The conversion necessity is a term I coined a few months ago. It’s used to quantify the need to convert bitcoins back into traditional currencies. It’s a very elementary concept, but an important one to consider. You can imagine the BCN (Bitcoin Conversion Necessity) as a number between 100 and 1. The higher the number the higher the necessity is for people to convert bitcoins back into traditional currency. The lower the number the less demand or need for people to sell bitcoins or convert them back into currency. This is because more of the things you want or need to buy you can buy with bitcoins. It’s a concept I think is often overlooked when thinking about bitcoins as an investment.
Since bitcoins share the unique properties of both a currency and store of value (read: Why Do Bitcoins Have Value?), someday you may never need to sell them once you own them. As the value of bitcoins increase, and more businesses begin accepting them, the need to convert bitcoins back to traditional currency will fall. Once you’re able to use bitcoins to cover all your expenses (either as an individual or business), you can just spend bitcoins directly and work for or purchase more– basically how traditional currency is used today.
The beautiful thing about bitcoins is the fact that they can be purchased as an asset and directly used as a currency after their value increases over time. There’s no need to cash out, sell-off, or dump bitcoins when they are accepted as payment– just go out and spend them! In doing so, one can also bypass the traditional banking system. By simply spending bitcoins to purchase what you need there’s also no capital gains tax on the increase in value of your bitcoins (or at least no way to enforce a tax at the moment). I suspect it will be very difficult if not impossible for governments to tax appreciation on bitcoins when they try, and you know they will!
Bitcoin owners today still must convert their coins back to traditional currency in order to buy certain items, pay bills and purchase things at their favorite shops. However, the tide is shifting and the conversion necessity is falling. As the value of bitcoins increase there will be more value to spread around, and more people willing to spend bitcoins. With willing spenders, more business will accept bitcoins and the conversion necessity will fall further– eventually it will fall to zero, or at least get pretty close.
It’s anyone’s guess as to where we stand right now on the BCN curve, but as more businesses begin to accept bitcoins, the less necessity there will be to convert to traditional currencies. The conversion necessity may also be different for each individual depending on location, lifestyle, and purchase habits.
If you own bitcoins or have plans to invest into bitcoins don’t forget that it is a currency too! After months or potentially years of appreciation your bitcoins are an asset that will pay dividends as currency. Use your bitcoins to buy that dream home, a new car, take a vacation or send your kids to college! The fact is you may never need to sell your bitcoins!
As Bitcorati continues to build out its directory for bitcoin businesses and merchants, we’ll share our insights on the evolving bitcoin supply chain, stories and visualizations of the falling conversion necessity and what we expect to be a vibrant and growing bitcoin ecosystem!