As Bitcoin stabilizes below $500 for the first time since it’s eye-popping run to over $1,000 in November 2013, many crypto pundits are scratching their heads and trying to make sense of the current weakness — especially given the excitement & innovation that we are seeing within the global Bitcoin community. Venture capital has also been pouring into Bitcoin startups at a rabid pace (north of $100m so far this past year). However, over the past couple of days, I’ve had numerous friends contact me asking the same question : “What’s happening with Bitcoin?”.

Bitcoin is currently trying to finding an equilibrium point — at least at the current volume levels — given all the recent disruptions to the ecosystem (including the recent MtGox collapse). Equilibrium would be defined for me as the point of stability in price where there is symetric volume and consistent growth on a daily basis between buyers and sellers (utopian, but right now there is asymmetric growth which is not being quantified — so traders are having a problem predicting where it would go).

History shows that it needs to find a very stable price point for a few months before it can really retest any previous highs. External factors like Russia, Ukraine, China, etc will contribute to Bitcoin volatility and changes in the supply/demand curve globally.

I spent some time at the CoinSummit conference in San Francisco last week and my panel discussion, “Bitcoin transactions — what are the barriers for merchant and consumer adoption?” was well received by the community.

Its very clear that Bitcoin has amazing potential but the fact remains that we are still in the very early stages of it’s evolution — which many have likened to the Internet in 1993. Mainstream consumer adoption is just not there yet. We’re waiting for the “Netscape moment” for Bitcoin.

I also don’t believe Bitcoin is suitable as currency — I think it’s a commodity that can be traded for goods and services. It may become a currency in time, but it just isn’t one right now. It’s a scarce, digital commodity — and the trading that takes place on exchanges really reflects the market sentiment around the value of this digital commodity.

In the not too distant future, entrepreneurs & technologists will use the actual Bitcoins themselves in new and interesting ways (think smart contracts, etc.) —how many will be ultimately needed is unknown, and that’s what creates the imbalance in price. Right now it’s all speculation as to what that future value of a Bitcoin will equate to. This is what makes the Blockchain far more interesting than the actual Bitcoin — but I’ll leave that for a future post.

I have some alternative views (i.e. not stuff the mainstream press totally gets), as to why Bitcoin is trading below $500 right now, but I want to point out that I am a Bitcoin bull for the long term. I even predicted at the Silicon Valley Bitcoin Conference in May 2013, it would reach over $1,000 in 2013 when it was trading at $100 to audible sniggers and laughs from a very Bitcoin friendly audience.

That said, conversely, here are the key reasons why I think the Bitcoin price may not organically reach $1,000 again this year, without an external event shifting the supply/demand curve for Bitcoin. It is difficult to predict anything further out than a single quarter in the Bitcoin world, so instead of making bold predictions I would rather focus on highlighting some issues that are suppressing the Bitcoin right now.

TechCrunch published a story yesterday about the recent IRS rulings around Bitcoin — which classifies it as an asset, not a currency (which effectively makes transactions using it taxable). To be frank, anyone who thought that Bitcoin would not be subject to taxes in some form is living in a dream world.

Anyone who made 5000%+ returns over the past year or so should not be complaining about paying capital gains tax — it could have been worse and been classified as income tax. That said, it will have an impact on the price of Bitcoin as some people holding them will need to sell some of their coins ahead of tax filing next month.

The real impact is that the notion that Bitcoin is a “deflationary” currency vs the USD has effectively been dispelled. Any deflationary gains have to be offset via capital gains taxes. This does not mean that it is not deflationary vs other currencies, but given the IRS has given strong guidance here — it’s effectively mooted in the USA. It will remain a store of value, but it clearly is not a currency in it’s current form.

The upside of the IRS guidance is that given it’s not classified of a currency, you can buy and hold Bitcoin for years and never pay taxes until you realize the gain. Contrast that against the treatment of foreign currency holdings (and subsequent appreciation against the USD) and you’ll see it’s a fair outcome.

The IRS guidance when coupled with unconfirmed rumours that China is “banning” Bitcoin has led the mainstream press to postulate that these are the reasons for the current weakness in the price.