Last week our theme was “Is it time to buy Bitcoin? Google’s data on Bitcoin searches“. Our theme for this week is “Why is Bitcoin going up? HOLD on Bitcoin?”
TLDR. Ten years ago, when Satoshi Nakamoto published Bitcoin’s whitepaper, he described a “peer-to-peer version of electronic cash.” The idea was for Bitcoin to be digital cash. To provide a borderless means for payments, without intermediates. Since then, while Bitcoin has become a household name, it has yet to realize its true potential. It’s primarily used for speculation, instead of an everyday means of exchange.
Major retailers have become very receptive to the idea of accepting Bitcoin as means of payment. Now you can pay your AT&T bills using Bitcoin. Satellite television and Internet service provider Dish Network accepts Bitcoin as a payment option. You can fund your Microsoft account with Bitcoin, to purchase games, movies, and apps in the Windows and Xbox stores. Who accepts Bitcoin? Here’s a list with a few of the major companies accepting Bitcoin.
Yet, research from Chainalysis shows that just 1% of Bitcoin transactions were payments to merchants. Almost no one is using Bitcoin to buy things. Speculation was the primary use for Bitcoin.
In the first four months of 2019, the proportion of merchant related transactions remained low. Only 1.3% of Bitcoin (BTC) transactions were purchases from merchants. The most extensive use is speculation on exchanges. The increase in price has to do with what we are willing to pay for Bitcoin and cryptocurrencies, instead of what we can actually do with them.
Bitcoin’s volatile nature discourages people from using it to buy things. People prefer to HODL and make huge profits in the future, instead of using Bitcoin to pay for things.
Five years ago, criminal activity was behind about 90 percent of cryptocurrency transactions. Now, illegal activity has shrunk to about 10 percent and speculation has become the dominant driver.
Speculation is important for new technologies. Whether you are dealing with emerging technology, a new business or idea, speculation is one of reasons that something will cross the chasm, to become widely adopted or a complete failure. But speculation can also be bad, when its not backed by growing usage.
Today, usage for Bitcoin and cryptocurrencies is still very low. About 85% of Bitcoin’s value is the result of speculation. Investors are heavily speculating on the future usage and adoption for cryptocurrencies and blockchain, but today utility is just a small component of the current price.
Use cases are what will drive Bitcoin’s growth, not speculation.
During a conference in Korea, Andreas Antonopoulos said “Crypto doesn’t have a use-case in the ‘developed’ world… yet“. The reality is that until scalable use cases are fully deployed, cryptocurrency markets will remain a highly speculative and volatile.
Many attribute this to block size, Lightning Network, or user experience.
We are starting to see some real use cases around the world. Projects like Facebook’s upcoming stablecoin, JPMorgan’s JPM Coin and Fidelity’s recent announcement that it will start buying and selling BTC for its clients. These are all important and constitute stepping stones in mass-adoption for cryptocurrency, but I am not sure if they are the Bitcoin’s killer app.
If we want to predict where it might go, we need to look beyond price and follow how its used and who is using it. Lack of real-world use is the biggest challenge for Bitcoin. Maybe Bitcoin will never become a payment currency and will only be a stored value just like gold. But it’s only by using Bitcoin we give it “real”, intrinsic value. Either way, with serious money now coming into the market, we are still at the beginning of everything.
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.
He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.
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