Rapper 50 cent is now taking Bitcoin for his new album Animal Ambition. This is obviously less about Bitcoin and more about being a very savvy marketer. He understands the value of being in front of the curve, shaping public perception, and the PR boost that Bitcoin generates among certain affluent circles. This led pundits all over the Internet to proclaim that he was on the verge of changing his nom-de-guerre to 0.0007759 BTC, or 77 millibits. The problem is that if he did denominate his name in Bitcoin he would be changing it every day. 77 millibits today, 85 tomorrow, 24 two weeks from now. The joke underlies a major problem with the entire Bitcoin ecosystem, and one that companies in the space are all-too-willing to ignore.
The reality is that Bitcoin is too volatile. It is all over the place, rising to spectacular heights and then crashing back down again. Numerous companies have come out of the woodwork to address this problem, most focusing on the Merchants. It is relatively trivial to trade out BTC at the point-of-purchase and fix the value to USD, taking very short term volatility risk. This is essentially the model that Bitpay operates under, as well as a number of payment vendors. These serves all address Merchant concerns about accepting Bitcoin, but what about the consumer? The reality is that putting money into Bitcoin is a scary process, some people want to benefit from the capabilities of digital currency without making speculative investments with their money.
If I want to buy a cup of coffee, but have to wait a while to get my BTC delivered to my wallet then I’m taking all of the volatility risk of the currency. That risk gets priced into everything I buy. It’s like rolling the dice when you go to the store, am I getting a welcome discount or a very expensive latte? That is the hidden cost and risk associated with the network, it is something the Bitcoin-faithful ignore in favor of pushing merchant and consumer adoption, but it is a major problem. Let’s imagine for a second that you take $20 out of the ATM, and expect that you will be able to buy a cup of coffee at $2 a day for the next 10. 5 Days in the cost of the coffee is now $4. Instead of 10 days worth of Coffee you now get 7. That isn’t an acceptable situation for most consumers. To put it even further into perspective, Bitcoin has been compared to various highly volatile unpredictable assets, what if you wanted to buy something from a Merchant using crude oil futures. Does that make any sense?
There are ways to address volatility. Derivative contracts on Bitcoin, options and futures will allow for tighter spreads. Ultimately that should eliminate some of the volatility concerns, but what about demand. Ripple got one thing right, which is that you have to separate the underlying from the transfer of monies. Whenever you try to price something in a scarce resource there are going to be fluctuations in price, and adding insurance instruments in order to hedge that volatility will spread the risk around. Can Bitcoin be competitive if 1-2% is pegged on to every transaction in order to constrain risk? This is a problem that gets worse as popularity increases and supply dwindles. Global remittances flow in 2012 was $514 Billion dollars. How can we possibly hope to tackle that market along with all of the others we could potentially disrupt when the unit of account has a market cap of six billion? Do we expect every Bitcoin to change hands every day?
Now on the surface I am just playing devil’s advocate. The reality is that the community is extraordinarily resilient, and I’ve got a few tricks up my sleeves also ;). The sheer scale of the current Bitcoin network is mind boggling, a lot of compute power is being used to secure the network (Ghash.io 51% not withstanding, I’ll cover that later). We have a long way to go but we are on the cusp of being able to solve the biggest problems in the space, and besides we can look to 50 cent for a little inspiration, get (bitcoin) rich or die tryin’.