A Stable Price for Bitcoin May Create Wild Appeal for Payments

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One of Bitcoin's scariest traits is the digital currency's chaotic price fluctuations, making many consumers afraid of losing money if the price abruptly plummets.

Some think instituting a value-in-exchange benchmark—a set price for exchanging the digital currency for U.S. dollars—could put those concerns at ease. Others say this idea would push trading out of the country and add an unnecessary variable, since many consumers might use Bitcoin only as a pass-through when purchasing in other currencies.

In 2013, the price per bitcoin started at $13 and at one point surged past $1,100. After the February 2014 failure of MtGox, a large bitcoin exchange based in Tokyo, the price per bitcoin dropped below $500 before settling somewhat stably at around $650.

Bitcoin was created in 2009 as a payment instrument that is not reliant on the payments industry's infrastructure for authentication and the movement of funds. Some have seen it as an investment instrument, and many of Bitcoin's early adopters have become quite wealthy by holding onto the bitcoins they purchased years ago.

The Winklevoss twins have predicted the price could hit $10,000 per bitcoin someday. Max Keiser, an American broadcaster who created his own cryptocurrency, Maxcoin, says Bitcoin will top $5,000 by the end of this year.

Bank of America set Bitcoin's price target at $1,300 in a research report released in December. And if Bitcoin lived up to its full potential it could end up being worth as much as $100,000 per bitcoin, according to Gil Luria and Aaron Turner, Wedbush Securities analysts.

By design only 21 million bitcoins will ever be created. And if demand continues to eclipse supply, the price for each bitcoin should rise, making it an appealing investment vehicle.

However, this investment frenzy runs counter to the desires of the people who wish to promote bitcoin as an alternative currency, says Robert Pargac, director of global investigations and compliance at Navigant Consulting.

"To get the mainstream consumer to use the virtual currency as a common medium of exchange [the community] will have to eliminate the wide swings in price," Pargac says.

A value benchmark could help clear up the confusion over whether Bitcoin is a currency or a commodity, Pargac says.

But instituting a value-in-exchange benchmark would be a short-sighted approach, says Jaron Lukasiewicz, founder of CEO of Bitcoin exchange, Coinsetter.

"Suggesting that bitcoin can, in practice, be tied to another store of value or that it needs to be for the technology to work is misguided both on our industry and the Bitcoin protocol," Lukasiewicz says.

To Lukasiewicz, Bitcoin is a payment protocol that the commodity bitcoin rides on. In the future, mainstream consumers won't necessarily hold bitcoins in digital wallets, he says. 

Instead, a consumer might store a local government currency such as U.S. dollars in an account and, when paying someone who does not accept the same currency, allow a third party to convert these funds to bitcoins on the back end to facilitate that transaction. This would allow a U.S. consumer to purchase from a merchant in Europe, using Bitcoin as the back-end payment rails.  

This theory sounds a lot like Ripple Labs' business model. Ripple, headed by serial financial services  entrepreneur Chris Larsen, created a network that runs on a distributed peer-to-peer system similar to Bitcoin and establishes gateways to route payments across multiple currencies.

"Ripple has created a really awesome payment network; it's everything that Bitcoin still needs to build," Lukasiewicz says.

Instituting a benchmark would merely "create an unnatural arbitrage opportunity," he says. If the benchmark was issued in the U.S. but not in other countries, traders would go to non-U.S. exchanges to buy and sell their bitcoins, he says.

"Plus it's the exact opposite of the free market," he says.

But other Bitcoin aficionados like the idea of establishing a benchmark. "Because of the global, decentralized nature of Bitcoin it could become the defacto benchmark for currency conversion throughout the world," says Karsten Behrend, co-founder, CEO and compliance officer at BitCM, a digital currency compliance consulting startup.

Traders would value a shift towards more transparent Bitcoin pricing, Behrend says. And the benchmark could add credibility to Bitcoin as a medium for exchange, he says.

"There should be a transparent price discovery mechanism and inter-exchange communications protocol that is resistant to price manipulation," says Behrend.

For example, he says, issues occurred because consumers were using MtGox as a price index or as a data point for a composite index. Because of the Japan-based exchange's operational inefficiencies, this practice skewed the market price.

"Informational asymmetries tend to arise based on the market making capacity on a limited number of exchanges," Behrend says.

Bitcoin is still a young technology, and many people predict the price will stabilize once more consumers and merchants begin using bitcoins for everyday payments.

Instead of instituting a benchmark, many in the virtual currency market say it would be sufficient to provide consumer disclosures about price volatility. Few exchanges do this today. 

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