Nobody knows what will happen with Bitcoin. This is meant to be a bearish take on its potential as if written from the future -- at the end of 2014. None of the following has actually happened -- it's just one take on what could happen to Bitcoin. For a bullish take, click here.
Bitcoin exploded in popularity in 2013. But thanks to numerous obstacles, it failed to gain the traction it needed to succeed. Bitcoins are still traded and used for fringe transactions in 2014, but mostly as a novelty. What were the reasons for its failure?
There will be a finite number of bitcoins "mined," which bucks the trend of most every currency currently in use. This results in deflation, where one bitcoin can buy more goods the next day than today, so the incentive is to hold onto it. Japan had been fighting inflation for several years, only breaking the trend in 2013 after its central bank doubled its monetary base -- something Bitcoin is unable to do.
With these deflation incentives, the spending of bitcoins was few and far between. While this first led to a dramatic increase in its value, the bitcoin market fell apart once it was realized a select group of early adopters held a significant amount of the total bitcoins at the expense of other users who only dealt in fractions of bitcoins. Without the demand from new adopters, the market collapsed in mid-2014.
Complexity beyond the average
While cash is a simple concept to grasp, holding onto a digital wallet, encrypting it, and backing it up ended up being too much for the average user. Solutions that attempted to simplify holding and spending bitcoins were always lucrative targets for hackers. And while the average consumer was used to losing digital documents and photos after neglecting to back up files, losing straight-up wealth left a sour taste that didn't improve upon traditional banking and payments.
The real killer to Bitcoin's adoption proved to be the institutions Bitcoin tried to subvert. The near-zero transaction fees of Bitcoin and much faster processing threatened banks. In 2012, the banking industry voted against improving the speed of the automated clearing house network that takes a few days to clear payments because of worries over the cost of revamping and potential fraud. However, also at risk for the banks were wire fees. And such a move could also hurt the success of Bank of America, JPMorgan Chase (NYSE:JPM), and Wells Fargo who created clearXchange for peer-to-peer payments.
Unless banks controlled the next system, and it didn't hurt revenues, they had no reason to allow Bitcoin-friendly companies to bank with them. Especially if it opened up the banks to potential legal or image liabilities of unscrupulous Bitcoin use. Examples of wary banks include Chase's suspension of Bitcoin seller Bitinstant's account, leading to Bitinstant's suspension of services. These conservative banking policies with regard to Bitcoin continued through 2014.
The failure of Bitcoin
While Bitcoin failed to bring about the revolution in payments it set out to accomplish, banks did have to step up their own services to match many of the benefits of Bitcoin in 2014. Bitcoin's mistakes also could guide a future version, or one of the many other alternative currencies, to success.
This was a look into the future as if bitcoin fails-the events above are fictional, and are just one take on bitcoin's future. For an opposite viewpoint, click here.
Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.