Where the value really lies in Bitcoin
The technology underlying bitcoin may be more valuable than the virtual currency, writes Stephen Gunnion
In the week that online marketplace bidorbuy.co.za announced it would start taking bitcoins as payment, using BitX as the platform, Microsoft quietly stopped accepting them as currency on its Windows site. And early disciple Mike Hearn said bitcoin was broken.
Microsoft subsequently retracted what it said was inaccurate information inadvertently posted on its site, and committed to accepting the virtual currency as payment for content in the Windows and Xbox stores, but this still illustrates the degree of suspicion surrounding the world’s first virtual currency — and the pressure on mainstream companies to toe the government line.
The market for bitcoin is also still largely driven by speculators and investors, despite growing acceptance as a means of transacting and for remittances across the globe.
Governments and central banks are also keeping a close watch on a currency that sits outside the traditional financial system. Russia, for instance, is reported to be considering making the use of bitcoins a criminal offense that is punishable by jail time.
“I think bitcoin is still definitely very experimental; we don’t really know where it’s going to go, but it’s the first virtual currency that has shown potential,” says bidorbuy CEO Jaco Jonker.
“The [rate of] adoption in SA is still low, but I think it’s getting some traction. Ultimately what we as a market place want to do is give buyers and sellers as many options as possible.”
While activity globally is still driven mostly by speculators and investors, BitX CEO Marcus Swanepoel says more consumers are starting to use it to transact and for business payments, particularly across borders.
“We expect transactional use to increase a lot, given the benefits to for merchants and for consumers,” he says.
The benefits, says Swanepoel, include reduced fraud risk, cheaper transactions and the fact that there is no need for a credit card. The tie-up with bidorbuy.co.za should also help open “the wider bitcoin ecosystem in Africa, and should have a strongly positive effect on the broader industry”.
It’s as good as gold — or even better. Lorien Gamaroff, CEO of Bankymoon, says bitcoins are a digital form of gold, with intrinsic value and no counterparty risk. Value can be measured in bitcoins, it’s divisible, durable and a store of value.
It’s also scarce, he says, with only 21m ever to be created.
“We are increasingly living in a digital world and bitcoins are easy to store, and can be used to pay for things around the world,” says Gamaroff. “The world is slowly embracing the idea that [this currency] is a good thing.”
As a store of wealth, some investors may have been disappointed; those buying at its peak north of $1,100 would be a lot poorer now. It fell to around $200 early last year and has now settled at just above $400.
“It’s not volatile, it’s just a sign of it gaining acceptance,” argues Philip Haslam, who co-authored
When Money Destroys Nations, an account of the disintegration of Zimbabwe’s economy and the dangers of the huge quantitative easing embarked on by major economies since the 2008 global financial crisis.
“You get the sudden realisation that there is value in bitcoin and then you see speculators pushing the price up, before it normalises,” he says. “The bottom line is what we are seeing is that there is investment interest and that the general move has been upwards.” According to Haslam, a reference point for the first real value of bitcoins is about 7 US cents. For the past several months, he says, it’s been stable at $350-$450 — though in fairness, this is a trading range that makes even the rand appear stable.
“It is evolving; if we look at this in 12 months’ time it probably will have changed even more,” says Galileo Capital’s Warren Ingram. “When it was created, people would have put it in the same category as gold as a store of value. But what it has proved is to be extremely volatile, and that’s a real factor to consider.” Still, Ingram believes that bitcoin could be one of the things that revolutionises the way money or value gets created and traded in the world. The technology used to create bitcoins — the actual encryption — is
probably more valuable than the store of value in bitcoins.
The underlying infrastructure that makes bitcoin possible, and secure as a means of transacting, explains Gamaroff, is the blockchain.
The blockchain is a decentralised ledger of transactions involving bitcoins. It maintains a record of all changes in ownership, also ensuring that the crypto currency isn’t used for multiple transactions.
It’s quick — and becoming quicker — and costs a fraction of transacting through banks and central clearing systems, says Haslam. Entities can transact and trade assets directly among each other without the need for an intermediary.
However, blockchains are seen as so revolutionary that they have attracted attention way beyond the bitcoin community they were designed to support. They risk becoming mainstream.
“Banks, financial institutions and governments around the world are starting to see the value in the blockchain,” Gamaroff says. “There is a vested interest in maintaining the status quo. I think it’s going to be an uphill battle, but there is no way that this technology can be stopped.”
According to a report by KPMG on growing interest in fintech companies, total venture capital investment in bitcoin and blockchain start-ups jumped from $3m in 2011 to $474m in 2015. IBM has also launched an open-source blockchain initiative with partners including the London Stock Exchange, Cisco and Intel. That’s because it has the potential to lower transaction costs, decrease transaction times and minimise fraud. It’s perfect for stock exchanges, which rely on more expensive and cumbersome clearing houses.
KPMG says: “Blockchain is a notable example of an emerging technology that offers enormous potential to the financial services industry. However, this needs to be balanced with the reality that substantial barriers must be overcome in order for this potential to be realised.”
JPMorgan CEO Jamie Dimon is one banking executive who is sitting up and taking notice. He recently said on business news television channel CNBC: “The blockchain is a technology we’ve been studying . . . and yes, it’s real. If it proves to be cheap and secure it will be adopted for a whole bunch of stuff.”
Closer to home, the large banks are also expected to invest in blockchain applications, says Rand Merchant Investment’s Dominique Collett. AlphaCode, Rand Merchant Investment’s club for fintech start-ups, has brought Gamaroff into the fold to help advise on blockchain solutions for organisations. “If we can move it into a regulated space, it is going to increase financial services access and efficiency, particularly for a continent like Africa,” Collett says.
It appears that whether or not bitcoin survives and succeeds in creating a universal currency that anyone can transact on and invest in without being at the mercy of government and central banks’ policy decisions, blockchains may be the better investment. While the first blockchain was devised to support bitcoin, there is no monopoly on the technology.
The jury remains out on bitcoins, though.
Hearn, one of the early core developers of bitcoin, drew heavy criticism from the libertarians who are desperate to break free from government-controlled economies when he wrote earlier this year that the crypto-currency was a failed experiment and was irretrievably broken.
“What was meant to be a new, decentralised form of money that lacked ‘systematically important institution’ and ‘too big to fail’ has become something even worse: a system controlled by just a handful of people,” Hearn wrote in the online publishing platform
Medium. “Worse still, the network is on the brink of technical collapse. The mechanisms that should have prevented this outcome have broken down, and as a result there’s no longer much reason to think bitcoin can be better than the existing financial system.”
Hearn is not alone. Henry Farrell, an associate professor of political science and international affairs at George Washington University, wrote in the Financial
Times earlier this month that the digital currency has always seemed like a magic trick.
Rather than spinning straw into gold, he wrote, bitcoins transform wasted computing power into money that people will actually accept as payment.
Ingram is not sure he’d be taking a speculative view on buying bitcoins now and hoping they’ll go up in value. Gamaroff also cautions that with no regulation of the bitcoin market, there’s no protection for investors.
“If you think back to the gold rush in SA, the people who really made money over the long term were those selling the shovels,” says Ingram. “The mistake is just to ignore it, but I wouldn’t go to the other end of the spectrum and say this is what I’m going to use. The rules around the encryption are extremely good and the encryption is sound. But all the rest is evolving in front of our very eyes.”