Bitcoin Armstrong. via the Bitcoin subreddit.
Ever since the value of one Bitcoin rose above $200 USD (£120) in late October, I’ve been obsessively catching up on all the lost time I’ve missed out on since the ethereal cryptocurrency was born in 2009. Back then, like all sorts of other tech enthusiasts who completely missed out on an opportunity to make a bunch of fast cash, I decided not to invest in Bitcoin. Why? Well, to be fair, it was less of a conscious decision and more of a fleeting thought pattern that went something like: “Huh? What is this thing? I don’t understand it, let’s move on.”
If you’ve completely avoided learning about Bitcoin up until this precise moment in time, my favourite way to explain it is with this animation that was screened at the LeWeb conference in London earlier this year. If learning through CGI isn’t your thing, and you’re still unclear on what Bitcoin is, to be brief: it’s a digital form of encrypted cash that’s designed like gold – in that there is a finite supply of 21 million Bitcoins – so theoretically its value should continue to increase over time. So far, that system of increasing value is working remarkably well, and in the interest of full disclosure, I have invested a bit of Canadian coin into Bitcoin.
Today, Bitcoin is worth well over $1,000 USD per coin and is approaching parity with gold itself.
This massive surge in value has propelled Bitcoin into mainstream news headlines the world over. Last week, the United States Congress and the Federal Reserve admitted Bitcoin can be used for legitimate purposes – even though the FBI may never recover all of the Bitcoins it raided from Silk Road – which was a huge boost of confidence for the crytocurrency that could.
The Winklevoss Twins put in $11 million of their real, US dollars into Bitcoin this past April. That investment was worth $32 million on November 9, and at today’s prices, they’re sitting on roughly $98 million USD. The Winklebros also plan on opening an investment trust that will allow people who don’t want to get involved in the murky world of Bitcoins to buy a share of the Winklevoss’ Bitcoin empire instead. This will provide investors with the relief of never having to log in to a Bitcoin exchange—an idea that has already been copied by a firm called SecondMarket.
On top of all that, last Friday, Richard Branson announced that whenever Virgin Galactic begins to launch human beings into space, tickets can be purchased with Bitcoin. Granted, allowing Virgin Mobile customers to pay their phone bills with Bitcoin, or for Virgin Airlines to sell regular ol’ plane tickets to Bitcoin users would have been a stronger vote of confidence – but I understand, Branson is a baby steps kinda guy when it comes to internet money.
Government approval, absurdly wealthy identical twins and space flight aside, societal acceptance of Bitcoin appears to be happening on a grassroots level as well. While Bitcoin is in the earliest stages of adoption right now – and it could, of course, all come crashing down before it hits the next stage – a company called CoinKite in Toronto is developing debit machines for merchants to accept Bitcoin and other virtual currencies. Plus, the first Bitcoin ATM was installed in Vancouver last month and has taken over $1 million CAD since. Surprisingly, Canadian entrepreneurs seem to be leading the charge of consumer Bitcoin products in North America even though the Canadian government has a very unclear stance on the cryptocurrency itself.
Canada’s Bitcoin development, however, has absolutely nothing on China’s. Check out this absolutely insane Bitcoin mine in Hong Kong that appears to use the same amount of energy as a small nation. It’s entirely water-cooled! Then there’s BTC China, the world’s largest Bitcoin exchange. BTC-China actually hit the $1,000 per coin mark last week; well before the embarrassingly named, Tokyo-based exchange, MtGox (Magic the Gathering Online Exchange) exceeded $1,000 yesterday. The sheer amount of Chinese investment has been credited to both Bitcoin’s ability to evade strict government regulation, and simply because the Chinese are pretty good when it comes to saving money.
While the dramatic rises in value certainly make Bitcoin a tantalising investment, it’s the comparisons between Bitcoin now, to the World Wide Web in the early 90s that truly captivated my interest. A video posted on IBM’s banking-focused YouTube channel asks the following question of Richard Brown, the company’s Executive Architect for Banking and Financial Markets: “Could Bitcoin be as transformational as the World Wide Web?”
IBM's Executive Architect for Banking and Financial Markets discussing Bitcoin's potential.
Essentially, Brown believes that virtual currency will change the world and will continue to be a powerful force in the near future – particularly in developing nations where access to the modern banking system is non-existent. But Bitcoin is simply just a protocol. Many of the technological apparatuses to make Bitcoin actually work in the real world do not exist yet. Right now, we can point to the world’s only Bitcoin ATM and prototypes of Bitcoin debit machines as proof of that new technology emerging – but we really have no idea where this is all going.
For example, Brown imagines a world where your fridge and washing machine have identities on the blockchain (the distributed ledger of all Bitcoin transactions, which is publicly available to all Bitcoin users) so that they could manage the purchase of electricity themselves, depending on how much juice the autonomous appliances need to chill your celery and launder your bra.
In its current state, Bitcoin is a framework from which brand new innovations can be developed. It is essentially a giant sandbox that is waiting to be populated with human beings who have impressive sandcastle building skills. The infrastructure of Bitcoin exists, but it's missing many of the applications that are necessary to make the virtual currency user-friendly.
One just needs to look at the process of buying a Bitcoin in to see how rough the system is. While it’s easy enough to grasp if you want to put the time in to learn, at the moment, you need to start off by getting an account at a Bitcoin exchange which allows you to buy Bitcoin with real world currency. The major player in Canada is Virtex, with Vault of Satoshi a distant second in terms of trading volume (it gets its name from Satoshi Yamamoto, the pseudonymous and mysterious creator of Bitcoin itself).
To get an account at one of these exchanges, you need to verify your identity – and this is where a certain amount of trust comes in – with a scan of your real world government ID and some proof of address, so the exchange can play fair with existing money-laundering laws. Once that process is complete (it can take over a week to get validated at Virtex) you can purchase coins through a janky, auction-style “order book” system. Once you’ve purchased Bitcoin, you’ll need to store the coins into a virtual wallet, either on your computer or your phone. The most secure way to store Bitcoin is in an offline “cold storage” computer that literally never touches the internet. This makes your Bitcoins impossible to hack remotely. No part of this process can be fairly described as user-friendly, so it’s clear that Bitcoin has some rough edges to smooth out.
It does seem, however, that these clunky processes will be redesigned soon enough. Reports of venture capital interest flooding into the Bitcoin market have become more frequent since the price started booming, and it’s not hard to see why. With such a popular (and somewhat sketchy) technological framework spreading like wildfire online, there’s a lot of work to be done to make it more accessible to the average person. This is a massive opportunity for the tech industry.
Peter Theil, co-founder of PayPal and Facebook’s first external investor, gathered his buddies who belong to his investment fund, Founders Fund, and dumped $2 million into a service called BitPay—which essentially is positioning itself as the PayPal of Bitcoin. BitPay allows online merchants to accept BitCoin easily. As it stands, there are very few options for retailers to do such a thing online – so BitPay is filling a very real need. A common dream for Bitcoin enthusiasts is that existing giants like Amazon and eBay will adopt the currency – but given that the coin’s value is in such a volatile state, and few people know what Bitcoin is to begin with, such mainstream acceptance is not likely to happen anytime soon.
Whether Bitcoin succeeds beyond the already ridiculous accomplishment of reaching $1,000 USD per coin and becomes a staple of day-to-day economics online, or if another virtual currency (like its silver competitor Litecoin) eventually takes its spot, there is evidently a very real push from society and industry alike to make virtual currency work. With so many people pushing their belief in cryptocurrency, its heights are probably still years away. On the other hand, even though the US government and China’s Central bank have issued their cautious approvals, if Bitcoin really takes off their approach might change—and a negative government backlash could really push virtual currency backwards.
Ultimately, Bitcoin is a fresh financial infrastructure that is untested by basically everyone in the world – but if this fever pitch continues to accelerate, we may see society continue to morph in unpredictable ways as Bitcoin spreads through it.
Follow Patrick on Twitter: @patrickmcguire