Bitcoin's story of one step forward, one step back

TO even the casual observer, the progress of bitcoin must occur in fits and starts. Every step towards mainstream adoption inevitably appears to be accompanied by a step away from it. This week alone, the bitcoin world heralds the opening of the first licensed bitcoin exchange in the United States, even as a bitcoin website in South-east Asia is charged with securities fraud.

Similarly, the virtual currency's price has gyrated as much as its fate. In the last 12 months, bitcoin has been worth anywhere from US$854 to US$177, with plenty of movement in between. It is not of particular comfort that the price has tended south over that time frame.

Such volatility would not be so disturbing if bitcoin were considered solely a speculative instrument like commodities futures or junk bonds, but it is not.

Since bitcoin burst onto the scene, its proponents have championed it for virtually every use - as a medium of exchange, a store of value, a frictionless way to transfer funds and also as an anonymous means of funding illegal activity.

Speculation, investment and liquidity can sometimes be at odds with each other, and within the bitcoin context, all three are at war. The currency is prone to being hoarded in anticipation of a future spike in value and while that is happening, few are inclined to use it to pay for goods. Even though mainstream firms such as Overstock.com accept payment in bitcoin, it is unlikely that such companies propagate the circulation of the currency by, in turn, paying their suppliers and their employees with the cryptocurrency. It is even more unlikely that their employees will want to be paid in anything apart from fiat currency.

It does not help matters that what could have been a more efficient way of getting funds from one end of the globe to the other has been tainted by its association with drug traffickers and other criminal elements. This has not helped central banks, already concerned about bitcoin's perceived role in money-laundering activity, feel any kindlier towards it.

As it turns out, even the criminal elements are yearning for some good old-fashioned stability. Earlier this year as the value of bitcoin took a nosedive, drug dealers lamented on underground forums that their profit margins were being wiped out by the currency's volatility.

So, with both the drug-dealing underground and central bank overlords annoyed, some of bitcoin's proponents have begun to speak of the currency in rather more careful and qualified terms, of late. Instead of proclaiming bitcoin as the future of transactions, they now say that some later and more evolved iteration of bitcoin - some other kind of cryptocurrency perhaps - will eventually triumph.

But where does that leave today's bitcoin and the people who have cast their lot with it? The Winklevoss twins of Facebook fame, for example, are hardcore backers of bitcoin, and continue to be so despite its recent travails. According to them, the lack of regulation is what is causing the volatility in the cryptocurrency. The problem is, bitcoin's low-cost model is predicated on a lack of regulation. Therein lies the paradox of bitcoin's existence. Even as its many uses pull it in several directions, the very factors that helped it to thrive now threaten to pull it apart. Until this is resolved, the currency will always take one step forward, and another back.