcoin’s crucial role in the global economy. Investors and traders have relied on the digital currency to protect their wealth and avoid economic and financial crisis resulting from excessive government monopoly over current monetary systems.
Indian government’s decision to demonetize 500 and 1,000 rupee banknotes led to one of the worst economic disasters in recent history, essentially halving the economy’s cash circulation and causing a nationwide financial turmoil.
China’s imposition of heavy regulations and impractical policies on cash outflow to prevent the devaluation of the Chinese yuan also pushed the demand for bitcoin further, as investors sought out for assets and stores of value that can be used to bring money out of the country.
Bitcoin’s strong performance in 2016 and its price rally that have allowed large markets like China to reach all-time high trading margins can be identified as a closure of the first phase of bitcoin, that is digital commodity.
Vinny Lingham, CEO at Civic.com and bitcoin analyst who has offered insightful analysis and accurate price predictions for bitcoin over the past few years, stated that bitcoin has proven its worthiness as a digital commodity. It was evident that traders and investors used bitcoin as a digital commodity as an alternative to traditional assets.
However, in terms of bitcoin’s long-term growth, the end of bitcoin’s first phase as a digital commodity marks a beginning for the digital currency’s next two phases: store of value and currency.
Bitcoin has already demonstrated its practicality as a digital commodity. The next phase according to Linham is proving bitcoin’s applicability as a store of value. Is bitcoin an asset that can be saved, retrieved and exchanged at a later time? Or is it simply a commodity?
Lingham says the former accurately portrays bitcoin at the current stage as bitcoin offers high liquidity, stable global exchange rates, and is not perishable. Bitcoin does not depreciate over time unlike assets or physical products.
“A store of value can be a commodity that’s not perishable (so wheat, corn and pork bellies are not stores of value) or subject to depreciation over time (for instance, mass produced motor vehicles, or other homogenous products where technology & time can render a store of value worthless).” explained Lingham.
Throughout 2017, bitcoin will most likely demonstrate the qualities of a store of value and present some stability and reliability to experts.
For bitcoin to truly reach mainstream adoption, it needs to reflect the qualities of a currency. It must demonstrate low volatility rates and price flunctuation for the general population to rely on as currency.
Lingham also emphasized the importance of low volatility in his report. He wrote:
For Bitcoin to become a trusted medium of exchange (aka “a currency”), it needs to be stable, and have low volatility. You cannot have a situation where your money is worth less (or even more) in a day or an hour. Volatility and unpredictability in currencies is harmful to businesses in particular, and if businesses cannot be assured that the Bitcoins they received the previous day will help them replenish their stock, then they will be unwilling to accept it and risk their livelihoods.
Andreas Antonopoulos, bitcoin and security expert, made a similar point in mid-2015, when people were satisfied by bitcoin’s increasing price.
“Don’t be too excited with recent bitcoin short squeeze and rapid price climb. Volatility is bad even when it’s going upwards,” said Antonopoulos.
When bitcoin is near to maximizing its money supply and its value demonstrates currency-like behaviour, it is presumed to reach mainstream adoption and attract the likes of the general population.
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