Even as entrepreneurs look for new business models, the bitcoin community has been working through some legacy issues, like the 2013 indictment of the operator of Silk Road, an anything-goes online market where drugs were peddled for bitcoins or the bankruptcy filing by Mt. Gox, a Tokyo-based exchange, after hackers pilfered 850,000 bitcoins. Regulators are proving to be a bigger challenge than many entrepreneurs had hoped. Benjamin Lawsky, the New York state superintendent of financial services, proposed rules on digital currency companies that drew often-unprintable reactions from bitcoin entrepreneurs before being scaled back. European banks were warned against handling bitcoins until new EU regulations take effect. The U.S. Internal Revenue Service ruled that bitcoins would be treated as property, not currency — meaning that buying a $2 cup of coffee with bitcoin you bought for $1 could trigger a capital gains tax. And the Bitcoin Foundation is fighting an internal battle over whether supporters should focus on advocacy or improving the software that makes transactions in the currency possible.
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. 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 an 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. Bitcoins can be used to buy an ever-expanding list of things, including a Tesla sports car. That’s still a fraction of the fiat currency economy, but a band of well-funded startups with names like Coinbase, BitPay, Xapo and Bitgo are making it easier to exchange and store bitcoins safely.
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 is as the basis of a new kind of payment system. 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 and as a medium for micro-payments in emerging countries. Tim Draper, a legendary Silicon Valley venture capitalist, bought about 30,000 bitcoins from the U.S. government (they had been seized from Silk Road) and aims to help people break free from weak local currencies. But even some of the currency’s canniest boosters realize there is no guarantee that bitcoin ever will 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.
First Published Oct. 3, 2013
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John O'Neil at email@example.com