Where the value re­ally lies in Bit­coin

The tech­nol­ogy un­der­ly­ing bit­coin may be more valu­able than the vir­tual cur­rency, writes Stephen Gun­nion

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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.”

Pic­ture: iS­TOCK

Jaco Jonker

Pic­ture: HETTY ZANTMAN

War­ren Ingram

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