Bitcoin, the dominant digital currency that’s making its way onto the board room agendas of Fortune 500 companies and into the portfolios of average investors, is poised to have a big 2016.
Since emerging as a niche trading instrument in 2009, bitcoin has garnered significant media attention (more often than not, negative attention). While weathering a barrage of bad headlines, the bitcoin ecosystem has grown, attracting more than $1 billion in venture-capital funding over the last few years, supporting some entrepreneurs to build companies, services and capabilities that utilize bitcoin and the blockchain technology on which it’s built, and may transform the financial services landscape forever — and for better.
In contrast to fiat currency (like the U.S. dollar), bitcoin has no central authority, has a finite and known cap on its supply, and allows for near instantaneous value transfer. Against a backdrop of currency wars and manipulation, volatility in equity markets, and interest rate uncertainty, investors need diversification in their portfolios, and bitcoin may be the new asset that provides them with just that.
Bitcoin is still in its infancy, but that’s what makes investing in it promising. Over the last few years, what hasn’t killed bitcoin has made it stronger.
Regulation? Now more of a friend to digital currency than its enemy. If bitcoin is going to fulfill its potential, it needs to do so within some regulatory framework and not in a black hole. The IRS has declared bitcoin to be property for tax purposes, the Commodity Futures Trading Commission has declared bitcoin to be a commodity, and regulation at the state level has emerged, offering investors similar protections when interfacing with other money service businesses. Adoption? Taking off in a meaningful way. Today, well north of 100,000 merchants and service providers accept bitcoin as a form of payment, and number of daily bitcoin transactions continues to trend higher.
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Two years ago, many banks and broker-dealers started internal working groups that focused on understanding bitcoin. There was no shortage of skeptics and naysayers, believing that a decentralized currency like bitcoin could never gain support.
Fast forward to April 2015, when banking giant Goldman Sachs anchored a funding round for Boston-based bitcoin firm, Circle. Since then, across the financial services industry, banks, broker-dealers, hedge funds, registered investment advisers, asset managers and custodians have gotten involved in the bitcoin space, and publicly.
Why? Because bitcoin stands to disrupt much of the electronic payments, e-commerce, remittance and offshore deposit spaces, and even the gold market. It’s worth mentioning that the aforementioned barely scratch the surface on the potential use cases for bitcoin. Early adopters and entrepreneurs highlight bitcoin’s role in the proliferation of micropayments, not to mention the way asset ownership is recorded.
This is why other financial services firms besides Goldman are now involved. This includes Barclays, BBVA, Citigroup, UBS, USAA, and even the likes of the Nasdaq, NYSE and CME Group. Similar to the way the Internet and the layers built on top of it, such as e-mail and e-commerce made communication and commerce much more efficient, bitcoin can remove existing frictions within our financial system and give rise to an entirely new generation of industries, companies and business models.
Why now? Well, bitcoin is a classic case of supply and demand. With a known and predictable supply, demand is the lever that we must closely monitor. If bitcoin continues to pervade Fortune 500 boardrooms, bulge bracket bank trading desks and hedge fund water cooler conversations, demand for bitcoin could grow meaningfully (and so could bitcoin’s value).
This article is commentary by an independent contributor. At the time of publication, the author held positions in bitcoin.