Tuesday, May 21, 2013

The Future of Bitcoin

Having had a bit (pun intended) of time to decompress from the Bitcoin 2013 conference that I attended  in San Jose this past weekend. Here is my current thinking on Bitcoin and how that thinking evolved over the conference.

Going into the conference I thought the major problem for Bitcoin (and other crypto currencies) was the exchange point between fiat currencies and Bitcoin. My view was that as long as the government can control these points of exchange, and associated bank accounts, that Bitcoin could not get much passed being a dark underground virtual currency. My belief seemed to be buttressed by the recent seizing by the Department of Homeland Security of the funds held in US accounts by leading Bitcoin dealer, Mt Gox. My view was that if the government can control the exchange points and shut them down, then it would be game over for mass use of Bitcoin.

After spending some time at the conference, however, I realized that there were a number of dealers about to launch, who were going through the painstaking and expensive process of registering in the US as money exchange dealers.

At this point, I thought to myself, "Okay, registered exchanges will survive, but they won't offer any of the significant (though not foolproof) anonymity that Bitcoin itself offers." In other words, if you have to register with  name, DOB and SS#, then there is limited use for Bitcoin. It's almost just like a bank account, though with fluctuating value.

When I learned that the Bitcoin Foundation was about to hire a lobbyist in Washington D.C. and a staff of lawyers, I thought to myself that nothing good could can come of that. That it is negotiating with the devil and that it will mean even more restrictions on Bitcoin.

By the middle of the weekend, however, I began to see how the registered exchanges and the Bitcoin Foundation could  provide good cover for Bitcoin. If the government is happy with exchanges that are being registered and the Bitcoin Foundation provides a distraction for the government, by which I mean, congressmen and  regulators think that an agreement with the Foundation is an agreement with the Bitcoin community, than that could all be to the good. As I learned at the conference, the Bitcoin community is far, far bigger than, and there is much more to them, than regulated money exchanges and that if the registered exchanges and the Bitcoin Foundation distract the government and keep it from focus on the entire BTC community, than all the better.

As Tuur Demeester said to me, Bitcoin has a thousand heads. That doesn't mean that Bitcoin will survive a battle with the government, but it will be a battle. Expect some casualties. CEO Alan Safahi of Zip Zap told me, there will be some lawsuits, some scams and some arrests.

But just as there is an above ground group that wants to deal with government regulations, there is an underground group that has no plans to do so. One exchange developer told me he doesn't have the money to register as a money exchange, but plans to launch his exchange anyway. There were even wilder schemes that I dare not go into in print about. Let's just say there are some very creative and aggressive people in the community.

That said, there is some big money pouring into the crypto currency world. Peter Theil recently put $2 million into BitPay. Google Ventures has put money into another platform/crypto currency, Ripple. I also got wind of a global multi-billionaire, who wants to keep his name and his investment secret, but who has put money into a Bitcoin company.

It is this BIG money, above ground money, that may keep the regulators from shutting down BTC completely. And if it is not shutdown completely, the nature of Bitcoin is such that the underground BTC world will continue to develop methods and systems for all sorts of exciting things. It will be a cat and mouse game. But the mice here are very smart. They are thinking of all methods possible to make a government shut down of Bitcoin very difficult. This means, of course, that they want to see as many users adopt BTC as possible, but their thinking goes beyond that.

I heard one speaker tell a large audience that they should make their charitable donations in bitcoins. His argument was that if the government tried to shut BTC down in the future and charitable organizations were receiving some of their donations in BTC that they would likely then object to the government shutting down BTC. Like I said, they are thinking all angles. The government at present may have the ability to shutdown the entirety of Bitcoin, but as it becomes more used in mainstream transactions, the more difficult it will be politically to do so.

One EPJ reader asked me at the conference if I had changed my mind about Bitcoin and now consider it a money. My answer was that I still don't. It still doesn't have the liquidity that a medium of exchange has. That is, you still can't walk into every store and use bitcoins to buy something, but that is changing and at some point you may be able to do that and that would make it money. But I must hedge even here, about BTC has the crypto currency likely to emerge. BTC has a major advantage to being first in a sector, most of the developers are working on BTC, but that doesn't mean it will end up top dog if a crypto currency succeeds.

Remember, in the early days, we all used AOL email and AOL search and then came along Google and gmail, which changed things a lot. BTC may come out the winner or it may be another of the crypto currencies out there. Ripple's XRD looks very interesting to me. It is surrounded by very smart people, has money and it has that investment from Google Ventures.

In short, at this stage the government is a significant threat, but it is a threat that likely doesn't understand the beast it is dealing with. It is very possible they won't understand the moves they need to make to shut the crypto currency world down. If they don't, and use of crypto currency grows, then long term we may end up with a currency that, unlike the Fed's fiat dollars, can't be inflated at will.

If a crypto currency emerges as a popular medium of exchange. It could in a way become the crypto world's answer to gold, a currency that climbs in value against depreciating currencies, such as the dollar, but a currency that may be even easier to transport and hide then gold. Indeed, as one attendee explained to me, crypto currency does not have to take any physical form at all. If you remember your passcode in your brain, you can pass any border check point without a customs agent detecting the wealth you have with you.


  1. Thank you for an interesting report.

  2. A friend of mine who has worked as an accountant for several non-profits has told me that he finds it to be more difficult for non-profits to get credit from banks because of the political risk associated with collecting on potentially bad debt.

    More specifically, the worst, from a political perspective, is churches. It looks very, very bad to seize the assets of a church.

  3. Great reporting. Thank you.

    It seems to me that the only way the government can "shut down" Bitcoin is by shutting down the exchanges. But if Bitcoin were to truly become money - that is, if/when it is accepted by retail outlets, online, your landlord, etc. - then there will no longer be a need for those exchanges, and therefore no point at which the government can shut it down. Do you agree?

    1. Yes, it really will be a cat and mouse game. But, if it gets widely adopted, game over Bitcoin wins.

  4. Fantastic report on Bitcoin. Every part was interesting.

  5. THIS is why I read EPJ. Thanks for your time, money and energy to bring back this report.

  6. A reasonable report but this bit drives me nutz (and you're by no means the only culprit for this):

    "That is, you still can't walk into every store and use bitcoins to buy something, but that is changing and at some point you may be able to do that and that would make it money."


    So tell me, if I wander into a New York bar, can I buy a drink with Malaysian ringgit? No? So ringgits aren't money?

    If I were to pop into a 7/11 in Malaysia and try to buy a smoothie with American dollars, guess what? They wouldn't accept them and tell me to go find a money changer. So dollars aren't money?

    If I go to a German pub and try buying a beer with Japanese yen, they'll say 'Nein'. So the Japanese Yen isn't money?

    Fun fact and true story - after reading how silver was gonna explode I bought 10 oz off ebay. A couple of years ago tried selling it here in Malaysia - and couldn't find any goldsmith or pawn shop willing to take it. No question about the authenticity or anything like that, they just don't buy silver. Worthless.

    As for gold, try walking into a German pub, New York bar or Malaysian 7-11 and buy a drink with some gold shavings?

    Worthless too, and certainly not 'money' by your definition.

    Bitcoin is internet cash, better than gold because you can send it digitally and easily divide it (and it's harder to counterfeit). Part of its beauty is anyone CAN accept it if they want to, without the usual charges, 'capital controls' and messing around changing paper for paper.

    Oh, and the 'spread' in Malaysia for gold? 35%!! The best I could ever find, with the help of my local father in law who knows a guy who knows a guy, was a disgusting 18%.

    If it ever got to the stage that the general public accept bitcoin as cash to be spent anywhere, then bitcoin would have already won that battle a long time before, wouldn't it? That's like refusing to vote for Ron Paul until he's been in power for at least 10 years or so.

    Think of it as internet money or digital gold. You cannot send gold online, only digital representations of it. Bitcoins however are digitally transferred, via the blockchain ledger. Unlike digital gold a bitcoin or fractions thereof cannot exist in 2 places at once.

    Finally, the bit about how crypto currencies may be the future but maybe not bitcoin, what's that about? I see that everywhere, it's like some kind of agnosticism, wishy-washy thinking or speech that says nothing.

    Any other such currency that succeeds will only do so riding on the coat-tails of bitcoin's success, so again you're demanding accomplished success as a sign of succeeding.

    If you truly stand for a currency that cannot be inflated by government or their cronies, then stand up for bitcoin. It's already 4 years old, has a $1 billion market, accepted by thousands, held by a million or more people.

    What are you waiting for? Government permission?

    1. very Well written reply did attend part of the conference, unfortunately Bitcoin is still a nerdy thingy, but what it seems to work like either the Hawala system of xfer of currency which is live and well despite government restrictions on it, since it is based on "trust" my take on on this is it needs a "Base" "Country" to accept it like legal tender maybe a country like France, or Hong Kong or even Singapore if that happens one is looking at the end of U.S. dollar an international currency which also means few sanctions against rogue nations like Iran for they won't work ! so I refuse to believe that western nations will allow Bitcoin to be more than a nerdy transactions world wide !

  7. " The government at present may have the ability to shutdown the entirety of Bitcoin, but as it becomes more used in mainstream transactions, the more difficult it will be politically to do so. "

    The goverment (and its media) has the ability to produce FUD... Fear ... Uncertainty ... and Doubt. They may inhibit cryptocurrencies but the idea will not go away by govt decree.