Bitcoin Hits the Big Time, to the Regret of Some Early Boosters
The first major conference for the digital currency suggests it is gaining legitimacy, but in a manner disappointing to some early enthusiasts.
This past Sunday, Doug Scribner took out five $100 bills and began feeding them into what looked like a small, white ATM in San Jose Conference Center in California. The machine swallowed the bills smartly and credited him with an equivalent value in bitcoins, an intangible, digital currency that is backed by not gold or any government, but by math.
Scribner was one of an estimated 1,100 people who attended Bitcoin 2013, a weekend-long event in the heart of Silicon Valley and the first large conference dedicated to Bitcoin. Unsurprisingly, all those present seemed certain that the cryptocurrency was set to upend the world of finance, perhaps more. But the event also offered something new: evidence that Bitcoin is gaining traction outside its existing community of enthusiastic early adopters.
Bitcoin’s origins are mysterious. It was created by an unknown individual or individuals who used the pseudonym Satoshi Nakamoto. Cryptographic operations and oversight from a peer-to-peer network of people running Bitcoin software process transactions and protect against counterfeiting without the need for a central authority (see “What Bitcoin Is and Why It Matters”).
Commercial enterprises based on Bitcoin are gaining momentum in part thanks to people like Scribner, who, after buying large numbers of bitcoins early in their short history, has seen them soar in value and is in a position to invest. “I’m going to buy one of these and put it in Mall of America,” Scribner told me after using the dollar-gobbling machine, which has a $4,000 price tag. He described a plan for a small booth that would offer passing shoppers Bitcoin literature and the opportunity to exchange greenbacks for bitcoins on the spot. Scribner, who works in teleconferencing near Minneapolis-St. Paul, Minnesota, could probably afford to do it. He says that he bought his first 100 bitcoins when they were just $3 each, and then steadily amassed more at relatively low prices. A single bitcoin today now sells for just over $120.
More significantly, the conference also showed that Bitcoin has begun to attract the backing of conventional technology industry investors, who have sunk millions of dollars into a handful of Bitcoin startups. “What’s going on right now is a transformation from stage one, supported by the purists that are devoted to the idea, to a period where we are asking ‘What does this do for global commerce?’ ” Chris Larsen, CEO of OpenCoin, told me at his company’s booth, one of about 20 in the conference’s exhibition space.
Larsen previously founded two conventional finance companies, E-Loan and Prosper; his new company runs a service called Ripple that offers easy transactions between conventional currencies, bitcoins, and a math-backed currency of the company’s own design. OpenCoin is backed by Silicon Valley venture funds Lightspeed Venture Partners, Andreessen Horowitz, and Google Ventures (see “Big-Name Investors Back Effort to Build a Better Bitcoin”). Bitcoin businesses have been started before, but OpenCoin and a few others now have access to funds, expertise, and contacts that allow a more significant, lasting assault on the status quo. The U.S. Treasury helped strengthen investor interest in March, when it clarified which financial crime regulations apply to virtual currencies.
CoinBase, the media sponsor of the San Jose event, received the largest venture investment in a Bitcoin business to date earlier this month. The company, which originated in the incubator Y Combinator and helps individuals and businesses use bitcoins, received $5 million from Union Square Ventures, a fund better known for backing Tumblr and Zynga. In San Jose, I also met the founders of BitPay, which enables online stores—including those hosted by Amazon—to take Bitcoin payment. Bitpay recently received $3 million from Founders Fund, led by Facebook’s first major investor, Peter Thiel.
BitPay CEO Tony Gallippi told me that Thiel invested because he saw how the company could help ease online commerce across borders; the company already handles $5 million in transactions each month and says the figure is growing. “Traditional payments such as credit cards don’t even work in half the world, so companies just choose to not service international customers,” Gallippi said. “That leaves a big opportunity.” He plans to take further investment later this year but told me it will be more for reasons of making strategic contacts than a need for cash, since he and his cofounders have significant Bitcoin holdings.
One reason Bitcoin is interesting, says Jeremy Liew, a partner with Lightspeed Venture Partners, is that it could displace the practice of wiring money across borders, which underpins much international trade today and can be onerous. “If I’m trying to wire a supplier in China it’s a three- or four-day process with heavy fees,” he says. “Bitcoin transactions can be instant and free.”
Liew and others shrug off the currency’s wild swings in value over the past few years, saying that the general trend is upward and that volatility will decrease as more people use it. BitPay, OpenCoin, and others also offer services that make it possible for a business to make sure incoming bitcoins keep their value by having them instantly converted to dollars. “Bitcoin can be used as just a transport network,” says Liew.
Several people from Silicon Valley involved in Bitcoin liken its potential to that of the Internet, saying it will enable money to flow as easily across the world, and between people, as e-mails and video do today. Yet mingling with the crowd in San Jose also made it clear that some of those who have supported Bitcoin for the longest don’t like the approach of these startups and their investors.
Bitcoin’s earliest adopters were libertarians, cryptographers, and coders attracted by the idea of money that could operate without government oversight. They liked the idea that people could exchange bitcoins without knowing or trusting one another. Large exchanges and payments companies that operate much like existing financial institutions and follow the same regulations compromise both of those features, some argue.
“When those people talk about revolution, it’s ‘I put out a disruptive app.’ That’s not a revolution to me,” said one attendee, who told me that his online handle is Alexmat and that he quit a job with Goldman Sachs’s commodity desk in Tokyo to operate a private, one-man Bitcoin exchange business in Seattle. “These companies would be happy for it to just function like Mastercard. That is not what Bitcoin is about.”
I met Alexmat within the large crowd assembled for one of the best-attended talks of Sunday. Ian Miers, a PhD student at Johns Hopkins University, took the stage to explain that Bitcoin’s design doesn’t provide the “anonymity” many assume, and offered a possible solution: an extension to Bitcoin called Zerocoin. Bitcoin’s design relies on a public log of all transactions; that log doesn’t include names, but researchers have found that it can be used to deanonymize transactions, says Miers, something he believes will soon be attractive to marketing and financial companies, as well as law enforcement. “The reality of the matter is that Bitcoin is not that private,” said Miers. “It’s actually worse than cash.”
Being part of the crowd clustering around Miers after his talk was like being at a very different event from that inhabited by the venture-backed startups. People talked of the likelihood that the U.S. government is already tracing all Bitcoin transactions and spoke favorably about the potential for a truly anonymous currency like Zerocoin to undermine existing financial and political systems. Coders approached Miers offering to help out with the project, and Alexmat offered financial support.
However, if Bitcoin is to grow up and become widely used, it may have to be in a way that leaves behind some of the features that first attracted its early adopters. Liew, of Lightspeed, acknowledges the role of that community in Bitcoin’s rise but says anonymity and decentralization aren’t compatible with mainstream use. “The libertarians’ zeal took Bitcoin from nothing to something, and then you had people that were attracted by the anonymous nature, who mostly use it for [illegal] online gambling,” he says. “But the appeal of zero transaction costs is universal.”
Looked at this way, Bitcoin could hit the big time as less an idealistic reinvention of currency and more a technology to move payments more efficiently than today’s systems.
The changing face of the Bitcoin economy is personified by Jared Kenna, a 30-year-old Bitcoin millionaire. I first met him two years ago when he ran his Bitcoin exchange Tradehill out of a shared office in San Francisco, where he and his cofounders dressed down, hacker style, in hoodies. Not long after, regulatory pressure and a lawsuit shut the company down.
When I met Kenna in San Jose, he was wearing a suit, tie, and trim beard, and looked like a junior Wall Street worker. He talked a lot about regulatory compliance and said that a rejuvenated, 15-person-strong Tradehill now trades millions of dollars each month. Kenna brought a notary public to the conference so he could sign up new traders on the spot in compliance with U.S. financial regulations on verifying identity. “We realized how important image is. We put the suits on and are trying to be the most professional outfit in the business,” said Kenna. “The libertarians don’t like that we are playing ball with regulators, but it’s necessary to get Bitcoin established.”
Kenna knows Bitcoin’s early-adopter crowd well, having been one of its most active members himself in the past, but he now runs with a different crowd. “We’ve had multiple billionaires come in and talk to us for an hour and open an account,” he said.