August 19, 2016
Bitcoin: Bubble to Bedrock? – Part IV
A case could be made that Bitcoin—its rise and fall and rise again—was the payments story of 2013. But in the early stages of 2014, the debate had shifted from volatility and concerns of illegal activity to merchant acceptance and consumer adoption. The demise of the world’s largest Bitcoin exchange, however, brought dormant concerns back to life. Recently, CardNotPresent.com embarked on a three-part series on Bitcoin and its spasmodic progress toward legitimacy. The Mt. Gox meltdown, which happened in the interim, obliges us to extend the series. So, in the spirit of author Douglas Adams, we present Part IV of our trilogy: a look at recent upheaval and whether Bitcoin is undergoing an existential crisis or a bump in the road toward greater adoption.
Part IV – So Long and Thanks for All the Bitcoin?
By D.J. Murphy, Editor-in-Chief, CardNotPresent.com
When this series of articles was conceived nearly two months ago, the environment surrounding Bitcoin was somewhat different than it is now. Mt. Gox’s difficulties were coming to light, but the complete havoc was weeks in the future. Much of the news at the end of 2013 and into 2014 was about the increasing ranks of online retailers willing to accept Bitcoin, despite the publicity around black-market Website Silk Road that trafficked in illegal products paid for by Bitcoins, which was shut down by law enforcement in September. With online discounter Overstock.com leading the way, Bitcoin was beginning to make inroads in repairing a public perception that tended to characterize the cryptocurrency as a refuge for outlaws.
If you are a fledgling currency, however, and your largest exchange stops trading, admits to actions that could only be construed as gross incompetence or outright fraud and declares bankruptcy, hard-won stability tends to vanish quickly.
In one sense, it might seem that Bitcoin is back to square one. Elected officials and law enforcement, sensing an opportunity, are making noises about the current and future legality of the currency. Countries all over the world and many U.S. states are considering regulatory and statutory limits on Bitcoin. And consumers just don’t know what to think.
But, Bitcoin infrastructure and funding in Bitcoin startups is significantly farther along than it was even last fall when the Silk Road debacle cast a temporary shadow on the budding payment method. Powerful financial interests like Internet pioneer Mark Andreesen continue to back Bitcoin companies and the number of ventures trying to leverage the cryptocurrency’s growing popularity are surging.
So, have the events of the past few months—especially the loss or theft of around 850,000 Bitcoins (7 percent of the world’s supply)—irrevocably shaken the faith Bitcoin was painstakingly building? Or has that faith translated into an environment that can shake off Mt. Gox as growing pains?
Mt. Gox Problems Not Surprising
To anyone who was paying attention, says John McDonnell, CEO of Bitnet Technologies, the downfall of Mt. Gox was widely anticipated. Mistrust of the exchange was very high among Bitcoin enthusiasts, although the extent of the malfeasance or incompetence (it is still unclear which) was not understood.
“The profundity of Mt. Gox’s problems was well concealed, but we’ve been monitoring them, as have pretty much everyone else of importance in the Bitcoin world,” McDonnell says. “No one has been dealing with them for a while except some unfortunate thrill seekers who saw an opportunity to arbitrage.”
McDonnell is referring to a large spread that developed between the value of a Bitcoin on Mt. Gox and the rate offered on most other exchanges. His speculation—along with that of much of the Bitcoin-related industry—is that when Mt. Gox finally became aware that its practically non-existent bookkeeping had resulted in massive losses of Bitcoins and fiat currencies, it artificially inflated the price of Bitcoins to incent people to use the exchange.
“In hindsight, the strange dislocation in price that was going on at Mt. Gox was an intentional effort to draw people into selling Bitcoin there in an effort to bolster their reserves while they looked for an emergency loan. When that didn’t come through, they started to point to the transaction malleability flaw [as cover].”
The Bitcoin community is working hard to frame the recent trouble as a Mt. Gox issue rather than a Bitcoin issue and go back to work raising awareness and adoption. Politicians, however, are not quite as willing to let the matter rest. Many will seize on the issue in the name of consumer protection and attempt to impose new regulation or statutes controlling how—or if—Bitcoin can be used in commerce. The question is whether any resulting laws overwhelm the currency enough to kill it.
A round of U.S. Congressional hearings in November, before the current crisis began, produced positive results for Bitcoin. But, when this much money disappears, the political environment can change quickly. Only a week ago, U.S. Senator Joe Manchin (D-W.Va.) went so far as to ask regulators to ban the currency outright.
Several states also are looking into regulation, including New York, which wants to license Bitcoin companies, requiring enhanced consumer disclosure rules, capital requirements and a framework for permissible investments with consumer money.
Internationally, China prohibited its banks from facilitating Bitcoin transactions, Japan announced new taxes and regulation to come on Bitcoin transactions and Russia has banned the currency.
But, while the U.S. and China dither, says McDonnell, Europe is embracing Bitcoin with open arms—vital for a currency that boasts a cheaper way to transact online across borders as one of its strengths.
“Germany and Switzerland validated Bitcoin with official act of parliament,” he explains. “The UK is now in that category. Ireland said its central bank doesn’t have a mandate to tackle Bitcoin. The Nordic countries are also in lockstep with this, issuing warnings, but at the same time recognizing it as a financial instrument it can tax. The sum total in Europe is the whole ecosystem is probably going to flourish there more than even North America or China.”
Will Merchant Acceptance Cool?
More important than any noise legislators are making toward Bitcoin is how many merchants accept it. Part III of this series looked at the state of merchant acceptance and the business case for doing so. One of the companies that agreed to speak to CardNotPresent.com for that article was Overstock.com, perhaps the most successful early adopter of Bitcoin. The company recently said it has taken in more than $1 million in Bitcoin transactions and, just this week, revised its year-long projections upward from $3-$5 million in revenue to up to $20 million.
We got back in touch with Overstock to see if the recent trouble had cooled management’s enthusiasm for Bitcoin, but they aren’t backing off a bit.
“We’re not making any changes based on what happened at Mt. Gox,” says Judd Bagley, the company’s director of communications. “We’re still optimistic about Bitcoin’s long-term prospects as an alternate currency.”
Coinmap.org is an interactive map that tracks the number of merchants accepting Bitcoin. At the beginning of November there were 552 entries on the map. That number had grown to more than 1,000 by the end of November. And, as of the publication of this article, more than 3,300 merchants worldwide had registered on the Website’s map, the vast majority in the U.S. and Europe.
In addition to Overstock.com, major names like Reddit, the NBA’s Sacramento Kings and Virgin Galactic, Richard Branson’s civilian spaceflight initiative, accept Bitcoin.
The Second Wave
McDonnell says many are looking at the demise of Mt. Gox as a case of creative destruction: that a failure of this magnitude had to happen to stimulate new growth. While he doesn’t necessarily subscribe to that theory, he did say this episode may mark the end of Bitcoin’s infancy and the infusion of a new perspective—one rooted in payments.
Perhaps nothing marks this as a new chapter for Bitcoin more than the unmasking yesterday by Newsweek of the cryptocurrency’s purported mysterious founder. Satoshi Nakamoto—always thought to be a pseudonym, but actually the Bitcoin inventor’s real name—is a 64-year old Japanese-American living humbly in California. Described in the article as extremely intelligent, moody and obsessively private, he personifies the characteristics associated with Bitcoin’s invention and early development.
But, as the Newsweek piece details, Nakamoto has disassociated himself from Bitcoin. And, perhaps this break, along with the upheaval caused by Mt. Gox, will coincide with a rebirth for the payment method.
“It’s time for the second wave of entrepreneurs in Bitcoin,” McDonnell says. “There was a first wave of ‘crypto-anarchist-libertarian’ types wearing Guy Fawkes mask and occupying Wall Street who jumped on Bitcoin as a way to store value outside of government manipulation. And, bless their souls, they built the original infrastructure.”
But it’s time, he says, for people to recognize Bitcoin for what it can deliver to merchants.
“We all just came from Visa,” the veteran of Visa online processing unit CyberSource says of his new company, Bitnet Technologies. “We’re looking at this as a payment pipe, not a currency. As a way for merchants to accept cross-border payments in an inexpensive way and eliminate fraud. Not reduce it or mitigate it—eliminate it.”