In 2009, an engineer using the pseudonym Satoshi Nakamoto introduced a new digital, open source, currency to the world called “Bitcoin”. Since then, the buzz, excitement, and adoption of bitcoins has grown at a phenomenal rate, with the total value of bitcoins in circulation hitting $1 billion as of April 2013. Talk of a bubble has coincided with the buzz, but both have also served to highlight the tremendous potential in the Bitcoin ecosystem.
Great, so what is it really?
Paraphrasing from Wikipedia:
Bitcoin is a decentralized digital currency based on an open-source, peer-to-peer internet protocol. [...] Bitcoins can be exchanged through a computer or smartphone locally or internationally without an intermediate financial institution. [...]
Bitcoin is not managed like typical currencies: it has no central bank or central organization. Instead, it relies on an Internet-based peer-to-peer network. The money supply is automated and given to servers or “bitcoin miners” that confirm bitcoin transactions as they add them to a decentralized and archived transaction log approximately every 10 minutes.
I’m going to butcher any explanation I try to provide but Quora has several good writeups on what Bitcoins are and how they work. A reasonable analogy though, is think about “Bitcoins” as a type of precious metal that has no intrinsic value but is able to store value, transfer value between parties, and be mined to find new pieces.
The key takeaways about how Bitcoins work are:
- Unlike traditional currencies, no central bank controls the amount of currency in circulation. Instead, the total amount of possible Bitcoins is algorithmically limited by the protocol itself.
- Transactions between parties are relatively anonymous and done in real time. Contrast this with other digital payments like credit cards or wire transfers where there is little anonymity and a settling period.
- As of now, there’s absolutely no regulation as far as reporting, security, or anything else you’d associate with traditional financial institutions.
- Currently, it’s all digital – there’s no practical way to “print” a Bitcoin and use it like a dollar bill
So what’s going to be disruptive?
There are dozens if not hundreds of startups playing in the Bitcoin space and several “large” companies have also started adopting Bitcoins as an alternative form of payment. Several high profile investors including YCombinator and Union Square Ventures have also made significant Bitcoin related invetments, signalling that savvy investors believe a potential market exists. Personally, I’m excited about companies attacking the following:
Hassle free, instant, and international money transfer. Paypal was supposed to allow us to do this, but even in 2013 its difficult and expensive to transfer people money – let alone internationally. If someone can address the current concerns of fraud and money laundering using Bitcoin they’ll have an instant winner on their hands.
Catapult in legalized online gambling. In the last few years, there’s been an ongoing discussion about if America should legalize online gambling and if so, how it should be done. Because of the decentralized, anonymous nature of Bitcoin, it’s conceivable that the emergence of a large enough Bitcoin powered gambling market would force the US government to legalize online gambling in order to get access to the additional tax revenues. This would obviously be a boon for struggling social game companies like Zynga, but also provide an enormous opportunity for new startups.
Provide a viable alternative to credit cards. Recently, there’s been a lot of action in the payments space including innovative companies like Square and Roam which are aiming to alter how consumers pay at the point of sale. Unfortunately, almost all of these new payment solutions still rely on existing credit card infrastructure to complete the payment which leaves them at the whim of interchange fees. Boston based LevelUp is tackling this issue but at the end of the day they’re still getting hit by the fees somewhere. An innovative Bitcoin company which provides a viable alternative to this existing credit card infrastructure would open the door to radical innovation in the payments space by eliminating hard interchange fees.
What might go wrong?
There’s a huge amount of opportunity in the Bitcoin space and the ecosystem is just starting to build out. With the Bitcoin boom of 2012 already inked on the Wikipedia entry, the next few months are going to be a critical time for the nascent currency. The single largest to Bitcoin is ultimately going to be regulation from sovereign governments. The US Department of Treasury has already issued several statements regarding Bitcoin and its clear the government isn’t happy with the situation as it stands now.
Regardless of what regulation is passed, Bitcoins are technologically different from previous virtual currency and the ecosystem has already demonstrated its resilience and innovation.