How far is the skyrocketing Bitcoin from becoming a currency?

“Bitcoin’s first phase (2008-2016) — creating a digital commodity; second phase — proving it as a store of value; third phase — as a currency.”

I noticed a lot of people retweeted or shared this tweet of mine and it’s a hot topic so I wanted to expand on my point in this post.

In my previous articles or tweets, I have written about Bitcoin as a commodity, which has caused a lot of confusion. Isn't it a digital currency? Well, maybe, but not yet.

I don't believe Bitcoin is appropriate as a currency, I think it is a commodity that can be used to trade goods and services. In the future it may become a currency, but right now, it is not a currency, right now, it is a scarce digital commodity.

This paragraph is excerpted from my first Bitcoin article, which was published in March 2014.

To better illustrate my point, let’s take a moment to understand at a very basic level the differences between commodities, stores of value, and currencies (these definitions are from Investopedia), and I’ll summarize them briefly.

A commodity is a basic good in an economy that, while it may exist in different grades (A, B, C, etc.), is essentially homogeneous and easily exchangeable. Precious metals such as gold and silver are good examples of commodities, as are wheat, corn, pork, etc.

A store of value can be a commodity that is not easily perishable (so wheat, corn, and pork are not stores of value) and does not depreciate over time (for example, mass-produced cars or other homogeneous products will depreciate significantly due to technology and time issues, so they cannot be stores of value). Stores of value usually have a basic level of demand, and their prices will not fall sharply (for example, platinum is a store of value because it has industrial demand), and they may also cause structural changes in the local or global economy, and even black swan events. In essence, the value of a store of value does not decay over time, and in fact it can also increase.

Many altcoin holders are shouting that Bitcoin could be replaced by better technology. This is a possibility, but Bitcoin has a huge network effect, just like Facebook. I am willing to bet that in the short term, another cryptocurrency will not surpass Bitcoin due to technological advantages. If it happens, it will be mainly due to network effects and commodity demand, not technology.

Money is essentially a common basis for transactions. It's hard to carry around large amounts of gold or other stores of value, so paper money was created, which historically was backed by gold (not anymore, and I won't discuss that). Money is used as a medium of exchange, because otherwise you'd have to constantly calculate the exchange rate of one good against another.

If you are interested in learning more about money, you can read an excellent paper written by Mr. Nick Szabo in 2002: "The Origins of Money".

So, what is Bitcoin? The white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" written by Satoshi Nakamoto, I think it misled a lot of people, yes, it is a great long-term vision, but it does not explain what steps Bitcoin needs to go through before it can become a digital cash system.

For Bitcoin to be a trusted medium of exchange (aka money), it needs to be stable and have low volatility.波动性and不可预测性in currencies are particularly detrimental to business, and if Bitcoin is too volatile, businesses will be unwilling to accept that risk, and the same applies to those who earn Bitcoin. I'm not talking about Bitcoin as a payment network that is converted into fiat through third-party services such as Abra or Bitpay. I'm talking about actually accepting and holding Bitcoins because they are trustworthy as a medium of exchange and will not depreciate.

Since its inception, Bitcoin has been labeled with high volatility for many reasons, including that its market capitalization/liquidity pool has expanded over the past 3 years (more information in the previous article). In fact, Bitcoin's volatility is at an all-time low. (Data from BTCVol)

It's getting closer to stability, but that doesn't mean we've reached the second stage. I think Bitcoin has to go to around $3,000 first, which I believe is entirely possible later this year. But it has to keep volatility low and rise steadily, and if the price rises too quickly, it won't actually help it. If Bitcoin goes above $4,000 before the end of 2017, I'm sure we'll see a crash and we'll be back to square one.

As I pointed out at the beginning of the article, I think we are just going through the first stage of Bitcoin, where Bitcoin is widely accepted as a digital commodity, millions of people hold Bitcoin, miners are mining it and getting paid well, and Bitcoin is also seen as scarce and deflationary, with the ultimate total amount of Bitcoin not exceeding 21 million (with no more than 5 million Bitcoins remaining to be produced in the next 100 years).

If the first phase of Bitcoin was as a digital commodity, the second phase will be to prove that there is enough market demand for it, and then the price of Bitcoin will steadily rise over time. Bitcoin holders are an interesting group, they want to see crazy returns of 20 times a year, just like drug addicts looking for the next stimulus. In the next few years, we should aim for 2-3 times returns per year, and then the returns should steadily decline over time. The power of compound growth will ensure that we can still get a 20x return, but it will take a longer time period. The more stable Bitcoin becomes, the closer it is to a store of value and eventually a currency. At that time, Bitcoin will usher in a new era, which may take another 5 to 10 years.