Bitcoin Conundrum. Or Things I Do Not Understand

Out of three properties that were initially selected as an advantage of cryptocurrency (anonymity, speed and lower fees), Bitcoin has left with only one - anonymity.

The network fee for sending crypto amounts between wallets is above $40 dollars (Canadian). This is up from about a dollar in September 2017. The transactions are not that instant, since it depends on the network load.

Even though the decentralized nature of crypto currency assumes no intermediary between the buyer and seller, it happens that to support the operations one still has build the infrastructure. Users pay commissions to cryptocurrency exchanges, and other services like ATM fees. (ATMs transactions fees are at the level of about 10% for withdrawals).

Should I use bitcoin to sell my product?

Of course, if it helps to bring extra revenue. But how do you set the price? What if bitcoin will drop in price after you sell the product? Would you reset your price accordingly? One way to deal with the uncertainty, is to convert bitcoin back to cash immediately to avoid ‘currency risk’. For that you would pay the commission that exchange is charging (the buy/sell spread on the exchange I last used was about 1.5%) as well as the withdrawal fees for processing the wire transfer (2%). Of course you could include this extras in the price, but the customer has already paid similar fees to buy their bitcoin. Unless bitcoin price becomes more predictable, I don’t understand why businesses would use it.

Why bitcoin has a price?

It is often said that the main function of bitcoin is to facilitate the payments. This currency is not meant to be an asset. If that is the case, why does bitcoin has a price? And why people keep buying it? I can understand why people are buying a foreign currency. For example they intend to use it to buy foreign goods or to travel. They also buy foreign currency as the means of investment. The value of foreign currency is associated with the purchasing power of that currency within the country and with a relative stability of its economy compare to other countries. In case of bitcoin, there is no country. It is decentralized in nature. That means there is no one who can help stabilize the currency value. This function is performed by central bank in case of a national currency, but in a crypto world, this function is omitted by design.

How to value bitcoin?

Should I use similar techniques to evaluate bitcoin as to value a stock? On the surface, holding bitcoin is very similar to holding a sparse asset. The supply is limited and determined by an algorithm. There are still more people that don’t have bitcoin than those who already have it. The price is going up. However, bitcoin is nothing like a stock. There is no company, that generates a cash flow to promise the return on its capital. And thus, there is no target value that will determine whether bitcoin is currently over- or undervalued. As long as there is an interest in buying, the price will continue raising. But what if the interest dissipates. Especially if majority coin holders realize that they don’t use it. Especially with the current level of transaction cost and price volatility.

To summarise

My understanding is that, as long as there is a price tag attached to bitcoin it will behave like an asset. Since it is designed to be decentralized that price will always be volatile. As long as it is volatile, the producers or service providers will be hesitant to use it to price their products and as a result consumers won’t have the need to spend their coins. This will drive the interest in holding bitcoin down and thus the interest in buying it. After all, why would you buy bitcoin now, if you can always buy it later? Is it because there won’t be any bitcoin left?