In the Face of Tightening Regulations, Bitcoin Needs to Become Useful

China’s brief love affair with Bitcoin is officially over. It’s now illegal to buy stuff with BTC and by Chinese New Year, which falls on January 31 this year, users in the world’s second largest economy will no longer be able to buy or sell bitcoins with their local currency.

For Bitcoin, the price-crushing, bubble-popping breakup could be a blessing in disguise, giving the enduring cryptocurrency time outside the glare of the media to truly find its way. Simply put, Bitcoin just isn’t useful yet. Ideology aside, it desperately needs a killer app.

Thus far, it’s only served two functional purposes that our current system doesn't already conveniently facilitate. First as a means to buy drugs online, and second as a store of value, either for those with limited financial options, such as China, which tightly controls capital flows, or speculators looking to make a quick buck. For as much as the Bitcoin world loves to tout the latest store to accept Bitcoin, its utility in buying regular things still lags behind traditional currencies and platforms.

As we've already seen, Bitcoin's ability to circumvent regulation is the sort of stuff governments won’t put up with for very long, and given Bitcoin’s reliance on centralized exchanges, it’s only a matter of time before those gateways are closed. China’s out, too. Hopeful Bitcoiners looking to India as the new hotbed of demand from a populous developing nation will likely be disappointed. The world’s second largest country by population will presumably follow the lead of its peers, while its relatively low per capita means that its citizens wouldn’t have the appetite or disposable income to make a real dent anyway.

The only solution then is for Bitcoin to actually become useful.

The popular narrative is that the decentralized open source protocol represents a revolutionary payment platform. By sidestepping major credit card companies and their onerous fees, using Bitcoin as a transaction processor arguably reduces total fees. It’s a realistic if boring solution, but in reality, the math doesn’t quite check out, not yet at least.

It’s true that merchants could conceivably save a percentage point or two versus Mastercard or Visa, which BitPay, a startup that allows vendors to easily accept purchases in BTC, prominently advertises. But that formula doesn’t take into account the costs for potential customers, who still exist in a fiat-denominated reality.

Acquiring bitcoins is becoming ever simpler, thanks to services like Coinbase, which just received another $25 million in VC funding, but it’s far from instant or necessarily cheap. Every trade subjects users to further fees, not to mention the inherent risk of holding the stuff. Bitcoin remains highly volatile, if the latest crash is any indication. Impatient buyers can acquire coins more quickly through escrow services like LocalBitcoins, but that also means swallowing higher markups. After all, everyone needs to take their cut.

And beyond the headaches of developing new systems for the purposes of logistics and accounting, any company that hops on the cryptocurrency bandwagon will also need to deal with the fact that all their sales will no longer be private.

For a company like Amazon, which has never released actual Kindle sales figures, the transparent nature of the technology could be a dealbreaker. Bitcoin’s distributed public ledger, known as the blockchain, is admittedly revolutionary in its own right. But for some, it may simply be too disruptive, at least for the time being.

Innovation takes time to settle, and it’s easy to forget sometimes given the media hoopla that Bitcoin is incredibly young, having only truly entered mainstream consciousness in the last year. Paypal existed for three years in various forms before it discovered its killer app in eBay. But if the concept of Paypal was straightforward, many people still aren’t sure how Bitcoin even works.

Which is why most early arrivals, beyond the philosophical upstarts, are motivated by PR rather than utility. Shopify has little problem offering BTC since as an e-commerce platform provider itself, the onus is on its users to sort out payments. Meanwhile, Virgin Galactic’s product—trips to space—is, like Bitcoin, firmly rooted in a not-so-distant future. The biggest issue is that the system we have now works pretty well. Why would the average Internet user go through the convoluted process of buying BTC to pay a retailer when he could use his trusted, simple Visa?

All this may be painful for profit-seeking speculators to swallow, but it likely won’t bother the purists. If anything, the current regulatory climate in the US and Europe is cautiously optimistic. Adhering to the wishes and rules of banking officials will eventually provide virtual currencies with a sense legitimacy that they are only beginning to earn. Moreover, having to follow the rules will force investors and early adopters, who have already committed a great deal of time, money, and passion, to develop Bitcoin's purpose and mainstream credibility beyond its wild price swings, which only serve to undermine its definition as a currency. Investment in surviving firms will only further develop the ecosystem's rapidly maturing infrastructure adding new layers of convenience, security, and possibilities.

As with any new technological innovation, this may ultimately emerge in the unlikeliest of places, perhaps Africa for instance. In developing economies like Nigeria, where spotty financial infrastructure can prevent people from even using Skype, the ability to bank with as little as an SMS message may prove radical.

Other properties of digital cash, like Bitcoin’s seemingly infinite divisibility, could make it a practical vehicle for the coming tidal wave of micropayments as the ad-driven web loses momentum. And further down the line, the fact that crypto-wallets are tied to private keys rather than human names and social security numbers could make it the perfect currency for Google’s legion of robots.

Until then, Bitcoin largely remains a novelty, a hipster way for in-the-know techies to split the bill at dinner. Being able to send money to anyone in the world with an internet connection in a matter of minutes is certainly cool. It’s undeniably an intriguing idea, a wild experiment that provides a rollercoaster of emotions for Bitcoin’s growing number of adventurers. But as the situation in China has shown, it's going to take time for Bitcoin to mature beyond that.

@sfnuop