I think the last few months has seen a number of transitions in the market for Bitcoin.

First, and most importantly; the speculators are starting to drift away.  With the price stable or gently declining for a few months, the kind of mindset that wants to make 20% a month minimum just doesn’t see the excitement any more, so greed is weakening.  And because greed grows weaker, fear grows stronger.  Fear begins to overcome greed as the herd instinct kicks in.  The speculator is depending on other speculators staying in the market.  The realization that speculators are exiting the market, combined with the underlying suspicion that the market may in fact be primarily sustained by speculators, means that a mass exodus could cause a collapse, and the speculator does not want to wait.  To be the last one to get off the sinking boat usually means getting off underwater.

Second, the infrastructure needed to actually use Bitcoin as a normal investment or for buying things is more and more present.  More and more merchants and retailers are working out deals with payment processors to deal with Bitcoin payments.  More and more startups and technologies exist to try to make Bitcoin easier to manage and deal with.  And more and more mutual funds, hedge funds, market trackers, etc, exist to help people manage Bitcoin as part of an investment portfolio.  Regulation about it is still murky, but less so as time passes.  It is definitely better integrated into the financial infrastructure of the world than it has been before.

Third, whales are moving.  Very slowly and very carefully, some people with deep pockets are buying all the mining output and the stocks sold by speculators drifting away.   But they’re not bidding up the price in order to do it, they’re just backstopping the larger price declines.  They’re starting to accumulate some large amounts but don’t seem to be in any particular competition with each other, nor in any rush. And whoever they are they’re being very quiet.

Fourth, despite the increased payment processing infrastructure, I’m just not seeing the uptake of Bitcoin as a payment system.  So far these systems don’t offer retailers who immediately trade back to USD or some other government-issued currency much real advantage in costs, and I haven’t heard of anyone offering a price break to customers for using Bitcoin.  The approximate volume of trades on the blockchain remains steady, instead of increasing the way one would expect if newegg, overstock, et al were getting a lot of Bitcoin business.  Bitcoin solves the value-transfer problem better than other approaches, but it does not appear that this particular problem is seen as a pain point by the consumers who’d have to abandon their accustomed channels for value transfer in order to drive its use.

So on the one hand I’m seeing a collapse of the speculation market, but on the other that collapse is being backstopped or slowed by new purchases which are being made by people who are being very quiet and patient.  On the other hand I’m seeing a lot of payment and investment infrastructure falling into place, but the payment infrastructure is not being widely used – at least not yet.

I’m backing up and trying to see a bigger picture here.  Ultimately, I wind up asking this question; does Bitcoin have value as an investment outside of speculation?  IOW, is there a legitimate specific role for Bitcoin as a long term investment, aside from speculative thinking that it’s going to be valuable because other speculators will want it because it’s going to be valuable because other (( recursive regress …))?

I think that there is.  Bitcoin has a valid investment role as a hedge against liquidity crises, capital controls, and foreign-investment tariffs.  It will be beneficial for diversified investors to hold some Bitcoins, even if in the long term Bitcoin underperforms the market, because in circumstances where their other investments post losses Bitcoin will post gains, insulating the investor against catastrophic loss.  Gold occupies a similar niche, but Gold is all too easily stolen and difficult to transfer over long distances immediately.

But …  How much? In a universe where Bitcoin has reached a long-term stable valuation (ie, speculators no longer a significant part of the equation) you actually need to be doing something fairly esoteric in your investment portfolio for Bitcoin to be more advantageous than some other investment.  It’s hard to imagine a steady state in which rational investors keep more than a tenth of a percent of their holdings in Bitcoin. It will almost always be better for them to diversify or hedge using some other instrument with a greater upside.   Of course the same is true of going short on stock or bond positions, and a lot more investors do that than it’s advantageous for.  So advantageous or not, there will always be some demand driven by short term speculation.

We live in Interesting times.