Payments Views


Bitcoin in 2014

Last year was, of course, the break out year for Bitcoin.  Incubating in geek-nurtured obscurity during its first few years, 2013 saw the international media, global investors, entrepreneurs, and even a few just plain citizens jump onto the math-based currency (fewer managed to actually purchase some bitcoin). The currency has since ballooned in value.  It continues its remarkable volatility, based on new market activity (China), regulatory restrictions (China), emotion, security concerns, and pragmatism (cash-out activity). Bitcoin has also proven to be remarkably resilient.

That was last year.  At the risk of affirming yet again how often prognosticators are wrong, here’s what 2014 should bring to Bitcoin and the math-based currencies following in its wake.

Infrastructure Maturation.  A math-based currency isn’t much use if it isn’t fungible. If you can’t spend it, what’s the value? Since an all-bitcoin economy doesn’t exist, you have to be able to exchange bitcoin in and out of fiat currencies, the obvious domain of currency exchanges.  2013 saw numerous screw-ups by exchange operators including theft and missteps with regulators.  Such nonsense should subside in 2014. The exchanges and trading platforms still standing are better capitalized than some earlier entrepreneurial efforts and more focused on regulatory compliance.

For example, Coinbase raised $25 million December 12, 2013 from Andreessen Horowitz.  Led by internet entrepreneur Jeremy Allaire, Circle was launched October 30, 2013 with $9 Million Series A from Jim Breyer, Accel Partners & General Catalyst Partners. Others are out there.  Smarter money is backing Bitcoin and the math-based currency paradigm.

Rock solid bitcoin exchanges and trading platforms are necessary for a currency to thrive.  While missteps are likely, it looks like 2014 should strengthen these essential services and, in turn, raise confidence in the entire ecosystem.  The impact of solid, reliable, even boring currency exchanges on math-based currency uptake cannot be understated.

Use Cases Proliferate. With basic exchange services in place, 2014 will see some use cases tackled that go beyond simply buying, selling, and currency arbitrage.  International remittance, B2B payments, leaving a tip for a blogger, they’re all possible. The use of the block chain ledger to track asset ownership is an intriguing and potentially powerful application.

Infrastructure maturation should inspire confidence in creative application developers to experiment and build new apps using math-based currencies. If math-based currencies are to thrive, they have to be used.  Thus far, the simple use of bitcoin to replace USD in an ecommerce transaction is not especially interesting.  Yes, its cost is a bit lower but it is hardly a transformational use case.

I’m particularly interested in seeing applications that simply use bitcoin rails to move value.  Once we see both the sender and receiver transact in their local currencies via a math-based intermediary, transparent to each party, then we’ll know this approach has staying power.

Will 2014 bring the “Bitcoin killer app”?  I don’t know.  I’ll be satisfied if a handful of specific niche applications emerge that actually get used.

Bank Support Remains in Low Gear.  Bank support for Bitcoin and other math-based currencies will remain in low gear because, frankly, where’s the upside?  Yes, a few tech-forward banks will support exchange operators but beyond those leaders a more compelling business case will have to be made before doing business with Bitcoin companies appeals to cautious bankers leery of waving a flag in front of regulators.

What’s the impact of bank hesitation on the Bitcoin ecosystem?  Not much. Once enough value is moved into bitcoin, there will be sufficient liquidity to conduct a broad range of transactions including B2B payments.  While moving money to and from currency exchanges, never mind PayPal accounts, could become more convenient with the active support of banks, it is not a precondition for consumer adoption.  Compelling use cases beyond currency arbitrage are required (see above).

Moving Value In and Out Stays Slow.  Simply getting funds to and from an exchange will remain awkward.  Like many others, I had to create a unique bank account, tie that to a Coinbase account, wait for verification via the micro-deposit process, and move funds back and forth via ACH.  Not exactly realtime transactions.  Despite expected improvements in bitcoin wallets, I don’t see moving fiat currency, a.k.a. money, into and out of bitcoin getting much easier in 2014.

US Regulatory Patience Continues. Given maturing infrastructure and Bitcoin’s still minuscule role in global transaction flow, US regulators will continue their “watchful waiting” approach. As long as math-based currency businesses comply with FinCEN and money services business regulations, the experiment that is Bitcoin and all math-based currencies can continue.  This is a very good thing.

Meanwhile, the Bitcoin ecosystem should consider how to extend its inherent transactional transparency to bitcoin ownership.  While anonymity has its virtues, regulators need to be able to follow the money.

Ripple Creates a Wave. Bitcoin is not optimal for every use case, especially point of sale, high value transactions. But other math-based currencies exist that could better address this use case.  Ripple Lab’s transaction ledger is updated every five seconds or so.  The Ripple Labs algorithm also natively supports currency exchanges.  I expect some intriguing announcements from companies using Ripple-based rails.

Internet Security Concerns Hinder Market Development. All math-based currencies exist on an internet that is demonstrably fraught with insecurities. For the generations raised on card-based payments and their consumer protections, digital cash is a foreign concept.  There’s no recourse if a recipient doesn’t deliver on a promise. That’s the cash equivalent issue.  Making it even more difficult is the state of internet security in general.  Almost nothing is hacker-proof.  That pervasive vulnerability will inhibit the spread of math-based currencies. Your bitcoin is safest when it’s stored offline.

Gaining Muscle, Gaining Experience

Last summer, Glenbrook conducted a survey on Bitcoin views with a largely US-based set of payments professionals.  Remarkably, even then, a strong cadre of payments insiders were believers in Bitcoin’s longevity and its potential.  2014 will see Bitcoin and other math-based currencies continue to affirm those beliefs and win over others.  But don’t look for the economic and monetary policy arguments to subside.

If you’re viewing Bitcoin as an investment vehicle then what matters is how many others want a piece of today’s 12 million bitcoins.

But if you’re interested in the exchange of value problem, the “crux of the biscuit” is how math-based currencies fit into payments systems based on fiat currency.  As 2014 produces a more stable infrastructure, the challenge will be identifying the applications most susceptible to augmentation or outright displacement by math-based currencies.

Unlike so many Internet phenomena, moving money is not amenable to revolution. Steady evolution is required to build confidence.  2014 should see math-based currencies settle down to the work of proving themselves through continued experience and experimentation. There are endless opportunities for it to all go wrong but 2014 should provide plenty of space for math-based currencies to get, at least for the coming year, the next evolutionary steps right.  If all of these approaches get a little less media attention and a lot more operational experience then 2014 will be a very successful year.

At Glenbrook, we’ve got a range of thoughts on what ideas to pursue and how the two worlds of fiat and math-based currencies can fit together—or cannot.  We’d love to discuss your ideas and, better, help you get them honed and into the market.  Get in touch and we’ll assemble the team.

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