Bitcoin may currently be going through an "adoption chasm" but the crypto-currency will have a profound societal effect, shaking up payments markets and other industries over the next few years, analysts from Wedbush Securities have predicted.
In a research note (PDF), analysts Gil Luria and Aaron Turner argue that after a rush of hype that saw bitcoin smash through the $1000 mark late last year, the currency slumped into a "trough of disillusionment" as regulatory worries in countries such as China and the Mt. Gox debacle knocked confidence.
However, some key numbers suggest that bitcoin is on the verge of a breakthrough: VC investments related to the currency have doubled in the last three months, while Blockchain.info and Coinbase now have more than three million wallets between them.
The note says that broader adoption is now one to three years away and that the scope for disruption is massive considering that 20% of US GDP is generated by industries whose main function is as a trusted third party.
The most obvious area in which bitcoin can flourish is in undercutting the $250 billion a year made in payment transaction fees. But Luria and Turner also think that the blockchain asset ledger and bitcoin protocol could challenge deposit fees, foreign exchange fees, escrow, trust management fees and collections fees.
Another potentially important role for bitcoin is in the emerging Internet of Things. The note argues that machine-to-machine communication will require a way for prioritising resources and allowing devices to transact.
Bitcoin is ideal for this because there is nothing to stop wallets being owned and operated by a thing. For example, payments could be used to reduce DDoS attacks and spam emails.
Luria and Turner are optimistic that three of the biggest brakes on bitcoin adoption - security, regulation and volatility - will be overcome.
They argue that emerging security tools mean that eventually bitcoin will not have to be held offline in cold storage. Meanwhile, within months there will be robust, secure, regulated and liquid exchanges in the US. These will both contribute to a steadying of prices.
Separately, a note (PDF) from the Montreal Economic Institute concludes that if bitcoin is to prosper it must have a clear legal status.
The note's author, David Descôteaux, argues that legislative steps should be taken to make sure that Canadian banks can do business with bitcoin-related firms. He also calls for clear tax rules, citing Germany as the model to be followed.