5 things Bitcoin could become

14 Mar, 2019 | Updated: 14 Mar, 2019
by Richard Allen
5 things Bitcoin could become

While viewed as a commodity in the eyes of US regulators, Bitcoin and the cryptocurrencies, in general, are often seen and used as a medium of exchange among the community. However, the fact of the matter is, Bitcoin and the plethora of altcoins can often be difficult to classify. We look at 5 things that Bitcoin could become.

A safe haven like gold

Considering Bitcoin was born out of the 2008 financial crisis, it makes sense to consider the currency as a safe haven during times of economic instability. This is an argument that gained in traction as Bitcoin’s popularity grew.

Its blockchain-based infrastructure and independence from the modern financial system only served to reinforce what Bitcoin evangelists were saying. In fact, as Bitcoin’s price continued to rise, one analyst told CNBC in 2016 that Bitcoin shared many similarities with gold – something that has been repeated many times since. The analyst stated that both Bitcoin and gold have an “extremely limited supply and a relatively inert state.”

Then, in 2018, a Goldman Sachs analyst went so far as to tell clients that cryptocurrencies could be thought of as stable assets, like gold. However, when the price of Bitcoin plummeted at the end of 2018, this argument suddenly seemed less airtight.

Furthermore, the World Gold Council released a report in late January that explains Bitcoin and cryptocurrencies, in general, can’t be considered a safe-have like gold. They state that cryptocurrencies will have a role to play in the financial market but can’t yet be considered a viable substitute to gold given their price volatility.

This isn’t an unfair statement but doesn’t necessarily mean that Bitcoin will stay this way. As the currency matures, and with the addition of appropriate regulation, Bitcoin’s volatility will decrease. This will open new doors, many of which may very well see Bitcoin become a safe haven during times of economic uncertainty.

To further this argument, a Medium post states Bitcoin already has the potential to offer safety during an economic crisis. It has a number of characteristics that counteract the volatility of a financial crisis, including its lack of correlation to traditional markets and its decentralized nature.

Fundstrat Global released the results of a survey asking respondents if they believed Bitcoin would make an effective safe haven from a financial crisis. The results found that 72% of institutional investors believed the price of Bitcoin would rise during a recession.

The medium post includes several advantages to using bitcoin during an economic crisis, including:

·  Most economic crises involve the fault of a central authority, which have no control over bitcoin

·  It’s widely accessible – all you need is an internet connection

·  It can be used as a universal store of value

·  It’s distanced from traditional markets, meaning it shouldn’t react to the same negative issues people have with legacy systems

·  Cryptocurrencies can be traded 24/7

Read more: Bitcoin is similar to gold and silver, VanEck & SolidX argue with SEC

A reserve currency

A reserve currency is one that’s held by governments and institutions in significant quantities. With fiat, this serves as their foreign exchange reserves. Bitcoin could one day rise to the occasion and replace fiat in this regard. There are many reasons why. Unlike fiat, Bitcoin lasts forever, it's 100% portable, secure, transactable and programmable. Bitcoin can be constantly upgraded to meet the needs of a changing society.

To this end, there are many who believe fiat’s time in the spotlight is drawing to a close and postulate that cryptocurrencies could be the ones to take over. Max Keiser is one of these people. Host of the Keiser Report, Max Keiser believes the world is moving in a direction that will see the rise of a deglobalized economy. In other words, the weakening of the US dollar. Already there are several countries developing their own system of financial transactions, free from US dominance.

Keiser is of the belief that Bitcoin can rise to the occasion since its completely independent from the US dollar or any other critical factors that play a role in traditional financial markets. “Soon, there will be a new global reserve currency and it won’t be the U.S. dollar, the euro or any other fiat,” Keiser said.

Keiser added “Among BTC’s traits, are the fact that it can produce a new block about every 10 minutes and its cap of 21 million coins. These allow BTC to be more stable and lead to a predictable monetary policy that is based strictly on mathematics, not on the whimsical antics of a state government or individual.

“That emission schedule of coins coming on every ten minutes makes bitcoin the central bank of the world with the most rock-solid monetary policy there is.”

Essentially, Bitcoin offers one of the most viable alternatives to the US dollar, especially for countries that are suffering from rampant inflation.

Read more: 'Bitcoin will become the next global reserve currency'

A platform like Ethereum (with Layer 2 protocols)

When Satoshi Nakamoto proposed the idea of Bitcoin in 2008, the very first public comment was made by James A. Donald that stated, “the way I understand your proposal, it does not seem to scale to the required size.” Well, more than ten years later and scalability is still the biggest issue facing Bitcoin: how to grow to meet increasing demand.

Bitcoin’s blockchain has been capable of handling around seven transactions per second. This has been enough in the past, but with growing demand, transaction times have been slipping and transaction fees have become extremely expensive. This is where Layer 2 blockchain technology comes in.

Layer 2 blockchain technology, often referred to as an “off-chain” solution, serves to scale blockchain transaction capacity while still retaining the decentralized benefits inherent with a distributed protocol. The technology is still quite buggy but has proven to be effective in reducing the burden on the base layer (the root blockchain) by offloading transactions from the main blockchain onto layer 2 platforms. All this means that the blockchain network can handle much higher transaction throughput.

Bitcoin’s layer 2 protocol has been dubbed the Lightning Network and is widely regarded as the solution to the currency’s scalability issues. If Bitcoin is to ever stand a chance of becoming a legitimate alternative to current payment mechanisms, the Lightning Network is its best chance.

CoinTelegraph likens the current state of the Bitcoin network to sending a telegram. At one point in time, it was the most efficient method for sending a message. You had to go down to your local post office, fill in a form and pay for your message based on how many letters it contained. The message would then be telegraphed to the nearest telegraph office and a postman would have to deliver it to its destination.

It was an expensive and time-consuming method compared to the instant messages we have today, and the Lightning Network serves to bring Bitcoin’s telegraph method to that of speed dial.

While the lightning Network is still very much in development, when completed it will offer numerous benefits. The most important being transaction speeds. No longer will you have to wait for several confirmations of every transaction you’re trying to make. Transactions will be close to instant regardless of how busy the network is. This will be a huge step towards Bitcoin being able to compete with traditional payment systems like Visa, MasterCard, and PayPal.

Transaction fees will be a fraction of what they are now if there will even be any at all. This will make Bitcoin a viable form of payment for things like coffee and buying a drink in a bar.

Bitcoin’s transactions will go from a measly seven per second all the way up to 1 million transactions per second, permanently solving any scalability issues.

The ICO mania that took place last year should see some of the billions of dollars raised in the token offerings make its way into Layer 2 development, which will hopefully expedite the process of mass adoption.

Read more: 5 unexpected uses for the Bitcoin Lightning Network

A commodity

A commodity represents one unit of a tangible asset such as pork, oil, or gold. Unlike with stocks or bonds, who produces a commodity is irrelevant as it’s fungible across all marketplaces. A commodity is also characterized by having a limited supply, with pricing being determined solely by supply and demand.

This, on a basic level, describes Bitcoin. Its algorithm has fixed its quantity at a pre-determined rate. And, just like a commodity, you have to sell Bitcoin to make any money from it. The profit coming entirely from capital gains.

As is the case with all commodities, holders aren’t stabilizing the price by waiting for dividends; they’re waiting for greater final gains. It’s this unpredictability that is the main reason why commodities investors don’t actually buy their products. Instead, they choose to invest in futures contracts which are driven around predicting volatility.

It’s for these reasons, and many others, that the US Commodity Futures Trading Commission (CFTC) classified Bitcoin as a commodity last year. This means that, from a regulatory perspective, Bitcoin can be treated like gold or oil.

Read more: Cryptocurrencies should be legally viewed as commodities, US judge rules

A security

A security is a fungible, negotiable financial instrument that holds some type of monetary value. In order for an asset to be classified as a security, it has to be put through the Howey test. Generally, securities represent an ownership position in a publicly traded company (via stock). While Bitcoin and cryptocurrencies may not meet the traditional definition of a security, they do share some striking resemblances.  

Bitcoin can be used as a variant of stock, for example, such as in the case of ICOs; as a bond provided the governmental bodies accept it as legal. Additionally, Bitcoin provides a sense of ownership of an asset of a financial promise that can be used to recover a financial value in the future.

While the Howey test has determined that Bitcoin isn’t classified as a security, and with the SEC stating last year that Bitcoin’s lack of a secure third party exempts it from security status, it does provide the promise to pay in future according to market value – like stocks. So, in its own way, Bitcoin could very much be considered a security.

Bitcoin has the ability to morph into many different iterations, but no matter what it becomes defined as it's this versatility will ensure its longevity for years to come. 

Read more: Colorado's new Digital Tokens Act exempts cryptos from securities laws


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