Cryptocurrencies like Bitcoin are different from other software and standards-based platforms. There are no governing authorities or dominant players or established industry groups. That’s deliberate. The whole point is to create a way of exchanging value that’s not centrally regulated by governments or private organisations. But that means a super-majority of the millions of individual users have to accept and adopt software updates, or else there’s the risk that Bitcoin will splinter into different versions with different values.
That’s what happened last week. The debate within the Bitcoin community over the best way to increase the capacity and speed of the underlying software resulted in a tenuous compromise earlier this year between many users with different interests. But not all of them. So on Tuesday, another big group agreed on a different method of updating the software and began running it their own way, in the process creating a new version called Bitcoin Cash.
Anyone who had one Bitcoin on Monday now has one unit of Bitcoin and one unit of Bitcoin Cash. The splinter group is big enough that the new unit of Bitcoin Cash actually has some value. It’s fluctuated wildly, but might – might – be stabilising in the $200 to $300 range. On the other hand, it’s not big enough (yet) to have hurt the value of the original Bitcoin, which topped $3,000 for the first time yesterday.
The drama isn’t over. A cryptocurrency’s value is, from the beginning, the cumulative result of millions of freely made, individual decisions, rather than a declaration made by a central authority that’s then moderated by whatever market forces are allowed. The compromise within the original Bitcoin community hasn’t been implemented yet and could fall apart, producing even more versions of the currency. That’s the inevitable – purposeful – risk of an unregulated medium of exchange. So far, as Bitcoin holders learned today, that risk is overwhelmingly outweighed by the reward.
The disruption in cryptocurrency markets this week, when Bitcoin sorta split into two, was the result of disagreements between different interests about the technology and crowd-sourced methods used to run it. It was also inevitable and purposeful – cryptocurrencies are intended to rise and fall according to the cumulative decisions of millions – eventually, billions – of sovereign, individual users, who won’t always agree with each other.
Bitcoin’s underlying software can’t keep up with the growing number and speed of transactions between its users. The limits of the software has been a known problem for years, but the urgency of solving it has increased in the past few months as the strain on the system began to slow down transactions.
The solution is simple: upgrade the software. But sometimes simple things are supremely difficult, and so it is with Bitcoin.
It’s nothing like updating a commercial application like Excel or iTunes that’s owned by a single company – Microsoft or Apple just do it. It’s not even much like Linux or other widely used open source software that can comfortably exist with many different versions – distros – floating around. Linux might be open source, but any given installation is a closed system – so long as you’re satisfied with the way your preferred version runs on your hardware, all is well. Operationally, it doesn’t matter if the person sitting next to you uses a different distro.
But if you’re exchanging information with other people – which is what Bitcoin is all about – then everyone has to format and process the data in the same way. Email works because everyone has more or less settled on a set of open standards that are periodically updated by industry groups that include big companies, like Google and Microsoft. If enough of the major players agree then pretty much everyone else has to follow along, or risk being shut out.
The same principle applies to cryptocurrencies like Bitcoin, but because schisms like we saw this week produce competing versions that, so far, have added value to the overall market and can be freely exchanged within their respective universes, there’s also an incentive to not standardise. By preventing consolidation into a single, monopoly platform, that balance has kept an ecosystem of independent cryptocurrencies alive.
Keeping it mainstream, says Blasko.
You can bid to buy pretty much anything on eBay, at least anything legal, but you need a straight up credit card or bank account to do it. And you can find sites on the dark web that auction off pretty much anything illegal, where you can pay with bitcoin or other alternative cryptocurrencies. At least until the FBI shows up. The difficulty comes when legal buyers and sellers try to negotiate online and settle up with bitcoin.
That’s where Crytpomarket.co comes in. The website, which is scheduled to go live in two to three months, has a simple proposition: duplicate eBay’s core auction functionality and combine it with an alternative currency exchange. Sellers post items, buyers submit bitcoin-denominated bids. When the deal is made, Cryptomarket holds the virtual money in escrow until the goods arrive. And those goods have to be legal.
“No drugs, we’re not going to go to jail for this”, said Jim Blasko, the company’s chief cryptographer at the Startup Debut showcase event at CES last night. The company will cooperate with law enforcement requests for information, at least to the extent that any online company must under U.S. laws. It will offer about the same degree of anonymity, or lack thereof, as eBay.
The one glaring weak spot in the business model is that eBay could decide to start accepting bitcoin payments at any time. To guard against that, Blasko says they’re expanding beyond bitcoin and will include lesser known and more lightly traded alternative cryptocurrencies such as litecoin or UnbreakableCoin. Cryptocurrency’s secret sauce is, Blasko thinks, the relationship it will build with the core alt coin community, which will at least ensure a sustainable niche for the long run.
Cryptomarket is the first hatchling from bCommerce Labs, a bitcoin focused incubator, which was featured at last year’s version of Startup Debut. Blasko said that they’ve raised about $50,000 – enough for the basic auction site development work and bitcoin integration – and are aiming for $500,000 in the next round.
The basic blockchain technology that underpins bitcoin and other cryptocurrencies could find its way into the basic infrastructure of the global financial system. A group of nine of the world’s biggest banks is taking the first steps towards adopting the blockchain concept, initially as a way of recording transactions. According to a story on Reuters, the group has engaged a financial technology company, R3, to develop a common blockchain-based platform…
[R3’s CEO David ] Rutter said the initial focus would be to agree on an underlying architecture, but it had not yet been decided whether that would be underpinned by bitcoin’s blockchain or another one, such as one being built by Ethereum, which offers more features than the original bitcoin technology.
The group will not do transactions via cryptocurrencies, at least not in the foreseeable future. Instead, the banks have decided that the blockchain method of reliably and transparently documenting transactions is potentially a better way of keeping track of who has bought what. At this point, there’s no plan to use it to buy or sell anything.
It’s a big endorsement of the open source method of developing key cybersecurity technologies. The bitcoin blockchain has remained secure throughout its lifetime, despite the huge incentive someone would have for cracking it. Flaws have been found in it, but widespread scrutiny – the result of the parallel incentive honest users have to keep it secure – has meant that bugs have been squashed and not exploited. Other aspects of the bitcoin ecosystem, online exchanges for example, have been successfully attacked, but the underlying technology that the banks are evaluating has proven rock solid.
Bitcoin is back at CES, with 9 crypto-currency related companies pitching at the Startup Debut showcase last night. Bitpay, the big Atlanta-based payment gateway, was there, as a prelude to anchoring a growing Bitcoin pavilion on the show floor – I’ll be checking that out. BitAngels made a return appearance as well.
The most interesting of the newcomers was ChangeTip. It’s a San Francisco start-up that just raised $4.2 million in seed funding, or so spokeswoman Victoria van Eyk said. And I believe her because she bought me a cup of coffee.
Well, actually, she sent me a tweet with $1.50 worth of Bitcoin attached. Which will get you coffee at a Tim Horton’s in her hometown of Ottawa. It’s a killer concept on two levels. First, it’s an incredibly easy way to transfer money – her ChangeTip account is linked to her Twitter account, so all she has to do is put an amount and @ChangeTip into the tweet, and the equivalent value in Bitcoin ends up in my ChangeTip wallet.
The second cool thing is that I don’t – or at least didn’t – have a ChangeTip wallet. That changed as soon as I clicked on the link that was automatically generated in a second tweet. That’s all it took. The crypto-money that’s in my account now is mine to use as I please: I can tweet it to someone else, or spend it like any other Bitcoin transaction, or just watch its value go up and down as the Bitcoin to U.S. dollar exchange rate fluctuates. In just the first hour, my available coffee money fluctuated between $1.49 and $1.51. Or $1.76 to $1.78 Canadian – I might just go for the big coffee.
No Internet access, no Bitcoin. If a merchant wants to take payment in Bitcoins at the cash register – or anywhere else – both he and his customer have to be connected. Danny Thorpe, owner of the Quail and Thistle tea room in Capitola, was one of the first bricks and mortar merchants in the area to accept Bitcoins. He spoke to the Santa Cruz Bitcoin and Crypto-currency Meetup in September about the benefits and pitfalls – a video of his presentation is below.
His tea room offers free WiFi access, primarily to facilitate Bitcoin transfers. He begins the transaction by using an app to contact his payment processor, in this case Coinbase. He gets a Bitcoin-to-dollar exchange rate that’s good for 15 minutes, and then shows a QR code to the customer. The wallet app on the customer’s phone scans the QR code, which tells him how much the tab is and Thorpe’s address. Hit send and the payment is confirmed, usually within 15 seconds, although it can take longer.
Thorpe said that he talked to business owners in Bonny Doon, in northern Santa Cruz County, about getting set up for Bitcoin. He found out that the lack of mobile data coverage coupled with an unwillingness to open up WiFi access meant that they couldn’t do it.
The amount of data involved is small, on the order of 400 bytes each way according to Thorpe – strictly speaking, it doesn’t even require broadband level speeds. A 30 year old dial up modem would serve just as well. But zero access means zero bytes.
Thorpe was surprised at the response. Although it’s not much in relation to his overall business, he’s getting more Bitcoin-driven customers and publicity than he expected.
The Bitcoin Meetup started in Santa Cruz this summer. It meets at NextSpace, usually on the third Wednesday of the month, at 6:30 p.m.
Where’s the fashion police when you need them?
Knee jerk calls to regulate virtual currencies, in order to protect us from a repeat of the total collapse of the Mt. Gox Bitcoin exchange this week, prove two things: 1. there are people in Washington (and, I wager, Sacramento) who must do nothing all day except see what’s trending on Twitter and paste top tweets into boilerplate bills, and 2. there’s a dangerous misconception that personal online behavior can be regulated. Intercepted, investigated, penalised, monitored, blocked, taxed and subsidised, yes. Run according to wise rules cleverly designed to lead us all to one vision or another of the Common Good, no.
Bitcoin’s purpose is to meet the needs of people who, for whatever reason, want to engage in unregulated transactions. There’s no shortage of talent aching to fill that need, whether for personal gain or in a quest for fame and status amongst fellow hackers, in the true and noble sense of the word. Regulate one solution and another will pop up.
In any event, Bitcoin’s fate will be decided by the market. If, as Marc Andreessen believes, the Mt. Gox eruption is just another step toward maturity, Bitcoin’s value and transaction volume will continue to climb. On the other hand, if there’s indeed a fatal flaw in the algorithm, then it’ll fade away. People will have lost wealth – more likely the product of Bitcoin’s rapid appreciation and the transactions it particularly enables than, say, heretofore prudent management of a pension portfolio – but it’ll be because they either accepted or ignored (if there’s a difference) or, perhaps, enjoyed the risks involved.
Better to guarantee regulatory success by sticking to predictably beneficent crusades. You know, like network neutrality.
Open for business.
Four thousand transactions a day and total 2013 transactions of $100 million would be chump change for Visa or Mastercard, but it represents blindingly fast growth for Bitpay, which only moved $3 million in 2012. It’s an Atlanta-based transaction processor, one of three Bitcoin-related companies sharing a small booth in the back of CES’s south exhibit hall.
Bitpay is one of several companies that make it possible for merchants – big or small, online or bricks and mortar – to accept Bitcoins from customers and get dollars, or whatever national currency they prefer, in return. A web store, for example, can have customers click on an option in a shopping cart and send their Bitcoin payment directly to Bitpay, which will convert it to dollars at a guaranteed rate. Bitpay also supports point of sale systems for onsite purchases.
The company says it has 20,000 accounts, and that it verifies that the products and services offered are legitimate and legal. Low volume merchants pay 1% of the transaction value, higher volume ones can opt for bulk plans starting at $30 per month.
Blockchain is an online wallet service which eliminates a lot of the geekiness involved in handling Bitcoins. You create an account and generate two keys: public and private. Anyone can use your public key to send you a Bitcoin; you unlock it with your private key, which no one else – not even Blockchain – knows. It’s a free service that’s trying to generate revenue with ads, but its real purpose is to stoke the Bitcoin economy, to the benefit of its investors.
The third company, Butterfly Labs, makes Bitcoin mining machines – specialised computers that do the math that makes the system run and generates new Bitcoins for the people doing it. Counting the companies at Startup Debut on Monday night, seven Bitcoin-based ventures are at CES. Might not seem like many, but as foundations to build on go, that’s solid enough: it’s two more than the entire country of India sent.
CES needs Bitcoin more than Bitcoin needs CES.
The 2014 Consumer Electronics Show opens next week in Las Vegas, with preview events beginning on Sunday and the exhibit floor opening on Tuesday. The show lacks last year’s changing-of-the-guard fascination, when mobile kingpins and rising giants held prominent places in keynote and featured sessions. Instead, it’s about reviving the brands that were shouldered aside in 2013.
But there’s always something new to see at CES, with three trends looking particularly interesting…
Wearables – CES exhibit halls promise to be packed with smart watches, eyeglass mounted video displays and cameras, and various other small, wearable devices – health and fitness related in many cases – that serve as smart phone peripherals or substitutes. The question to answer is whether the category will remain awash in marginally useful gizmos or will killer apps and dominant products emerge?
Chinese brands – Like Japanese and Korean manufacturers before them, Chinese companies are leaving bargain bin positioning behind, and building brand equity at an even faster rate. Aided by a huge internal market and a strong base in rapidly evolving mobile product categories, the likes of ZTE, Huawei and Lenovo will finally have the floor presence and brand recognition to match their market share. Prediction for 2015: one of the three will get a major keynote slot and the other two will figure prominantly at featured CES events.
Bitcoin – At least four companies built around this virtual currency are either in the show or on its periphery. One is a hardware play – it makes specialised Bitcoin mining equipment – and the others are online services. For many years CES got energy and edge from the adult content industry: maybe there’s hope a fresh libertarian wind will invigorate it again.
I don’t expect to see much mobile buzz or home automation system news. Devices of both sorts will be floating around, but it looks like the mobile industry is waiting for the Barcelona show next month and home automation is still searching for a mainstream business model. Let’s hope for surprises.
What fun would moon golf be without a friendly wager?
There’s more than a whiff of publicity stunt about it, but even so, the launch by PayPal and the SETI Institute of a project to create a payment system that can be used in outer space is a fascinating idea. The initial problem they want to address is creating a medium of exchange for the space tourism industry.
Elon Musk, one of PayPal’s founders, is also behind SpaceX, which makes real rockets that are already sending cargo into orbit and should soon be capable of transporting people too. The odd jaunt by multimillionaires aside, it’ll be years before there’s anything like passenger service to low earth orbit, but sub-orbital flights on Virgin Galactic are nearly a reality. Private sector economic activity won’t be far behind.
I can think of a couple of different approaches to the problem. The dull way is to use existing credit card systems, perhaps with a dedicated payment gateway for transactions made in LEO (or beyond) to sort out exchange rates and any other national banking issues that might arise. That scenario would be little different from using a credit card on a cruise ship in international waters. Like I said, dull.
The interesting way would be to create a completely new virtual currency for outer space, or adapt a terrestrial one, like Bitcoin. LEO doesn’t present any serious technical problems. Even linking with the Moon or L5 only introduces a couple of seconds of light speed latency. But developing something that could be used where ever mankind goes in the solar system would be a challenge. It takes more than 30 hours for a radio signal to go from one extreme edge of the solar system to another.
Buying something with Bitcoin, which relies on a large, highly encrypted log of transactions, is probably possible at that distance. Mining Bitcoins, which involves winning a computational race, wouldn’t be practical even from the minimum Mars distance of 4 light-minutes.
So we need another way. With Musk already in the space business and co-founder Peter Thiel developing both virtual currencies and sovereignty, PayPal has the pedigree to find it.