What is Really Going on With Bitcoin?

Bitcoin is mysterious. Is it the cryptocurrency used by criminals? A tool of anarchists? Or is Bitcoin simply a way to buy goods on Overstock.com?

Last week, Bitcoin news resource CoinDesk released its Q3 State of Bitcoin Report for 2014, which helps unpack what is really going on with Bitcoin right now.

Some of the key findings from the report include:

• Bitcoin closed Q3 at $386.27, down from a 2014 high of $951.39.
• Investment in Bitcoin startups continued.
• Dell became the largest merchant to accept Bitcoin so far.
• PayPal and Square announced Bitcoin integrations.
• Google integrated Bitcoin conversions into search.
• 90k merchants are expected to accept Bitcoin by the end of this year.
• 1.2 million Bitcoin wallets were created in Q3 2014, which is 23% more than the previous quarter.

While some people might be freaking out about the drop in the price of Bitcoin, there’s a more interesting story from Q3.

As Susan Athey explained at TC Disrupt New York earlier this year, the exciting potential for Bitcoin, and all digital currencies, is as a medium of exchange. Digital currencies have the potential to disintermediate traditional financial institutions, that have been too costly and inefficient for too long.

And if you use Bitcoin as a medium of exchange—i.e. you use USD to buy bitcoin, and then immediately use bitcoin to buy AUD—the price shouldn’t really matter, because you’re only holding it temporarily. (Although, depending on volatility, the length of time required for confirmation of Bitcoin transactions can still cause issues. This is why newer cryptocurrency technologies like Stellar, which were designed as a protocol first and currency second, are important).

If digital currencies are going to disrupt financial intermediaries over the longer term, they will need to gain the understanding, trust and adoption of ordinary people. Marc Andreesen has said:

One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous.

What we saw in Q3 was an improvement in understanding of Bitcoin. For example, adoption by large merchants like Dell, and well-known payments processors like PayPal, helps signal that Bitcoin can be trusted.

So for Q3, 2014 the real story isn’t necessarily that the price of Bitcoin fell. Price volatility makes headlines because it’s easy to report on. But the real story of maturing technology is more complex, which is why reports like CoinDesk’s are valuable.

In other words, what is really going on with Bitcoin is that it’s becoming more mature.