The heart of Bitcoin is still beating

The topic I am asked about most these days is probably Bitcoin. I have expressed my fascination with the digital cryptocurrency on more than one occasion and consider myself a bitcoin fan if such a thing could exist. Given the events of this past...

Share

The topic I am asked about most these days is probably Bitcoin. I have expressed my fascination with the digital cryptocurrency on more than one occasion and consider myself a bitcoin fan if such a thing could exist.

Given the events of this past week, however, most notably the disappearance of bitcoin exchange Mt. Gox along with access to all the bitcoins stored in its virtual vault, I have been asked if I've changed my opinion on bitcoin. Or as one person asked me, have I come to my senses. The short answer to that question is that I've never taken leave of my senses regarding Bitcoin.

It is true that I have an abiding interest in cryptocurrencies. But I have not owned any nor have I been tempted to "invest" in them. My appreciation for bitcoins is based not on my belief that anyone will get rich off of them (though I congratulate anyone who has done so and will feel no pity for anyone who loses his money if bitcoins crash). Instead, my interest in bitcoins is based on the fact that digital currencies like Bitcoin represent payments distilled to their very purest form.

Though capital "b" Bitcoin has taken its lumps this week, the heart of the bitcoin system--the blockchain--is still beating. And it's that heart that represents the real breakthrough.

To explain what I mean, first let's agree to throw out discussions about tulip bulbs and Ponzi schemes and evil central banks and everything else weighted with preconceived ideas that inevitably derail discussion on bitcoins. Let's also agree to not even consider bitcoins as an infant currency for the time being. There are some interesting questions there, but they can be dealt with in time.

Instead, let's just consider the blockchain, the open ledger that records all of the bitcoin transactions. It's not just "open" in the sense that anyone can look at it and see every record of every transaction from the mining of the first bitcoins-the "genesis block-it's also "open" in the sense that any group or person can write code that allows them to create (i.e. mine), buy, sell and store bitcoins.

Because it is open, and because it's usable to anyone who cares to make use of it, making payments using bitcoins allows us to address issues- like risk and the cost of running massive networks-that exist in our current payment system. For instance:

  • The blockchain facilitates near real-time settlement that cannot be reversed, eliminating settlement risk for merchants. Without that risk, merchants no longer have to pay to guarantee settlement through credit cards nor opt for a cheaper, riskier payment method like debit.
  • Bitcoin offers its ledger to anyone anywhere, so cross-border transfers are as simple as domestic transfers. Even with bitcoin's current volatility, if recipients can turn bitcoins into their local currency as soon as they receive them, there is no risk. And these transfers can be done without the often exorbitant fees often associated with sending money internationally or converting currencies.
  • The blockchain allows for a nearly fee-free payment system with 24/7 uptime. The exchanges themselves may have issues, as Mt Gox did, but the blockchain itself isn't dependent upon any one company or organization. Access to the Internet means access to the blockchain and access to the payment network.

There are other benefits that an open ledger offers users and I will get to some of those in a second (and likely third) post. And that's another thing that's interesting about Bitcoin: we're just now scratching the surface of how we can use an open ledger.

It would be counterproductive to not acknowledge that Bitcoin has some issues that need to be addressed. Indeed, there are some very real concerns, not the least of which is the digital currency's volatility. (I would point out that even with all the bad news around Mt Gox, bitcoins are worth less but are not worthless. In other words, bitcoins are holding substantial value through all of this.) The largest concern to me, however, isn't the volatility, failing exchanges or even hackers. I have other concerns about the viability of mining as the value fluctuates and mining gets more difficult (and thus expensive). In other words, right now my concern isn't that bitcoins' value swings wildly, just so long as it doesn't drop below the cost to mine new coins. I'm not sure what that would mean.

For a good overview of some of the trippier uses for cryptocurrencies, check out this month's American Banker. The cover story is on Bitcoin (and even features a quote from me!). The article's author, Marc Hochstein, does a good job of explaining some very interesting uses for digital currencies.

Posted by James Wester