Out of the Spotlight, Bitcoin Gains Legitimacy

Mainstream perception of bitcoin, much like the crypto-currency itself, has been volatile. Starting last fall and gaining steam throughout the winter, bitcoin became one of the most buzzed about topics on the internet. It was a recurring subject on sites like Business Insider and TechCrunch. Mainstream media got in on the action as well — Newsweek relaunched their entire publication in March with a large, feature story on the search for bitcoin’s mysterious founder.

Then, as quickly as it had risen, the currency seemed to drop out of the public consciousness. During its time out of the spotlight, however, bitcoin has made significant progress towards mainstream acceptance, and may be poised for a second breakthrough.

You can see the rise and fall in public interest of Bitcoin below, as shown by Google search volume for the term over the last year:

 

Although search volume is higher year-over-year, it’s nowhere near the peak of November and December 2013, where it averaged over five million searches a month. This is likely due to a drop-off in general interest, and perhaps the loss of the “novelty factor” the crypto-currency once commanded.

Bitcoin transaction volume has followed a similar path. Here’s the average volume over the past 12 months, according to Blockchain.info:

 

During November and December, transaction volume regularly surpassed 300,000 bitcoins, and spiked over the 900,000 mark in March. Since April however, volume has remained relatively flat, settling at around 100,000.

This drop in public awareness and transaction volume though, doesn’t mean that Bitcoin is declining as a viable financial asset, or even alternative currency. In fact, Bitcoin is closer to achieving widespread acceptance than ever before.

One of the main barriers to entry with bitcoin has been the lack of acceptance among merchants. For interested consumers, there’s not much point in purchasing an asset that no one recognizes. Thanks to the efforts of bitcoin-wallet company Coinbase however, this is changing.

Last week PayPal announced a partnership with Coinbase that will allow merchants to accept the digital currency in place of USD. Merchants who use PayPal subsidiary Braintree for payment processing can immediately begin accepting bitcoin, with the option to convert the coins back into fiat currency once the transaction is complete. From a public relations standpoint, this is big news. PayPal is a widely trusted brand. Even if they won’t be backing such transactions directly (it appears the merchants who opt-in will bear the risk), opening their platform to bitcoin reduces the barrier to entry for curious onlookers. Put another way, it expands the pool of legitimate businesses that accept bitcoin, and makes them seem safer.

Along the same lines, bitcoin investors may have gained a safety net in the form of the first U.S. regulated bitcoin derivatives exchange. TeraExchange, a N.J. based company, has received the Commodity Futures Trading Commission’s stamp of approval to operate a bitcoin swaps exchange. This will allow investors to trade USD-denominated bitcoin swaps ranging from one day to two-year maturities. While derivatives can be confusing (to say the least) for those outside of the finance industry, the basic premise here is relatively simple. As Reuter’s explains:

The derivative allows clients to protect the value of their bitcoin holdings by locking in a dollar value, offering an insurance against the astronomical price swings that have plagued the computer-generated currency.

The CEO of TeraExchange, speaking to the Wall Street Journal, elaborated further, saying:

generally speaking, the products that trade without a hedging instrument tend to be much more volatile because there is no way to hedge risk without going back to the underlying product.

Bitcoin’s volatility has certainly played a large role in shaping its uncertain, risky image. A single bitcoin cost roughly $125 one year ago. Since then it has hit highs of over $1,100, and is now valued at approximately $470. Here’s a chart from Coindesk showing bitcoin’s price over the last year:

 

For an asset, those are large deviations. For a proposed currency, it’s even more extreme. Allowing investors to hedge their risk could help stabilize bitcoin’s price, and limit such fluctuations. The backing of the CFTC for a bitcoin-based financial product alone is a big move towards gaining legitimacy on the broader market.

The SEC is also weighing the viability of two proposed exchange-traded funds (ETFs) that track the price of bitcoin in USD. Such funds allow investors easier access to assets like bitcoin (or commodities) by allowing them to invest in the product through the stock market. One of the funds, called the Bitcoin Investment Trust, has existed as a private trust since September 2013. The other is headed by the Winklevoss brothers (of The Social Network fame), and has been under review by the SEC for 14 months. Given the recent approval of TeraExchange’s platform, and the acceptance of Bitcoin by major companies such as PayPal, it seems that both ETFs will likely be approved.

That means we’re at a point where over the course of the next six months, there could be multiple publicly traded ETFs, a large derivatives exchange, and popular, consumer-friendly ways to pay for goods, all using bitcoin. It’s a striking contrast to the image of bitcoin just a few months ago, when the currency was almost inextricably linked to the Silk Road drug market and shadowy, Deep Web activity.

Not all of these recent developments are exciting, or lend themselves to catchy headlines, but they are crucial for laying the financial groundwork for widespread bitcoin trading, and potentially adoption. If bitcoin continues to gain acceptance as a legitimate asset, it will be notable not only for its financial implications, but for the remarkable turnaround it will have made in public perception.

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