Bitcoin has had a rough start to 2015. One of the world’s most prominent bitcoin exchanges has been compromised, and prices have tumbled to lows not seen since 2013. Observers are wondering what will become of Bitcoin this year, both in terms of price as well as the broader industry.
In recent contributions to Forex Magnates' Meet the Experts, itBit's Head of Business Development, Antony Lewis, addresses some of the challenges expected in 2015, including the prospect of liquidity improvements.
itBit is a bitcoin exchange catering to institutional traders looking for a high-capacity venue with bank-grade security and stability. Originally based in Singapore, it moved to New York last year.
Upcoming Challenges for the Bitcoin Industry in 2015
One of the main challenges facing the Bitcoin industry is the regulatory uncertainty. Most countries are still formulating the regulatory framework on the use of Bitcoin and other Cryptocurrencies . The New York Department of Financial Services is working on the second draft of BitLicense after receiving many comments from the industry; Singapore has committed to regulating certain types of companies in the future; Russia has banned bitcoin transactions; the UK eliminates tax on bitcoin trading; other countries may adopt the wait-and-see attitude in view of the upcoming BitLicense proposal. With the lack of clear regulatory guidelines, potential investors and larger companies have put on hold the idea of investing in Bitcoin for fear of breaching future regulations. The lack of protection for consumers transacting in bitcoin also hinders a more widespread adoption. Hence, more clarity is needed around Bitcoin and Bitcoin intermediaries: in terms of regulating exchanges and payment processors, taxation on bitcoin transactions and profits, whether an individual within a country is allowed to transact in bitcoin and consumer protection mechanisms. Bitcoin Price The public views bitcoin price as the main indication of its value. Bitcoin price was down by 40% in Q3 and has been hovering between USD 350 and 400 since, a far cry from its peak of USD 1,200 almost a year ago. This stagnant and relatively low bitcoin price has negative implications on the perceived value of bitcoin, which may create a vicious cycle: the declining bitcoin price reduces its attractiveness to investors and lowers the demand and thus may reduce the price even further. However, bitcoin price is not and should not be the only indicator of the development and adoption of Bitcoin. Other measures, such as the dollar amount of VC investment in Bitcoin companies, as well as the number of merchants accepting bitcoin should also be used as an indication on the value of bitcoin. Over 100,000 merchants have currently accepted bitcoin and all-time Bitcoin VC investment sums up to around USD 320 million. Based on the 2014 run rate, the investment amount is on track to exceed that of the internet in 1995. Other measures are increasing too: development as measured by open source projects and “forks” of the core Bitcoin code; press interest and mentions; permeation into the public consciousness and of course the network effect as more startups create an ecosystem. These all contribute to the value of the network. Lack of Specific Education to the General Public Another challenge is the lack of effective targeted education. The word “adoption” has been poorly defined and many people think that successful adoption means everyone everywhere using it. That is not the point and will never be the case. In reality, Bitcoin has niches and adds much more value to certain users and groups of people than others. There have traditionally been gross generalisations regarding the benefits of Bitcoin, whereas different segments will find different reasons to use Bitcoin over alternatives. Online merchants who have no bank accounts will be able to tap a new global market as they are able to receive Payments from anyone, anywhere with Bitcoin; consumers with no credit cards will be able to purchase things online; high volume traders will appreciate the volatility in the price of bitcoin and arbitrageurs will take advantage of the market inefficiency between different exchanges and currency pairs. Therefore, Bitcoin education needs to be a lot more focused and targeted in order to gain wider acceptance and adoption. It’s standard sales stuff: Talk about the specific benefits to specific groups, rather than the general features.
The Curious Case of Liquidity Constraints: Cryptocurrency vs. FX
Liquidity constraints are much more prevalent in cryptocurrency than they are in FX. Bitcoin’s all-time cumulative exchange-traded volume is around USD 5 billion, whereas FX has trading volume of a few trillion dollars every day. Hence, the Bitcoin market is still relatively immature and transacting in large sizes will easily move the market, leading to cries of manipulation.
For other cryptos, the level of liquidity differs depending on the cryptocurrency in question and the fiat currency it is trading against. Bitcoin accounts for 95% of the total volume of cryptocurrencies traded – other cryptocurrencies like dogecoin and litecoin face even more liquidity constraints than Bitcoin. In terms of currency pairs, USD is the most commonly traded currency, followed by CNY and EUR. Those looking to exchange bitcoin for Japanese yen or Polish zloty, for example, will face much higher liquidity constraints than if they exchange with USD.
The ecosystem is starting to grow up, though. Every day we are seeing new brokers and exchanges willing to put up a bit of risk to participate in the money flow. This results in a systemic move towards thicker order books, tighter spreads and better price discovery.
