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The Single Reason Bitcoin Isn't Ready for the Big Time

I"m a cryptocurrency hipster.

I liked the idea before it was cool.

It goes back about 7 years ago when I first read Cryptonomicon by Neal Stephenson, a book that is a mashup between World War 2 intelligence warfare and digital currency. This book was way ahead of its time, and I highly recommend you pick it up for the winter break.

Needless to say, I'm a big fan of how these digital currencies are developing. You've not only got Bitcoin, but a slew of competitors that have seen massive appreciation and some adoption in ecommerce.

But there's a problem. A big one.

It's not about valuations or bubbles-- it's about volatility.

(I'm an options trader, remember? I care about not just direction but also magnitude of moves.)

Here's a chart of what I'm talking about:

bitcoin-volatility

"Money" at its most basic function is to create a shortcut to exchange goods and services. You can also use it to denominate debt, that way a lender doesn't have to accept payment in the form of bushels of grain or back massages.

In order for trade to be properly facilitated, you need to have a "quiet" market. That means much, much lower price fluctuations relative to what we are seeing now.

Think about this... if you sell a house in Bitcoin (which has happened) and then you see a 20% drop in the currency, it becomes a much more risky endeavor. Any attempt to hedge is met with liqudity and slippage risk, so it is very tough for true widespread adoption.

That's the risk in these currencies.

Will this risk disappear? I think so. We're still in the early stages of this process-- BTC is only 5 years old.

These cryptocurrencies are trading more like penny stocks, but as they mature and more liquidity is introduced into them the volatility should cool off and we can see continued adoption into more mainstream sources.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/