Bitcoin as Commodity

Bitcoins themselves (as a finite resource) resemble precious metals and make an attractive investment as a store of value and currency, while the Bitcoin protocol is a near limitless source of verified transactions that can be incorporated into products and services with relatively minimal effort.

Much has been made of Bitcoin’s similarities to gold, and it has been touted as a hedge against sovereign risk in places like Cyprus and Argentina. Bitcoin, unlike banks, cannot be compelled by a failing government to turn over 15 cents of every bitcoin you have, or worse yet accidentally spend your bitcoins. Investor Chamath Palihapitiya calls Bitcoin “schmuck insurance”. Bitcoins will continue to have universal appeal as an easily obtainable and globally transferable commodity investment,especially in markets where depositor protections are easily ignored and inflation becomes an increasing reality.

Early investing in bitcoin has been defined by extreme volatility (the BTC>USD exchange rate over the past year has ranged from $13 to $260 and is now around $122), but it’s important to keep in mind that it takes time for the true market use case of a commodity to be developed. Standard Oil was founded in 1870, a full decade after the commercialization of oil extraction in Titusville, PA. At the time, kerosene was the valuable component of refined petroleum as the primary fuel for lanterns and heat. Gasoline was an unwanted byproduct and thought to have such little value it was simply dumped into rivers. The mass market for gasoline-powered cars didn’t really take off until the 1920s. A barrel of oil didn’t cross the $100 threshold until 2008.

Like oil, Bitcoin can be refined and put to use in novel and yet-to-be imagined ways. Bitcoin’s scripting language can be used to create transactions with multiple components (a standard bitcoin transfer needs just two things: (1) proof of bitcoin ownership by the sender and (2) the address of the recipient). Contracts can be designed and enforced that can require additional approvals, reference external facts, or even be timed to complete in the future. Because these conditions can be built directly into the Bitcoin protocol, this provides an interesting alternative to relying on (and paying!) banks, lawyers or other institutions regularly entrusted to help craft, facilitate and enforce transactions between private parties. Bitcoin can be used in marketplaces where others can’t or won’t usually go (especially for less than their market rate). Similarly, marketplaces with historically high transaction fees no longer require hourly or commission services to execute simple exchanges. Developers are only scratching the surface of what Bitcoin can do.