It is barely understood by the general public, its value is in freefall and it has a serious image problem. Daniel Roberts asks can the currency survive 2015?
Last year was an annus horribilis for bitcoin. Its price, once up above $1,200, sunk below $250. The second-largest bitcoin exchange had to temporarily suspend operations after a large-scale hack. And there have been two high-profile criminal prosecutions of bitcoin entrepreneurs. It was enough for some commentators to dub 2015 a make-or-break year for the currency, with experts saying it needs to find a purpose or face extinction. But that’s only one side of the story. There’s also been a flood of venture capital and bitcoin startups, as well as interest from legitimate bodies such as the New York STOCK EXCHANGE, all of which suggests bitcoin is here to stay.
Typically described as a cryptocurrency, bitcoin is really a peer-to-peer system that allows you to move value around the world, in decentralized fashion, without the usual headaches and fees. Its backers argue it is faster and more secure than conventional currency. They cite its potential for sending remittances and for storing secure documents. It could revolutionize the banking system, they say.
The bitcoin community hasn’t been helped by the high-profile actions of some of those associated with it. Ross Ulbricht is currently on trial for allegedly running the online marketplace Silk Road, on which anonymous buyers used bitcoin to purchase illegal drugs. Charlie Shrem was sentenced in 2014 to two years in prison for helping Silk Road customers transfer money illegally using his exchange BitInstant. Those prosecutions have added to the idea that bitcoin is a resource for criminals, but figures from the community argue that their stories have very little to do with the currency and its chances of lasting success. “The technology is technology, it’s neutral in character,” says Jerry Brito, executive director of the non-profit Coin Center. “Someone’s going to use it, if it’s good, which I think it is.”
The negative headlines that come along with the Silk Road trial, or with other bad news like the breach of bitcoin exchange BitStamp early this year, fuel wariness and add to the notion that many in the public still have: bitcoin is an unstable investment, it’s unsafe, and it is used for crime.
The developers engaged in building bitcoin don’t care much about those concerns. They feel the public does not need to understand bitcoin yet – maybe not ever – for it to succeed. The popular line these days is that bitcoin, in its current progression, is similar to the early days of the internet. No one was sure what the web would become, and even now that it’s so ingrained in our lives, most people don’t understand how it works. They simply know that it does.
“At this point, venture capitalists are drooling over bitcoin and its possibilities,” says Roger Ver, a bitcoin investor and evangelist whose philanthropic donations earned him the nickname “Bitcoin Jesus”. “It will take time for the general public to catch up, because the general public doesn’t have any reason to catch up until some general-use case applications are built. But most people don’t understand how email or banking works, they just use it.”
At the moment, 65% of the general public is “not at all familiar” with bitcoin, according to a new study by Coin Center. Of those who do have awareness of bitcoin, 84% have never used it.
The currency’s wild volatility in value hasn’t helped either. After peaking at just above $1,200 in 2013, the value of one bitcoin sits below $250 today. In December it was christened the worst investment of 2014, since its price fell more than 50% over the course of the year. Its defenders are quick to point out that from the end of 2012 to end of 2014, the price was up more than 1,000%. But the more fervent argument is that the price doesn’t matter anyway.
The volatility is a big problem. The instability damages the idea of bitcoin as a serious investment; many potential financiers such as hedge fund managers and banks won’t go near it. “If the price goes up, a lot of prominent people who have been buying it are going to talk about it publicly,” says Barry Silbert, who made his fame by creating SecondMarket in 2005 (which allows for the trading of illiquid assets, like shares in Facebook before it went public) and has now invested in 45 bitcoin companies. “When the price is way down, you’re not going to go on CNBC and talk about it.”
The system also relies on the participation of bitcoin miners, who use expensive software to record bitcoin transactions for a small fee. There is a price floor at which, like a written-off car, it will no longer be profitable for miners. Tyler Winklevoss, who has thrown more than $10m into bitcoin with his brother Cameron (the duo are known for their legal battle with Facebook founder Mark Zuckerberg, from which they got $65m in a settlement), says: “I don’t look at the price day to day, but I do think it matters. The price going lower and lower is dangerous to the security. It becomes prohibitively expensive for the miners. As long as the miners are incentivised to keep mining, I’m not worried.”
Another criticism of bitcoin has been security: in January, the Slovenian exchange Bitstamp was hacked to the tune of $5m and followed the $400m hack of Tokyo bitcoin exchange Mt Gox in 2011. But help is on the way: the announcement this month of an insured bitcoin exchange from Coinbase (which raised $75m last month, the largest investment round yet in a bitcoin company), has been hailed as a major step for the space. It’s a sign of good faith, says Jerry Brito, to see investments, “not only from crazy futurists like Marc Andreessen, but from the NYSE and USAA, places that are super conservative. Now we’ll start to see institutional investors, and hedge funds.”
Last summer, the NYDFS announced BitLicense, a dedicated set of regulations for bitcoin companies. This, too, was hailed as a big step, despite the irony, of course, that bitcoin lovers decry regulation. The Winklevoss brothers are also planning an exchange, called Gemini, that they hope will be, “the Nasdaq for bitcoin”.
Many bitcoin startups are focusing on security. The storage wallet BitGo uses multi-signature authentication, while the company Authy works with bigger companies like Coinbase to provide two-factor authentication rather than standard passwords. “Bitcoin is going to be more secure than paper money,” says the Authy founder Daniel Palacio. “We’re getting there. We will see better security. The user experience is not quite there for everyone. For someone who does not understand, it would be challenging to start using bitcoin right away.”
To be sure, unsavoury events like the price drop, two high-profile prosecutions, and the hack of a large exchange are bad for business. But there were many more positive indicators in 2014: more money was invested in bitcoin startups than ever before (around $300m, in companies like Circle, Xapo, and Kraken); more bitcoin startups launched than in any year prior (more than 500, compared with around 200 in 2013, according to data from AngelList); and acceptance by major companies continued to spread. (Microsoft, Dell and Overstock.com all accept bitcoin now; publisher Time Inc accepts it for magazine subscriptions.)
Many in the bitcoin world believe that what the technology needs next, in order to prove itself, is a “killer app”, one useful tool that would be accessible and exciting to the mainstream population. For Roger Ver, that app is Purse.io, which sources unused Amazon credits or gift cards from around the world and matches you with someone looking to get rid of theirs; that person orders the items you want, you send them bitcoin, and you get a discount on your order. “I don’t know anyone who wouldn’t be excited about 25% off at Amazon,” says Ver.
Others, including Winklevoss and Brito, point to ChangeTip, which allows people to send a tip with a quick tweet. Aiming to serve as a “love button”, the app has potential for media outlets – imagine if, instead of a paywall, you could instantly pay a few bitcoins to read without subscribing.
The problem is that, for now, the existing applications mostly cater to those already entrenched in bitcoin. Onename, for example, allows you to turn your private key (a series of digits) into a simple username, and has big plans to be the primary connector that verifies identity across the web. (“Bitcoin is saying that you don’t need banks for transferring money, and so, we’re saying that you don’t need companies like Facebook and LinkedIn for verifying your identity,” says cofounder Muneeb Ali.) But for now, Onename’s main use is for bitcoin enthusiasts to send bitcoin to other bitcoin enthusiasts. Similarly, people are mostly using ChangeTip to “thank” bitcoin bloggers. There is hype around how the blockchain could lead to a decentralised Uber, or a decentralised Dropbox, but such ambitions will take years to materialise.
The bitcoin-bullish speak in grand terms, describing 2.0-type applications when the technology is only barely in its 1.0 stage. Their eyes are set five years down the road, when most people aren’t convinced yet of its staying power. Indeed in January, Citi’s digital chief, Greg Baxter, questioned the “maturity” of bitcoin’s technology at a digital symposium; this month, Reddit abandoned plans for its own digital currency, Redditcoin.
Some insist that there doesn’t need to be a killer app yet, when the entire system is still in its infancy. “There are a few companies that are mass-consumer-focused, that, if the stars align, could potentially be that killer app,” says Silbert. “But I tend to think that in these early years, this will be a slow awareness and adoption curve. And then we’ll hit a point and it will accelerate just like the internet did.”
The “killer app”, for now, is seemingly bitcoin itself. That may not change in 2015, but as the hype around it grows, so too must the industry. Even those convinced of the potential bitcoin holds do not deny that it has its work cut out. It will take major strides to change the minds of skeptics. To keep up its steam, the price must stabilise. Consumers must see continued buy-in from major institutions. Acceptance by a big bank would help. Additional hacks of exchanges will not. The overall infrastructure must strengthen.
“I do think there’s a little bit of a sense of make-or-break this year, and it’s partly a result of the hype around the technology,” says Brito. “At the very least, the momentum has to stay. We can’t start backsliding. We can’t start to see less venture capital money, or fewer merchants coming into the space. We’ve got to see real maturation this year. And I think we will.”