On Dec. 6 China’s top search engine Baidu Inc (BIDU) announced they would stop accepting the red-hot cryptocurrency bitcoin as payment. The cessation is a blow for bitcoin proponents, who, however bullish, understand that bitcoin cannot maintain its valuation as a purely speculative instrument, and to have longevity and stability must gain market liquidity.

In short, to function as an actual currency at some point, Bitcoin must be able to be accepted on a truly wide scale for a variety goods and services, which it currently cannot claim to do.

Baidu is Protecting their Bottom Line

While Baidu’s suspension of bitcoin payments was certainly spurred by China’s central bank barring financial institutions from handling BTC transactions, the underlying issue is bitcoin’s extreme volatility.

In the statement announcing the suspension of bitcoin payments, Baidu cited not the recent Chinese government actions against bitcoin, but that the “recent large fluctuations in Bitcoin’s value makes it unable to safeguard users’ interests.”

They’re right about fluctuations hurting someone in the transaction, but at that moment it wasn’t the users they were protecting. More likely, Baidu was protecting themselves. The fact that when a bitcoin’s price does things like lose half its value in a couple days (as it did just prior to Baidu’s announcement,) a company accepting bitcoin as payment gets the shaft.

Like any company, they’re looking at the immediate bottom line, and revenue that has the chance of devaluing by 50 percent in one weekend is not a risk worth taking.

Extremely Volatile Money is Not Money, it’s a Sandbox for Daytraders

Bitcoin proponents tend to forget that a currency that is too volatile is not much use as a currency. It has use as a speculative vehicle for amateur forex players, to be sure, but not as a viable means of exchange.

For instance, think about what it means to actually spend a currency if it is rapidly increasing in value. Let’s say that one day, fifty bitcoins could buy one Tesla (TSLA) Model S car. If bitcoin continued surging as it had the two months prior, why on earth would a person spend their “money” on a Tesla when in a month, those same fifty bitcoins could buy two Teslas?

Or look at it from the perspective of the seller. A currency that is not liquid enough to fight off speculative binges is prone to sudden, unexpected price drops. Let’s say the dealer sells that Tesla for fifty bitcoins, and then the next day the price of bitcoin is halved after a trader sell-off exacerbates a panic. That dealer just sold their Tesla for half its value, and thus got royally screwed.

Whether upswing or downswing spending of a bitcoin is a dicey proposition for either side of the deal, with the current trend favoring the holder of the bitcoin. In most cases, this means instead of spending, people tend to save their bitcoins and hope they go up in value (which, due to their deflationary design, is normally their natural tendency.) This hesitancy to spend and to hold and wait for the value to go up creates systemic hoarding, thus favoring early adopters in a pyramid-type economic structure, eventually leading to depressions and bust-outs.

Macroeconomics aside, why are companies currently accepting a payment whose “correct” valuation, no matter how bullish or bearish, must currently be considered quite uncertain?

“(X) is Now Accepting Bitcoins”

As bitcoin increased in value 89-fold this year, a bevy of companies began accepting it as a form of payment. OKCupid, Baidu, Virgin Galactic, and yes, a Tesla dealer began taking bitcoin in lieu of US dollars. There are hundreds more that are “now accepting bitcoin,” mostly local businesses or tech startups.

From a business perspective, it doesn’t make sense. Why risk pricing your goods and services in bitcoin, when the correct price of a bitcoin is currently anybody’s guess?

Because bitcoin traffic is still relatively insignificant, almost any time some business, no matter how small, begins accepting bitcoin, it makes the news. “Now accepting bitcoin” announcements routinely appear on the front page of the bitcoin subreddit, a very popular gathering place for bitcoin aficionados, and attracts more business – via bitcoin or US dollars.

At this point in its history, accepting the volatile bitcoin as payment is not a wise business decision – at least from a bottom-line perspective. But it does buy that great intangible of publicity.

Being on the cutting edge is not cheap. For smaller tech startups, accepting bitcoin as payment is worth the risk in return for getting traction in the bitcoin (read: tech) subculture, and beyond. For larger companies… well, Virgin has a knack for publicity stunts, and Richard Branson is, if nothing else, a consummate self-promoter. Ditto for Snoop Dogg/Snoop Lion, who is trying to sell his new album for bitcoin.

The interesting thing is, the more people look past the very basic economic complications of accepting payment in bitcoins, the more it might eventually begin to actually stabilize via increased liquidity. This in turn, could help break the cycle of volatility.

Like any emerging market, this will take years and years and years to happen. But it doesn’t mean it can’t.

The Key for Bitcoin’s Viability is “Correct” Pricing

Bitcoin’s deflationary bias means it cannot probably ever function properly as a major currency (for an illustration of the massive economic problems that arise from deflation, look at Japan over the last 20 years.) But there are aspects of bitcoin that are extremely attractive, like its ability to facilitate international trade and its lack of service fees, and it certainly has a future as an alternative investment vehicle.

Bitcoin’s most bullish proponents are a little misguided about the feasibility of bitcoin ever competing with or replacing the world economic superpower’s paper currencies. But its publicity-minded proponents could help push bitcoin through this infant stage and greatly increase popular usage.

If trade increases, it will help the market “discover” the stable price of bitcoin in relation to goods and services. Then and only then will bitcoin become a viable alternative method of trade, and not just a speculative house of cards.

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