Bitcoin critics have long lambasted the infant currency for its lack of practical use and purchasing power, among other things. But a brand-spankin’-new partnership with eBay‘s (EBAY) PayPal shows that Bitcoin means business.
Could the integration with PayPal help Bitcoin morph from a faddish curiosity into the currency of the future? The latter is a lofty goal, but serious investors should at a minimum be aware of Bitcoin’s existence, why it’s unique, and what potential — if any — the currency possesses.
But first, in order to put the Bitcoin-PayPal integration in context, a short history of the Bitcoin saga is in order:
From 5 Cents to $1,127.64 in Under 4 Years
In 2013, Bitcoin took the financial world by storm, plain and simple. A pseudo-anonymous “cryptocurrency,” entirely digital and unbeholden to any central government or authority, Bitcoin emerged as a controversial new means of facilitating commerce last year. Amid loads of hype and euphoric talk of its future as a ubiquitous global currency, the price of one Bitcoin shot from $13 in January to over $1,100 at its peak in late November.
Venture back to the summer of 2010 and Bitcoins were largely unknown and practically worthless, trading for a mere 5 cents a pop. At those prices, one could buy 400 Bitcoin for $20. By Bitcoin’s peak in 2013, that paltry $20 investment would’ve ballooned into a sizable retirement egg worth more than $450,000.
In other words, if I decided to buy Bitcoins instead of pizzas just three times back in the summer of 2010, I could’ve been a millionaire three years later. (I regret nothing; pizza is delicious.)
Why Bitcoin Was Such a Big Deal
Bitcoin garnered widespread public attention for many reasons, but the media fell in love with it because the Bitcoin saga is an incredible story. It’s far too long to relate here, but let’s just say it involves an anonymous founder of the currency named Satoshi, a “mining” system in which Bitcoins are created or discovered by computers solving math problems, encrypted digital storage, infinitesimal transaction fees, and for the cherry on top, the Winklevoss twins of Facebook (FB) fame. If adoption became high enough, Bitcoin’s low transaction fees could put payment processors like Visa (V), Mastercard (MA) and American Express (AXP) up against the ropes. It is because of this explosive potential that I myself own a small amount of the currency.
Oh, Bitcoins are also difficult to track and assign to an individual, so both how one uses their Bitcoins and what they use them on are hard to trace and therefore often tax-free.
Why the Bitcoin-PayPal Integration Is Utterly Meaningless
Unfortunately, PayPal’s announcement this week is more hype than substance. In its blog post announcing the move, PayPal said that Bitcoin will be accepted as payment for “ringtones, games, and music,” which leaves a pretty substantial portion of the e-commerce market out of bounds for the cryptocurrency.
While its great that websites like Overstock.com (OSTK) and Reddit accept Bitcoin, the fact that a) cryptocurrencies are somewhat of a gray area with regulators and b) glibly speaking, its only fanatics are techies, anarchists and criminals — well, that doesn’t help.
The world of digital transactions is evolving, as the recent hubbub surrounding Apple (AAPL) Pay will attest. But just because there are now Bitcoin ATMs and you can buy ringtones with Bitcoin doesn’t mean the U.S. dollar is on its way out.
Don’t jump into Bitcoin because PayPal has begun to tentatively accept it; wait for adoption to pick up before considering Bitcoin as a solid long-term investment.
As of this writing John Divine held Bitcoin and shares of AAPL stock.
