Bit­coin hasn’t re­placed cash, but in­vestors don’t care

The Buffalo News - - BUSI­NESS -

These in­vestors aren’t us­ing their to­kens to buy com­put­ers or to book trips. In­stead, they are hoard­ing bit­coins as if it were vir­tual gold, a new way to store money out­side the con­trol of any govern­ment or com­pany.

“I’ve al­ways been skep­ti­cal of di­rectly com­pet­ing with and re­plac­ing ex­ist­ing forms of pay­ment,” said Steve Lee, a long­time Google em­ployee from San Fran­cisco who is in­vest­ing in vir­tual cur­ren­cies. “To­day, what bit­coin is ex­cel­lent at, and has mostly solved, is be­ing your own bank.”

The ar­gu­ment about what bit­coin does well and not so well can


seem like a se­man­tic de­bate for com­puter nerds, with lit­tle rel­e­vance to the out­side world.

But dis­agree­ments within the bit­coin com­mu­nity are be­ing watched closely by cen­tral bankers and fi­nan­cial in­dus­try ex­ec­u­tives. The ti­tans of fi­nance are mon­i­tor­ing bit­coin’s suc­cesses and fail­ures as they ex­per­i­ment with its tech­no­log­i­cal con­cepts, such as the ledger for record­ing vir­tual cur­rency trans­ac­tions, known as the blockchain.

Many large in­sti­tu­tions have said they hope to in­te­grate blockchain tech­nol­ogy into their de­signs for the world’s fu­ture fi­nan­cial in­fra­struc­ture, and those de­signs are likely to be in­flu­enced by what is learned from bit­coin.

“Peo­ple are look­ing at this, in part, be­cause they see the begin­nings of a new fi­nan­cial sys­tem – a fi­nan­cial sys­tem that has a very dif­fer­ent struc­ture than the one we have right now,” said Neha Narula, di­rec­tor of the Dig­i­tal Cur­rency Ini­tia­tive at Mas­sachusetts In­sti­tute of Tech­nol­ogy.

Lee and others hope that bit­coin can be used for pay­ments some­day, but he thinks that this will most likely come from soft­ware built on top of bit­coin, not the bit­coin net­work it­self.

Not ev­ery­one agrees with Lee’s po­si­tion. Many en­trepreneurs and aca­demics think that vir­tual cur­ren­cies will gain trac­tion only if they are easy and cheap to send around. The dis­agree­ment has given rise to a host of bit­coin com­peti­tors – in­clud­ing a sep­a­rate vir­tual cur­rency known as bit­coin cash. But the com­mu­nity that has de­vel­oped around the orig­i­nal bit­coin has in­creas­ingly been united around a vi­sion that is fo­cused on its gold­like qual­i­ties, rather than its abil­ity to com­pete with PayPal or West­ern Union.

“The rea­son peo­ple own bit­coin is be­cause it’s a great store of value, pos­si­bly the great­est that has ever ex­isted,” said Jimmy Song, a devel­oper who has con­trib­uted to the bit­coin soft­ware. “You can send money to Africa in 10 min­utes, but that’s not the main rea­son peo­ple buy it.”

When bit­coin was in­tro­duced in 2008, the ti­tle of the pa­per writ­ten by its cre­ator, the mys­te­ri­ous Satoshi Nakamoto, called the cur­rency an “elec­tronic cash sys­tem.”

The bit­coin soft­ware cre­ated a de­cen­tral­ized net­work of com­put­ers that any­one with in­ter­net ac­cess could join, mak­ing it easy to send bit­coins be­tween ad­dresses. And bit­coin first gained pub­lic no­tice be­cause of its use as anony­mous dig­i­tal cash on black­mar­ket web­sites such as Silk Road.

But the num­ber of peo­ple us­ing bit­coin to buy things was small com­pared with the num­ber of spec­u­la­tors buy­ing it be­cause of scarcity. This was some­thing the orig­i­nal soft­ware be­hind bit­coin had also en­cour­aged, by set­ting a limit of 21 mil­lion on the num­ber of bit­coins that would ever be re­leased.

The in­creas­ing value of bit­coin made it even less at­trac­tive as a way to pay for things. Most peo­ple don’t want to pay now with a dol­lar that could be worth twice as much next week.

There are also lim­its on the bit­coin sys­tem’s ca­pac­ity. A rule writ­ten into the bit­coin soft­ware had es­tab­lished that the net­work could process only around five trans­ac­tions per sec­ond – com­pared with the 25,000 trans­ac­tions han­dled by Visa each sec­ond.

This bot­tle­neck led to a fight be­tween peo­ple look­ing to bit­coin for dif­fer­ent pur­poses. Many early fol­low­ers be­lieved that the sys­tem could ex­pand to han­dle more trans­ac­tions with­out sac­ri­fic­ing its sta­tus as a vir­tual com­mod­ity. This camp pro­posed a change to the bit­coin rules that would have dou­bled the ca­pac­ity of the sys­tem in Novem­ber.

But Lee and other in­vestors and pro­gram­mers wor­ried that quickly ex­pand­ing the bit­coin net­work would threaten bit­coin’s in­de­pen­dence.

“To be a global money, you can’t have one bank or one coun­try con­trol­ling the money, or even a hand­ful of coun­tries or banks,” Lee said. “If de­cen­tral­iza­tion is jeop­ar­dized, most things fall apart with bit­coin.”

De­cen­tral­iza­tion is a re­sult of bit­coin’s un­usual de­sign, which al­lows users to keep and mon­i­tor the records of ev­ery sin­gle bit­coin trans­ac­tion, with­out any cen­tral author­ity.

If the num­ber of trans­ac­tions quickly in­creased, many bit­coin afi­ciona­dos be­lieved, only large com­pa­nies would be able to keep the records. What’s more, they be­lieved that the de­sign of bit­coin wasn’t well suited to com­pet­ing with PayPal and Visa, be­cause ev­ery trans­ac­tion has to be recorded on thou­sands of com­put­ers around the world.

“Any­one who looked at bit­coin and saw ‘cheap pay­ments’ likely doesn’t have much back­ground in com­puter sci­ence,” said Ben Daven­port, a co­founder of the vir­tual cur­rency startup BitGo and an op­po­nent of dou­bling the net­work.

This ar­gu­ment pre­vailed, and in early Novem­ber, the plan to dou­ble the net­work ca­pac­ity was called off.

Since then, peo­ple in­ter­ested in vir­tual cur­ren­cies to make pay­ments have looked to bit­coin com­peti­tors. Stephen Pair, pres­i­dent and CEO of BitPay, a startup that helps com­pa­nies take vir­tual cur­rency pay­ments, said his cus­tomers were look­ing to move be­yond bit­coin. “If peo­ple can’t en­gage in com­merce, it’s hard to imag­ine why they’d want to store their money in bit­coin in the first place,” Pair said.

Pair be­lieves that it is ir­re­spon­si­ble to sug­gest that a vir­tual cur­rency that has been around for less than a decade could pose a cred­i­ble chal­lenge to gold. The con­ceit of bit­coin as a good place to store money, he added, will be less con­vinc­ing when the price of bit­coin goes down, as it has in the past.

One al­ter­na­tive is bit­coin cash, which was cre­ated in Au­gust. The price of bit­coin cash has risen by more than 125 per­cent since the plan to dou­ble the ca­pac­ity of the orig­i­nal bit­coin was called off. But there is no short­age of in­vestors who have voted with their pock­et­books for the more cau­tious ap­proach of the orig­i­nal bit­coin.

Bit­coin’s price has jumped by 70 per­cent in the last month, to more than 10 times the price of an ounce of gold.

“I don’t think most peo­ple treat bit­coin as some­thing to buy be­cause it’ll get fea­ture X, Y and Z in the fu­ture,” Song said.

“Mostly, peo­ple are in­vest­ing be­cause they be­lieve it to be a good store of value.”

New York Times

“I’ve al­ways been skep­ti­cal of di­rectly com­pet­ing with and re­plac­ing ex­ist­ing forms of pay­ment,” says Steve Lee, of San Fran­cisco, who works for Google and in­vests in vir­tual cur­ren­cies. “To­day, what bit­coin is ex­cel­lent at, and has mostly solved, is be­ing your own bank.”

New York Times

Em­ploy­ees pause to get food at Coin­base in San Fran­cisco, which has been at the cen­ter of the frenzy push­ing up the value of bit­coin. It has been the dom­i­nant U.S. lo­ca­tion for cus­tomers to buy and sell vir­tual cur­rency.

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