VIRTUAL CURRENCY TAKING OFF ?

[Michele1940]

There are a lot of talk going on around the world about virtual currency such as Bitcoins and others.

Many are arguing that virtual currency is a reality and that it's here to stay. I personally agree with this proposition but virtual currency shouldn't be used as an alternative store of value asset only.

Bitcoin is probably the most known and talked virtual currency in these days.  From what we can see in the exchange markets, that have been created to trade Bitcoin, there is a lot of daily activity in the trading environment.

What we cannot see is a similar activity in the retail environment either for on-line or real world transactions. Aside from a few examples, this virtual currency does not seem to be taking off.

What are the reasons for this ? Well there are many.

First of all, aside from the early adapters , "mining" Bitcoin for the individual has become a difficult task.
This means that if you want to have some of this Bitcoin , you can exchange them for your fiat currency on the exchange markets. So you have to take some of your stored "real money" and use them to store them again into Bitcoin. Unless, of course,  you have a real intention to use this Bitcoin to buy something that you like and you need/want to buy.

Second, why do you have to convert your "real money" into Bitcoin if you need/want to buy something ? Because Bitcoin allows you and the seller to have a cost free transaction in the same way you would have if you would hand over your cash money to the vendor.  In addition handling cash money is also a cost both for you and the vendor.

Third, is the vendor giving you any additional advantage if you pay in Bitcoin like, for example, a small discount ?  Not that I am aware of. But might be possible that same are doing it. What I know for sure is that if you pay with real cash money instead of your credit card, you have a very high possibility to get a small discount if you dare asking for it.

Fourth, there are the exchange markets that makes the conversion rate change and it is difficult for you and the vendor to forecast its future value. You may exchange your "real money"  into Bitcoin today or you can accept a payment in Bitcoin as a vendor today at a fixed current rate and find out a few days later that the value of Bitcoin has dropped. Or it has increased. This uncertainty, surely complicates the matter even more. Unless you see into Bitcoin a form of investment in the hope that its value will go sky high someday.

Many might argue that even your "real money" are subject to the same process described above.
All fiat money of course are subjected to inflation and deflation. And the conversion rate between them vary daily. Some might also argue that fiat money might collapse and that you would end up having a bank account filled up with numbers that have no purchase value at all.

So, it seems that what we need for a virtual currency to become a usable currency is a sort of stability of its value. In order to accomplish this, we have to reduce the trading and increase the actual use of our beloved virtual currency.

[Enky1974]

So, it seems that what we need for a virtual currency to become a usable currency is a sort of stability of its value. In order to accomplish this, we have to reduce the trading and increase the actual use of our beloved virtual currency.

Reducing trading activities you will reduce also liquidity; liquidity plays a crucial role in financial exchange markets. Without the availability of counter-offers, markets cease to exist and they are replaced by individualized bilateral contracts. Thus, some liquidity is necessary even for the existence of a financial exchange market. Further, high liquidity expands the set of potential counter-offers and enhances the probability of a favorable match. Thus, higher liquidity increases the expected level of satisfaction of market participants.
A stable currency need higher trading activity and an higher level of liquidity.The high liquidity helps ensure that spreads are narrow and prices are stable, the major world currencies have high liquidity levels

[Michele1940]

 It is my opinion that the present monetary system is just a paradigm, a model. Therefore it is subjected to a shift. And a Global Virtual Currency ( not necessarily Bitcoin ) could be a good entry point for the shift to occur. But it needs to be available for everybody

[benjamindees]

In order to accomplish this, we have to reduce the trading and increase the actual use of our beloved virtual currency.

Yeah it is popular for politicians to bash traders but the fact is that more trading leads to more stability not the other way around.

[Michele1940]

In order to accomplish this, we have to reduce the trading and increase the actual use of our beloved virtual currency.

Yeah it is popular for politicians to bash traders but the fact is that more trading leads to more stability not the other way around.

Yes but, as outlined by Enky1974 "A stable currency need higher trading activity and an higher level of liquidity". We all can see the level of trading activity. But what about the level of liquidity ?

[benjamindees]

The liquidity is basically the number of people with cash stored at the exchanges, and the ability to trade with low fees.  The more traders, and the more exchanges, the more liquidity.

[Michele1940]

The liquidity is basically the number of people with cash stored at the exchanges, and the ability to trade with low fees.  The more traders, and the more exchanges, the more liquidity.

Yes correct. The cash stored at the exchanges. But a currency needs to be spend to be called a currency else it is a form of investment, I guess. But I am not very good in these sort of thing.
Any insight ?

[benjamindees]

Yes, merchants are the other form of liquidity.  And they are growing in number.  But it will be some time before they become more important than the exchanges.  I think that we will see two phenomena emerge.  One is Bitcoin will be used as a unit of account for international trade and currency exchange.  Basically, instead of exchanging between multiple international currencies, I can exchange into Bitcoins, and then exchange out as necessary.  The second use will be the emergence of local economies trading in Bitcoins exclusively.  Once stable proof-of-concepts of these two systems can be established, at the periphery of what is considered conventional currency use, that's when the real fun begins.  They can be combined.  When that happens, Bitcoin will quickly grow to dominate conventional currencies.  Think of it as the "epoxy method" of global currency development. 

[Michele1940]

Yes, merchants are the other form of liquidity.  And they are growing in number.  But it will be some time before they become more important than the exchanges.  I think that we will see two phenomena emerge.  One is Bitcoin will be used as a unit of account for international trade and currency exchange.  Basically, instead of exchanging between multiple international currencies, I can exchange into Bitcoins, and then exchange out as necessary.  The second use will be the emergence of local economies trading in Bitcoins exclusively.  Once stable proof-of-concepts of these two systems can be established, at the periphery of what is considered conventional currency use, that's when the real fun begins.  They can be combined.  When that happens, Bitcoin will quickly grow to dominate conventional currencies.  Think of it as the "epoxy method" of global currency development. 

Thanks !!! This makes me really Happy.