The Price of Bitcoin Is About to Get a Little Government Help

The price of Bitcoin stands to get a boost this year from an unlikely source - state and local governments.

At least two states, New Hampshire and Utah, have bills under consideration that would make it possible for citizens to pay taxes and fees in Bitcoin. New York City has proposed similar legislation.

Price of BitcoinThe reason? At least a few elected officials recognize the potential of Bitcoin to help government and citizens alike.

New York Councilman Mark Levine, the bill's sponsor there, said he saw accepting Bitcoin as a way to save Gotham a lot of money.

"It started with realizing how much money the city of New York is losing on transaction fees on credit cards, ultimately it's several million a year because of all sorts of fees and fines," Levine told CoinDesk last month.

New Hampshire Rep. Eric Schleien also sees a cost savings. He considers Bitcoin payments more secure than credit card payments.

The governments would not retain the Bitcoin. Instead, they would contract with third parties to convert the Bitcoin collected into U.S. dollars.

If it becomes law, the New Hampshire bill would take effect July 1, 2017. New York City's bill could beat that deadline; it would go into effect six months after its enactment. The Utah bill is more of a stepping stone. It merely creates a council to study the feasibility of accepting Bitcoin.

With regulatory treatment of the digital currency still up in the air, it's both surprising and encouraging that government at any level is looking seriously at adopting Bitcoin. If these pioneers have success - and especially if the use of Bitcoin saves their governments money - you can bet droves of state and local governments will follow suit over the next few years.

That kind of momentum will push wider adoption of Bitcoin among merchants and consumers alike. And the rise in use will keep nudging the price of Bitcoin higher. So will rising interest from venture capitalists and Wall Street.

The price of Bitcoin could use it. After soaring to more than $1,100 in 2013, Bitcoin prices plummeted 85% as of January of this year. Over the past two months, the price of Bitcoin has zig-zagged from lows around $217 to highs of about $295.

As of mid-day Tuesday, the CoinDesk Bitcoin Price Index was hovering around $243.

But there's another benefit to Bitcoin that in the long run could be the most important of them all...

The Dollar vs. Bitcoin Argument Revisited

One of the chief arguments Bitcoin critics use is that the cryptocurrency has no inherent value.

Now, Bitcoin enthusiasts will point out that its utility confers value. After all, bitcoin can transfer money instantly between any two parties anywhere in the world and without the need for any financial intermediary.

Plus, the underlying technology - the blockchain - adds value in its ability to associate data with transactions.

But let's just strip this down to the currency versus currency debate.

Bitcoin's critics have argued that since it is backed by no central bank or government (like the dollar), it can't have value.

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But with some governments looking at accepting Bitcoin as payment, a big chunk of the fiat argument starts to get muddy.

That's because the underlying proof that the U.S. dollar has value boils down to this: Citizens must pay their taxes in dollars. Therefore, citizens must obtain dollars. Therefore, dollars have value.

This idea is at least as old as Adam Smith, the father of economics. In his 1776 book The Wealth of Nations, he wrote:

"A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince."

To be clear, having a few state and local governments accept Bitcoin would not undermine the value of the U.S. dollar. Most people would still pay their taxes and fees in dollars.

But having Bitcoin as an option to pay some government taxes and fees elevates the status of Bitcoin, giving it value it did not have before.

The more governments that jump on this bandwagon, the more value accrues to Bitcoin. And that could eventually include national governments in addition to state and local entities.

Just imagine the impact on the price of Bitcoin if the Internal Revenue Service were to start accepting it.

Yes, the IRS has ruled Bitcoin property rather than currency. But it could still choose to accept Bitcoin as payment and convert it to dollars, just as the pending legislation in New York and New Hampshire proposes.

"A significant obstacle to the growth in Bitcoin use is the perception of its legitimacy. If it were to be a form of payment accepted by the government, I could see Bitcoin achieve huge success in a relatively short period of time," Joel Valenzuela, a member of the New Hampshire Free State Project, told the PanAm Post in February.

The Bottom Line: State and local governments in the U.S. have begun to toy with the idea of accepting Bitcoin as payment for taxes and fees. Should this trend take off, the added legitimacy of government approval will push the price of Bitcoin higher.

How to Buy Bitcoin: As government and merchants adopt Bitcoin, consumers who want to use the digital currency will need more ways to get it. And the spread of Bitcoin ATMs will be one such way. While it's not quite as straightforward as using a bank ATM, it's easier than you might suspect...

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