@Redneck_Engineer: my thoughts toward your questions.
When the Florentine florin became the international settlement coin in the 14th and 15th centuries, it did so because it was recognized as a reliably consistent unit of measure over time – stronger than its competitors. As a major currency, it was both a payment rail and a store of value. The one did not preclude the other.
However, the florin did not become the international standard in a year, nor a decade. In fact, it took well over a century for its virtues to spread across the trading nations of the time, and for a fully developed banking and remittance system to mature around it.
Similarly, gold did not become the 5000 year standard for wealth exchange and preservation the moment the first nugget was picked out of a stream. That, too, required millennia to develop.
We all need to exercise a similar long-term perspective on bitcoin. That seems to me a difficult thing to ask of us moderns, who think a long-term investment is something over 12 months; in some cases, merely over a quarter. Our very short term thinking (historically speaking) feeds the refrain that because bitcoin has not already become a payment rail or store of value it never will.
Plus, bitcoin is currently classified by the IRS as a commodity, and is taxed as such. That designation follows and reinforces the idea that bitcoin’s use case is as a supplement to, alternative to, or replacement for physical gold (precious metals in general). That’s a switch from the last cycle, during which the popularly shared use case for bitcoin was as an alternative payment rail and a permissionless – even shadow – currency. Times change and the narrative changes. It will again. But that’s just noise; the noise of the market trying to figure out what bitcoin is and how it might mature.
The IRS designation encourages us to constrain our ideas of what bitcoin is and what its future can be. However, bitcoin is already more than the IRS recognizes. In some parts of the world bitcoin functions today just as the florin did centuries ago: as an international settlement currency, as a payment rail, and as a reliable store of value. The places where that’s taking place are on the periphery of the first-world-dominated trading regime, among the unbanked and in the emerging market economies where the value of local fiat currencies is unpredictable.
The fact that bitcoin is already proving its worth as more than a store of value – that it is in fact not adequately described as a commodity – means the IRS will one day have to change its definition. I am certain that the day will come when bitcoin is recognized for what it actually is: a truly international, independent, market-based, hard money.
Until you understand what bitcoin really is, you will continue to struggle to categorize it and imagine how to use it.
What we are watching in real time is the birth of a new money. At twelve years old, it is just entering into its teenage years. It’s still growing, still maturing, and while we can see signs of what it will look like when it has reached its adulthood, we can’t be certain we understand it or its potential. Like any proud parent imagining that a child shows signs of becoming a doctor or lawyer, our projections might help shape bitcoin’s development – but might do so negatively as well as positively. What we project might poorly fit bitcoin’s maturity and so won’t materialize over the long term. I think the designation that it is a commodity is one such projection that will prove inadequate to all of the attributes present in bitcoin awaiting the right time to unfold. But, hey, I could prove as wrong, in part or whole, as anyone else.
Because bitcoin exists independently of any human authority, it will find its own way in the world. We will adapt to it. And because the infrastructure is already emerging that makes it increasingly easy and safe to use bitcoin to make micro-payments, the pressure to liberate the coin from the stricture of realized capital gains taxes for using it to buy a good or service will grow. Exponentially, I think, over the next handful of years.
Well within the decade the IRS will have to change its treatment of bitcoin because it will, in fact, be increasingly used as a payment rail around the planet, and it will increasingly supplant national currencies as a reliable and consistent and non-political settlement medium. As that character emerges, the IRS will either scrap the current designation and tax structure, or retard the participation of the US in the future global economy. We might be slow about it – as might be the West in general – because it undercuts our advantages, but in time we will have to recognize that bitcoin is money, and the only objective, market-based standard through which all national currencies are calibrated.
Until the redesignation, if I use bitcoin to make a purchase I have to track the exact coins I used, their acquisition basis, their value at the moment of conversion, and the corresponding cap gains tax implication. It’s too onerous to be practical for trivial transactions. Therefore, I am forced for awhile to use bitcoin as a combination long term investment and emergency savings account. That’s alright with me, though, because bitcoin’s value is still growing dramatically: our adolescent is still growing into her full size and maturity.
By the time she’s 20, her volatility will have reduced significantly, like all young adults. But it will be yet another decade or 15 years on before she’ll have become maturely stable. Meanwhile, an early investment in her future assures me of a share of her future wealth.
It’s also a great hedge against the increasingly rapid debasement of every fiat currency. In fact, bitcoin is not rising in dollar terms; a bitcoin is always a bitcoin. The dollar, however, is being rapidly inflated, and so is declining against a bitcoin. The smartest thing to do to preserve purchasing power is to trade as many devaluing dollars as possible for hard money, and bitcoin, like the ancient florin in its day, is the hardest.
As with the florin then, you can trade a bitcoin back into local fiat if you have the need; and you’ll nearly always be able to do so at a higher exchange rate. Even with cap gains tax treatment you’ll nearly always be well ahead of where you would be if you kept your savings in fiat, fiat equivalents, or even government-regulated and -manipulated precious metals.
TL;DR: bitcoin is an emergent money. Its volatility comes from the market finding its value, but that value is not zero, and steadily grows over time as its adoption as money expands while its new supply is trending toward zero. Its use case is still developing, but is larger than any one government or enthusiast yet realizes. Everything else is just the noise of humans trying to impose order and understanding onto an emergent, wild phenomenon.