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Making more bad loans is the tuition price for learning how to build and train new underwriting algorithms.
April 30 -
Digital money like Bitcoin opens up possibilities for banking without central planners or a lender of last resort, where interest rates and reserve requirements are driven purely by the market.
March 15 -
Now, with an ATM that directly converts paper cash to bitcoin anonymously, the interaction is with a machine rather than another human. No more face-to-face meetings, no more counterparty risk.
February 27 -
Coinbase makes it simple to buy and sell bitcoins via a bank account, but plays only to the low-fee, frictionless nature of Bitcoin and fails to leverage its unique privacy aspects.
February 22 -
The anonymous digital currency Bitcoin, which is already accepted on the Wordpress blogging site, has another mainstream partner. Reddit, the social news and entertainment site, now accepts bitcoins as payment for Reddit Gold, a subscription service.
February 15
Today, Bitcoin is the wild, wild West. But the sheriff is coming to town, and just like in the Old West, we'll see even more value creation once the law, the railroad and the homesteaders get here.
For those who are not familiar with Bitcoin, it is a
- Its value cannot be changed by the fiat of any single government or entity (unlike "fiat" currencies like the U.S. dollar controlled by the Federal Reserve Board)
- It is nominally anonymous (or more accurately, pseudonymous) in that transactions are tied to wallets (essentially numbered accounts with passwords), not to people
- It should be a "deflationary currency," meaning that its buying power should theoretically always go up over time
- Its transaction costs are zero (or close to zero)
- Its transactions are irreversible (which is attractive to merchants)
In many respects, it is useful to think of Bitcoin in the same way as we think of gold, although in practice the transaction and storage costs of gold are substantial.
There are currently around 11 million bitcoins in existence, but there will never be more than 21 million, a cap built into the Bitcoin protocol. As of this writing, Bitcoin is at around $1 billion in market capitalization, with monthly exchange volume of $50 million to 150 million (coins bought or sold), and daily transaction volume of $5 million to $35 million (coins transferred). All this is up from zero since the first coin was created on Jan. 3, 2009. But the volatility goes both ways – there have been three major crashes since then as well.
Even beyond exchange rate risk, Bitcoin is a risky currency to hold. As with cash, if you lose your wallet, you lose your coins. The
Early Bitcoin proponents fall into three categories: "crypto-punks" who are fascinated by the math, radical libertarians who dislike the idea of central control of any currency, and some shady elements who prefer that their transactions be "anonymous."
The shady elements are currently the largest component of the Bitcoin economy.
There are also some bright disinfecting patches of sunlight appearing amidst the shadows. Professional Wall Street traders have started to show meaningful interest in Bitcoin, citing attraction to the volatility and the "by design" deflationary nature of the currency. Citizens of countries with unstable currencies or banking systems or currency controls, such as
Consumer usage is still largely confined to
Bitcoin has a long way to go before it threatens Western Union, Visa or First Data, but the draw of zero (or close to zero) transaction costs is very appealing. The
If Bitcoin continues to live up to its potential, it could be a massively disruptive force in financial services, dramatically cutting the costs of doing business for millions of Americans, and billions of people worldwide. But to get to that scale, the Bitcoin ecosystem will need to grow a hundredfold to a thousandfold from current levels. This is conceivable, as it has already grown by 30 times in the last year alone. Three things need to happen before Bitcoin can get that big:
- Bitcoin volatility needs to be dampened due to the need for a deep and liquid exchange market between Bitcoin and government fiat currency.
- The regulatory framework needs to become clearer
- Most importantly, reputable merchants need to start accepting Bitcoin
All these things are starting to happen. More exchanges are springing up to handle Bitcoin volume and more traders are jumping in as Bitcoin prices continue to rise. With the
It's these changes that could propel Bitcoin to become a real and credible payments alternative. With the sheriff in town and more homesteaders turning up, we will start to see the basis for Bitcoin growing from $1 billion to tens or even hundreds of billions in value.
Jeremy Liew is a managing director at
