The market for Bitcoin is evolving quickly and furiously, posing both opportunities and risks.

While the price has stabilised somewhat since the wild swings during the last two months, the velocity of transactions has fallen as people are choosing to hoard their existing stash, rather than spend it.

The consensus among close watchers is that people are waiting for the exchange rate to drop steadily below US$100 or rise steadily above US$200 before making any big moves…

The pace of Bitcoin purchases is way up, but most striking trend has been the dramatic slowdown of velocity. The price rise has discouraged owners from spending, potentially giving the Bitcoin retail sector a reason for retooling expectations. Yet this trend can change in minutes, and with a relatively thin market for now, the actions of large players can make a huge difference.



The payment system itself is still on the march. The Wall Street Journal reports that John Donahoe, CEO of PayPal and eBay, is looking into integrating Bitcoin into its entire payment platform. ‘It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin closely,’ Donahoe said. ‘There may be ways to enable it inside PayPal.’

If this happens, it would be a big move for both the company and the currency. That he made the statement at all indicates just what an important player Bitcoin is already.

In a few short months, it has gone from being a tiny niche technology for geeks and pot sellers to having a $1 billion market capitalization and attracting some of the smartest venture capital in the digital world. The first fully functional Bitcoin ATM is being unveiled. If these become common in large cities around the world, the market will broaden and deepen dramatically.

The announcement comes as more merchants are rushing to attend a Bitcoin trade show in Palo Alto, Calif., on May 13-15. This conference is attracting many highfliers in Silicon Valley with plenty of venture capital to throw in the direction of this emerging currency. The speaker lineup alone is a who’s who of the entire digital currency marketplace. And Forbes is running a series on what it is like to live on Bitcoin exclusively for an entire week!

Bitcoin: Bad Press and Stress in the System

Meanwhile, the Bitcoin/dollar exchange rate has been under some pressure in the past week. Most observers think this is due to technical troubles at Silk Road, the Bitcoin escrow service that allows buyers and sellers to exchange money for just about anything (legal or illegal). Silk Road – just like the main Bitcoin exchange, Mt. Gox – has been hit by rapid-fire database queries that hammer the site to the breaking point. This time, it broke and stayed that way for days.

Bitcoin also got hit with bad press because the code to verify transactions has hosted some text files that carry additional embedded files from WikiLeaks and even some pornography. Even though users will never see these files unless they are very tech savvy, it’s unwanted exposure for Bitcoin. Global Guerillas has the story, and CNN Money has picked it up as well.

The problem (which generates bad PR, but, again, doesn’t affect most users) can be solved, but there are additional issues cropping up that are not so easily solved. For example, regulators are growing ever more interested in bringing Bitcoin within their reach.

The Financial Crimes Enforcement Network will be policing exchanges to make sure they are compliant with regulations. They will surely find some that are not. In this case, we could see some Bitcoin exchange owners frog-walking to the paddy wagons before the year’s end, which will only add to the bad press and scare away new adopters.

This is not a terrible thing, though, because the sector does need time to develop in an atmosphere without speculative frenzies.

In Canada, some banks are already spooked. TD Bank and RBC have frozen the accounts of two Bitcoin exchanges. James Grant, owner of Canadian Bitcoins, was told in a form letter from the bank that his account was closed, and his exchange is making the necessary adjustments. But Melvin Ng, proprietor of CADBitcoin, received a phone call and has decided to leave the exchange business altogether.

Such problems will continue for years until the market settles. Remember, digital currency is in the same position today that the World Wide Web was in 1995 – a huge experiment in trial, error, and real-time development. Meanwhile, there are some digital products out there that demonstrate that the unity of cryptography and payment system is here to say.

As with all emerging technologies, the best strategy is to sit tight and try to relax. Wade slowly into the shallow end of the Bitcoin pool and don’t purchase more than you can lose. This market will mature and stabilize in time, but we could be looking at five or 10 years for that to happen.

Jeffrey Tucker

Contributing Editor, Money Morning

From the Archives…

The Market Rebounds, but We’re Still Not Selling…

26-04-2013 – Kris Sayce

Is This the Last Hurrah for the Australian Dollar?

25-04-2013 – Murray Dawes

Here’s Proof the Silver Bullion Market is Alive and Well

24-04-2013 – Dr. Alex Cowie

Stand By for the Recession Rally in Resource Stocks: Take Two

23-04-2013 – Dr. Alex Cowie

A New Take on Hard Asset Investing

22-04-2013 – Kris Sayce