Bitcoin technology was unleashed on the World Wide Web about five years ago, but 2013 marked a time of unprecedented growth for the digital currency. As the price of a bitcoin increased over 6000 percent in 2013, more developers, entrepreneurs, and investors flocked to the virtual currency market than ever before. However, Bitcoin is not a household name or widely used service. The majority of Americans don’t even know what Bitcoin is. Additionally, its reputation for facilitating illicit activities, price volatility, and security questions are all issues the Bitcoin community must explain before it can go mainstream. But those invested in the technology, like the people I met at the North American Bitcoin Conference, believe this is a disruptive technology that is just taking off with no end in sight.
Bitcoin Wallpaper (Photo credit: PerfectHue)
Bitcoin Is Nascent Technology In The US
Despite Bitcoin’s record growth, not very many people know how to utilize this new technology. As reported by the Wall Street Journal, a survey conducted by GfK found that 76 percent of US residents are not familiar with Bitcoin and 80 percent say they would rather own gold than bitcoin.
What is Bitcoin?
Put simply, Bitcoin is simultaneously a cryptographic protocol and a virtual currency which gives consumers a way to exchange money for free or a nominal fee. It’s a “digital crypto-currency.” As a transfer protocol, it inherently operates as a money transfer medium to send bitcoin from user to user without the need of a third party intermediary. Digital, meaning it only exists in a digital format and there are no tangible properties to this money, just like e-mails, which are digitals letters. Crypto meaning it’s secured by cryptography, making it improbable for hackers to spend bitcoin from someone else’s wallet. And it’s a type of currency, valued in units of bitcoin which is divisible, like the US dollar or euro into subunits (like pennies.) There are other digital crypto-currencies that operate on the Bitcoin protocol, including LiteCoin and Dogecoin.
I like the email analogy Nicholas Cary, CEO of Blockchain.info gave me:
“People everyday of their lives use email, they probably have no idea how it works under the covers, but they use it because it’s simple, free, easy, and allows them to send messages anywhere in the world for free. It’s the same thing with Bitcoin, send money anywhere in the world for free.”
If you can operate a smartphone, bitcoin is easier to use than a credit or debit card. AND for businesses to accept bitcoin payments, they don’t have to have a merchant account. In other words, this payment system completely bypasses the banking system, which often charges significant fees to accomplish the same service of transferring money.
A Disruptive Technology
Bitcoin represents a very small fraction of overall transactions, but it has the potential to completely change the way the world banks. According to Blockchain.info, there are about 63,000 bitcoin transactions per day. In comparison, Visa and Mastercard have tens of thousands of transactions per second, dwarfing Bitcoin’s numbers. However, Bitcoin is more competitive than credit cards in emerging markets where one-third of humanity is excluded from the financial world.
Jeffrey Tucker, one of the biggest Bitcoin enthusiasts I’ve met, who’s also using Bitcoin to launch his new social media platform, Liberty.me, says Bitcoin is a disruptive technology that will “liberate the poor of the world” by offering banking services in emerging markets where banks are few, or may not even exist at all. Because Bitcoin is a global technology it can go anywhere regardless of geography. He says Bitcoin could give people in developing countries the ability to sell their products and services regardless of whether they have access to a bank or not, via mobile payment systems. And it turns out that in emerging markets a lot more people have cell phones than bank accounts.
How is it that Bitcoin has seen unprecedented growth, but most people still don’t know what it is?
Bitcoin is still in the earliest phases of industry development. The first years of Bitcoin were about building the infrastructure. Bitcoin entrepreneurs were busy setting up the most basic but fundamental aspects, including wallet and mining services. Today, Bitcoin is just starting to enter the investment phase, where venture capitalist, hedge funds and other financial firms are starting to invest money and capital into this nascent technology. Bitcoin isn’t quite ready for the consumer phase, where end users begin to utilize the services. Cary says that “if the entire history of Bitcoin was a clock, we’re still in the very early time. I would say were maybe in the second second of the entire history.”
I have now attended two Bitcoin conferences. Last May I went to San Jose, CA for the first Bitcoin conference, The Future of Payments. It was not very big, maybe a few hundred people of a close knit tech community, which I was vaguely familiar with. Most of the vendors were startups who were rolling out the Bitcoin technology such as exchanges, mining and storage companies. I interviewed Jered Kenna of Tradehill on the regulatory challenges Bitcoin faces, which ended up being a predictor of his future, because Tradehill suspended their exchange trading services a few months later. I also interviewed Charlie Shrem, one of the youngest members of the Bitcoin millionaires club who wore a ring engraved with the key or password to his Bitcoin wallet. We talked about his early success forming Bitinstant and his bar in New York city, EVR, which accepts bitcoin. Interestly, Shrem was arrested for money-laundering last month for providing Bitcoin exchange services to facilitate purchases on the web underground Silk Road market and faces tough legal battles ahead. The Winklevoss twins, well known for their investment in Bitcoin and their lawsuit against Facebook, were also at this conference. I took a picture with them, but they declined to interview with me.
Cameron and Tyler Winklevoss with Perianne Boring at the first ever Bitcoin Conference: The Future of Payments, May 18, 2013
As a monetary policy devotee, I was excited to be introduced to a new kind of currency. However, I struggled to see how it would ever be useful because the people I talked to were only involved in the beginning technology stages, not much end-user services. But the underlying feeling I got at the first Bitcoin conference was that I was witnessing the beginning of something big.
That feeling was solidified when I got to the 2014 North American Bitcoin Conference in Miami Beach, FL in January 2014. Every person I interviewed called Bitcoin a disruptive technology. In just six months, I can see how Bitcoin has grown and evolved through the industry phases outlined above by the types of people and companies in attendance. The Miami Beach conference had over 1200 registered participants, many of whom were small retailers offering new and innovative Bitcoin services that could be integrated into everyday products. Examples include LeetCoin, a competitive gaming platform where gamers can compete for Bitcoin and BtcTrip, a website where you can purchase airline flights with bitcoin. I can now see how Bitcoin could eventually be used as widely as email.
Bitcoin may be positioning itself as the preferred payment system. However, the community has a few issues to sort out before consumers will be comfortable putting their money in the digital currency.
Price volatility is one the biggest criticism of Bitcoin. Starting 2013 with an exchange rate of about $13.00 per bitcoin, it hit a high in November of over $1,200.00. Today, the price is hovering around $566. Its price in dollars is volatile, but according to Jeffrey Tucker, it’s a nonissue.
“It’s [Bitcoin] only volatile if you look at it in terms of national currencies. The bitcoin itself is valued in terms of goods and services not necessarily national monies. If you stay within the Bitcoin ecosphere, you can avoid volatility.”
To avoid volatility you have to stay in Bitcoin. You can’t go back and forth between US dollars and bitcoin. This will become more practical and easier to do as more business accept and pay their employees in bitcoin.
What is not volatile about Bitcoin is the supply. The total number of bitcoins is fixed at 21 million. Currently, about 12.3 million bitcoins have been mined, or brought into circulation. Bitcoins are being mined at a predictable and decreasing rate by individuals using specialized hardware on their computers. Once 21 million Bitcoins have been mined, that’s it. Unlike the US dollar, which is subject to inflation and price manipulation from central planners (which I talk extensively about the consequences of here and here) bitcoin’s value is derived from the people willing to use and accept this payment, supply and demand, it’s totally decentralized.
Bitcoin also has a bad reputation for facilitating illegal activities, such as being the preferred medium of exchange to buy and sell illegal drugs online, anonymously. The FBI take down of the online drug bazaar, Silk Road is much to blame for this. However, Bitcoin has proved to provide very poor anonymity for criminal behavior and does not provide the same level of privacy as cash. The blockchain, an open-source ledger of all Bitcoin transactions is public, which allows anyone to view Bitcoin transactions moving from address to address. While the bitcoin user’s identity is inherently anonymous, if any past or future transactions can be tied to an identity, it’s possible using network analysis or surveillance to find out who owns the address. Analog channels are much easier for criminals to route illicit activity though. As more bad actors are realizing this it’s being abused less.
Another issue is security. The cryptography used in Bitcoin is military grade and the blockchain is believed to be secure. If there is a bad actor, they are found in the individual exchanges and users. There are ways to avoid being scammed. Only deal with reputable dealers. It’s the same way with any other industry. For example, if you want to attend a NHL hockey game. You can buy tickets from the arena, on StubHub, Craigslist, or from a scalper, among other options. When you buy anything off Craigslist, you know you’re taking a bit of a risk. Same thing with Bitcoin. Only deal with people you trust.
The biggest threat to Bitcoin is government regulation. However, regulators are somewhat powerless if they wanted to totally outlaw Bitcoin. They would literally have to outlaw the Internet to do so. Various state and federal regulators are beginning to give input on how to integrate Bitcoin technology with existing financial regulation. The US Treasury Department’s Financial Crimes Enforcement Network (FINCEN) issued guidance on virtual currencies and regulatory responsibilities. We can expect state and federal lawmakers to take additional steps to regulate virtual currencies. The extent to which future regulation will stifle Bitcoin is unpredictable. However, the New York Department of Financial Services and US Senate Homeland Security and Governmental Affairs Committee hearings on Bitcoin were relatively positive.
Simultaneously, there is no doubt that the actual recognition of bitcoin as a currency, regulated by federal and state agencies, would instantly legitimize bitcoin use and its longevity – dismissing naysayers who claim that it is nothing more than another “tulip bubble.”
How To Use Bitcoin
If you’re interested in trying it out:
1. Get a wallet (to put your money in.) Blockchain.info is the most popular bitcoin wallet servicer. They also have an app for iphone and android so you can take your wallet with you wherever you go. To send and receive bitcoin payments, your wallet will have a unique identifier or address, such as: 1JArS6jzE3AJ9sZ3aFij1BmTcpFGgN86hA.
When using bitcoin, funds are sent to a Bitcoin address. This is similar to how digital messages are sent to an email address. Your wallet will also come with a QR code you can scan with a smartphone so you don’t have to manually type out your address when sending / receiving funds.
2. Get bitcoins. You can either buy on an exchange, from individuals or mine them yourself. Here is a link to exchanges. When buying on an exchange, you would provide your Bitcoin address at the time of purchase and the bitcoins will be transferred directly into your wallet. To buy bitcoins from an individual, open your wallet on your phone, have the seller scan your QR code with their phone, and they can send their bitcoin to you instantly from their wallet.
If you’re interested in mining your own bitcoins, here is where you can go to learn about this process. Just know that you will need to purchase additional hardware for your computer.
3. Spend bitcoins. More and more businesses are starting to accept bitcoin. Bitcoin.travel has one of the most comprehensive list of businesses that use bitcoin.
If you’re buying online, such as at Overstock.com, they give you an identifier to send the bitcoins directly to. It’s very simple and takes less time than entering your credit card information. Below is a picture of my recent bitcoin transaction on Overstock.com. All I had to do was scan the QR code with my phone, push “send payment” and the transaction was completed.
example of a bitcoin transaction on Overstock.com
Coinbase is also suggested for Bitcoin beginners. They provide their own wallet and exchange services and have the best reputation for simplicity and security in the US.
Full Disclosure Using Bitcoin
Because Bitcoin is so new and innovative, a lot of government regulation is obsolete when it comes to overseeing Bitcoin. The most important being anti-money laundering laws. Federal and state law requires businesses transmitting or converting money to register as a money service business. These law were originally written for banks before virtual currencies existed and are outdated. There have been several people arrested for money laundering for selling bitcoins for US dollars who were not registered with state and federal authorities. Again, only deal with reputable dealers.
The Bitcoin Challenge
The invention of the Internet, railroads, cars and practically all forms of disruptive technology went through periods of intense scrutiny from skeptics and competitors. However, these all turned out to be beautiful inventions that increased the standard of living for all. As so many aspects of our lives are migrating online including communications, commerce and government functions, it’s natural for currency to follow. The recent growth in Bitcoin might not be able to touch the financial systems currently in place, but Bitcoin is still very new and offers a service banks can’t.
If you are not familiar with Bitcoin, I challenge you to try it. Please tell me about your experience in the comment section below.