Is Bitcoin a joke to financial experts?

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Dear “financial experts” who write off Bitcoin,

Do you ever look at Bitcoin, not as a commodity or currency, but as a backbone technology, very much like the technology behind the internet (except this technology happens to be pre-commoditized)? Many detractors focus entirely on economic theory, and admittedly insane price gains that point to an unsustainable price bubble (tulips and Beanie Babies are often brought up). However, these arguments 100% ignore the technical relevance of a system that allows extremely low-friction and low-fee digital payments, in a world that is become more and more about digital connections.

Admittedly, the interfaces and trading mechanisms for Bitcoin have been somewhat clunky and difficult. And user adoption is still extremely low. However, I think tomorrow could well be a very different story. There have been many tens of millions of dollars invested by VCs in the past six months to forward technologies based on Bitcoin. Plus thousands independent developers are working hard to come up with new Bitcoin technologies. These people are often the brightest of the bright.

Sending money to anyone using Bitcoin is as easy as sending a text message. Yes, it’s actually that easy today, if you happen to have a specific smartphone messaging app (Gliph) connected to a funded Bitcoin exchange. So if I have no cash, I can just send a text message with a specific value (denominated in any currency) to pay a friend for half a dinner bill. Or I can send Bitcoin to anyone in the world in need, they just need a smart phone and an internet connection. There are no PayPal or credit card fees, no waiting for wired funds to be available, no middle-man at all; it’s almost like directly handing someone cash through the internet. That capability has been around for months now. But this type of payment will become much easier in coming months and years.

You don’t want to hold Bitcoin because you fear it’s a bubble or it’s just too volatile? As we progress down the road a bit, people will be able to instantly trade in and out of Bitcoin, if they just want to use Bitcoin as a transfer mechanism (BitPay and other companies have enabled merchants to do this for quite a while). Or people could keep some amount of savings in Bitcoin, if they believe the currency will continue to appreciate in the longterm, as the trend has been.

This payment functionality is just the tip of the iceberg. It’s hard for me to even imagine everything that can be built on top of Bitcoin in coming years, just as it was hard to imagine everything we do with the internet today, when the internet was in its infancy (You may be too young to remember, but there was awhile when buying something over the internet using a credit card seemed extremely scary, and most didn’t even consider it. Now almost everyone buys merchandise and connects to banks and investments online). I think when you consider the implications of the technology behind Bitcoin separately from looking at the traded value, it gives an entirely different perspective. Comparisons between tulips and Bitcoin are fair when one focuses only on the run up in price. But that seems to be a very myopic way to view an emerging, disruptive technology.

Sincerely,
Rob

Sponsored by Bkeychain.com – Brass-plated two-sided Bitcoin Keychains

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Bitcoin Trend After “Crash”

Media and bloggers just made huge news of a Bitcoin crash. However, if you look at this chart of the past 180 days, the recent severe spike (and return) in value looks like an aberration, and that Bitcoin is still solidly headed upward.

Why am I talking about Bitcoin?

A little over a year ago, I heard a podcast with computer security expert Steve Gibson discussing a relatively new experimental digital currency called Bitcoin. It seemed interesting, and after examining the open code to the digital currency, Mr. Gibson seemed to think the cryptographic Bitcoin system seemed very sound.

I had been hearing more and more news about Bitcoin, and decided a couple of weeks ago that it wouldn’t hurt to buy a small amount, in hopes that the long trend of appreciation would continue. There are plenty of good arguments for and against investing (gambling) in this currency, and plenty of talk about bubbles. I certainly wouldn’t recommend that anyone bought more Bitcoin than they could afford to lose. And a bit of research is required, just to understand how to safely buy and hold the digital currency.

The way I see it, there’s a 25% chance that bitcoins purchased today will be worth at least 1000% (10 times) their current value in less than five years. Statistically speaking, if you take those types of asymmetric bets regularly, you’ll come out ahead. Of course, these numbers are just my assessment (others think Bitcoin will be worthless within weeks).

I found out first-hand how difficult it is to sign up and fund an account with a Bitcoin exchange. It’s not rocket-science, but it requires careful reading and a bit of a leap of faith. But I think it’s clear that it will become easier to buy Bitcoin as new companies get involved, bringing Bitcoin to the masses. There’s even a Bitcoin ATM that is apparently coming, with the first two locations planned for Los Angeles and Cyprus (when you live in some countries, an appreciating currency looks particularly attractive). I think when the barrier to entry is lowered, and more and more people can easily try buying this geeky currency, that will drive the price higher. The biggest Bitcoin exchange, Mt. Gox, said recently that they are adding 20,000 accounts every day, and I imagine that number is growing. I don’t see how so many additional people interested in buying Bitcoin won’t add upward pressure to the price of Bitcoin.

Note that this chart is from Blockchain.info, but I added the gold line to show what I thought was a true trend line. As I write this, the price of Bitcoin on Mt. Gox is hovering around $115. If you bought just one month ago, your Bitcoin value has more than doubled! And that’s after the very-hyped “crash” of Bitcoin.