All Things Bitcoin

George Frey
Digital Producer Jon Xavier headed to the three-day Bitcoin 2013 conference in downtown San Jose, May 17-19.

Jon Xavier
Web Producer-
Silicon Valley Business Journal

It’s the end of the second day of Bitcoin 2013, the first international conference for Bitcoin, a digital currency that bills itself as the future of payments. The day’s events are over, and most people have already left the San Jose Convention Center and made the trek three blocks to the bar where they’re holding the afterparty — a place where they’ll pack several hundred people into a space built for half that number, and where, tellingly, they don’t yet accept Bitcoin.

The meeting room is empty, save for a handful of us milling around near the stage, eager to hear more from a group of economists talking about the future of Bitcoin as a world currency. I’m listening to a heated discussion between a local mutual fund manager and a European economist who’d done his PhD thesis on Bitcoin. They’re talking about something I’ll hear a lot about this weekend — liquidity. Is Bitcoin liquid enough to ever be a world currency? It’s getting pretty technical — concepts like price elasticity and the velocity of money are thrown around.

Finally, in the middle of an explanation of what the Austrian school of economics has to say about the relationship between debt and boom and bust cycles, the fund manager throws up his hands.

“I’m not interested in schools,” he says. “I don’t care about Austrian school or Chicago school or anything like that. The only thing I care about is, ‘Can this make me money?’”

We get kicked out of the conference hall shortly thereafter — they’re closing up for the night. As we head over to the bar, I talk to the fund manager about Game of Thrones. I forget to ask him if he got a satisfactory answer to his question.

—

What is Bitcoin?

At the Bitcoin 2013 conference this weekend, I was told it was the future of payments. I was told it was the ultimate growth commodity, that it could only go up, that one need only buy and hold and they’d surely get rich.

I was told it was the best chance the world had ever had to reform the banking system. I was told that it would surely fail. I was told that it was the most dangerous idea ever devised.

“Either Bitcoin will destroy the state, or the state will destroy Bitcoin,” one person told me.

In a way, they were all right. Bitcoin is all these things, if only to different people. People tended to fall into two camps — true believers who really did think Bitcoin could take over the world, and businessmen who knew that to do it, the Bitcoin community might have to make some hard choices.

Whether they knew it or not, these two camps were saying different things this weekend. There was one major point of agreement — in the future Bitcoin would either be worth billions, or it would be worth nothing. And given recent moves by financial regulators, the point at which that question is decided might be coming sooner, rather than later.

No, seriously, what is Bitcoin?

At its simplest level, Bitcoin is a digital currency that maintains value through scarcity and relative irreversibility of transactions, even without a central body to control the money supply. At the core of Bitcoin is the so-called “Block Chain,” a ledger (which is stored in the cloud) of every Bitcoin transaction that has ever occurred.

When a new transaction happens (ie., when a bitcoin is sent from one person’s digital wallet to another) it is added to the block chain by a network of so-called “miners,” who use their machines to independently verify that the transaction has occurred by doing a lot of really heavy number crunching.

These miners also generate a small amount of Bitcoin every time they verify a transaction, which both incentivizes them to do so and adds more Bitcoin to the total supply. The amount of Bitcoin generated halves roughly every four years. This means that the total Bitcoin supply will top out in 2140, with about 21 million digital units in circulation.

This means a few things. One, Bitcoin is hard for any one person to control, because it works in a peer-to-peer network. Two, it’s really hard to take back a transaction once it’s happened because it’s stored many times in the cloud.

And three, because there’s a set supply, the price of Bitcoin will probably continue to rise as long as it has any value at all to people. Whether that’s a feature or a fatal flaw generally depends on what monetary theory you subscribe to.

Idealogical split

Those attributes make it attractive to a certain type of people, regardless of its actual usefulness as a currency. That is to say, if you’re inclined to distrust the government and think that any state meddling in money can only end badly, then the idea of a currency existing on its own that governments can’t realistically control has an intrinsic appeal.

But there’s a second wave of people moving into the community now with other concerns — banks, fund managers, venture capitalists, economists and investors. They have been spurred by the recent growth in the price of Bitcoin, and by events such as the near collapse of the banking system in Cypress and instability in the Eurozone, which demonstrated the value of alternative currency. As they try to turn Bitcoin from a small, mostly underground economy into a true global payment system, they’re running into some problems.

One of the biggest is liquidity — it’s hard to get your money into Bitcoins, and once it’s in, it’s even harder to get it back out. That’s something many of the sponsors who had booths at the conventions were working on. There was a lot of buzz about a gift card app called Gyft, which partnered with BitPay, a Bitcoin processing system for merchants, to let users buy gift cards to a number of retailers — one convention-goer even used it to pay for his hotel room.

Still, that’s just a very small, very new part of the market. Most people who want to turn their Bitcoins into other currency still have to go through a small number of exchange sites. This is probably the biggest problem.

Not only are these sites comparatively small, and unable to process trades quickly, they also put lie to the idea that Bitcoin is completely immune to government pressure. If the governments of the world were really as serious about stopping Bitcoin as some of its more paranoid admirers think, they’d just have to make it hard enough to operate an exchange that it became extremely difficult to ever “cash out” a Bitcoin investment, driving away investors and merchants that might otherwise want to get involved in the currency. At that point, the question wouldn’t be whether Bitcoin would take over the world, but whether it would survive at all.

Troubling developments

That might already be happening. Last week the Feds shut down the U.S. subsidiary of the largest exchange, Japan-based Mt. Gox, in what might be the first stage of a much larger crackdown. Mt. Gox’s subsidiary had not registered with the government as a money transfer agent, as was required under the law, and didn’t comply with laws requiring it to keep track of the identities of people changing money on the site in an effort to combat money laundering. Mt. Gox processes upwards of 60 percent of all Bitcoin trades, so its loss would be a major blow to the currency.

FinCEN, the branch of the U.S. Treasury department charged with enforcing financial laws, has laid out a path to running a legitimate exchange in the U.S. But it’s a rocky route, requiring operators to fill out a lot of paperwork, submit to much more government scrutiny, and also collect a lot more information about their users. Some exchanges, like TradeHill, are trying to be as above-board and compliant as possible. Others are ideologically opposed to it, or are trying to find work-arounds.

In any case, it casts a lot of uncertainty on the future of Bitcoin, something the notoriously volatile market doesn’t need.

And there’s also the worry that in becoming legitimate, Bitcoin might lose its soul. More than one person I talked to said over-regulation had the potential to remove a lot of the attributes that attracted him to the currency in the first place.

“If you remove the anonymity, and you remove the irreversibility of payments, then what really is Bitcoin?” one person asked me. “A way to do payments online without having to pay a credit card transaction fee? That’s hardly a rallying cry.”

—

On the way home from the first night of Bitcoin 2013, head still spinning from an hourlong conversation about monetary collapse and the rise of alternative currencies, I stop off at 7-11 to buy a lottery ticket.

Yeah, I know the math. The odds of winning are about 1 in 75 million, roughly the same odds as being struck by lightning twice in one day.

But the Powerball is at $590 million this weekend, the third-highest payout of all time. I’ve hearing about it everywhere — not at the conference, where no one talks about ‘fiat currency’ except as a derogatory term — but around it, on the streets, in the elevator, in excited conversation between meeting hall staff in their immaculate burgundy jackets. At the 7-11 that night a group of cops is talking about it.

“If I won, I’m gone. That’s so much money, I’d leave San Jose. You’d never see me again,” one tells the other.

At a certain point, even knowing the odds, even realizing it’s a long shot, you think hey, what the hell? I pay my $2. The ticket the cashier hands me is either going to be worth $600 million, or it is going to be worthless. But I am hopeful. Even with those odds, I have the exact same chance as everyone else in America.

I didn’t win. But someone did.

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