Startups with names such as Chain.com, Ethereum and Colu are trying to use the blockchain for everything from voting to selling merchandise. They think of the virtual currency as just the first of many applications of the blockchain, and one that won’t be that widely used. Developers are currently split over proposed software changes that could either make bitcoins more useful or lead to a slew of competing versions. There’s also uncertainty surrounding how bitcoin-related businesses will be regulated. The U.S. Internal Revenue Service ruled that bitcoins would be treated as property, not currency. In September, the Commodity Futures Trading Commission said that bitcoin is a commodity, just like crude oil or wheat. Meanwhile, arrests for Ponzi schemes using bitcoins and mysterious spikes and drops in the currency’s value show that it has yet to overcome an early reputation as a tool for selling drugs and laundering money.
Virtual currencies aren’t new — online fantasy games have long used them — but the development of a secure digital currency without a central issuer rightly turned heads. The pseudonymous creator of the bitcoin system, Satoshi Nakamoto, solved a problem central to any currency: how to control its issuance, i.e., prevent counterfeiting. But Satoshi did it without relying on government’s central authority. He also solved one specific hurdle for digital money — how to stop users from spending the same unit of currency twice. His breakthrough idea involves the blockchain, a publicly visible online ledger that records every single bitcoin transaction, one maintained by a network of bitcoin “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. The miners earn a reward of newly issued bitcoin. The pace of creation is limited, and no more than 21 million bitcoins will ever be issued.
A bitcoin boom early in 2014 led some to call it a bubble with no intrinsic value. But entrepreneurs in the field say that focusing on the price of bitcoins is missing the point — the currency’s value as the basis of a new kind of payment system not reliant on third parties like governments, big banks or credit-card companies. Dreams of replacing the dollar aside, putting bitcoins to work is a matter of applying enough time and money, they say. Convincing applications of the bitcoin system include moving money abroad, signing contracts, clearing complex financial transactions and as a medium for micro-payments in emerging countries. The idea of the blockchain as the center of new businesses got a boost when Blythe Masters, a former JPMorgan Chase banker who helped develop the market for credit default swaps, joined a blockchain startup. Will bitcoins themselves be left behind in the blockchain rush? Even some of the currency’s canniest boosters realize there is no guarantee that it will ever break into the monetary mainstream. Mike Hearn, a member of the core team that updates the bitcoin software, said that the “most plausible outcome” is that it retains only a niche appeal.
The Reference Shelf
- Bloomberg Television has a video primer as part of its “The 12 Days of Bitcoin” series
- Bloomberg Markets traced the interest of Silicon Valley investors in bitcoin.
- CoinDesk has a Bitcoin price index; Bitcoincharts.com has a range of data.
- Two explainers, one aimed at kindergarteners and the other a you-too-can-mine-bitcoin project, plus an exploration of the double-spending problem.
- The New Yorker looks at Dark Wallet, a project meant to speed the spread of bitcoin, from the law student who invented the printable gun.
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First Published Oct. 3, 2013
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John O'Neil at firstname.lastname@example.org