01 Sep 2014
Ask the Expert: Byte-Testing Bitcoin
Is Bitcoin simply a fad—or the future of money?Re: Rob Kautz (MBA 1987); Jay Precourt (MBA 1962); Caleb Reeves (GMP 16); Peter Pifer (PMD 20); Tim Draper (MBA 1984); Joseph DiSorbo (OPM 41)Topics:
Crypto-currency expert Santiago Subotovsky (MBA 2009), principal at Emergence Capital Partners, fields alumni questions on Bitcoin—a digital, virtual, and unregulated currency that allows for anonymous transactions and has quickly moved from the tech underground to the mainstream.
How does Bitcoin intend to navigate the regulatory environment? In particular, how could they educate governments and ease concerns about the various types of risk pertaining to payments and currency?
—Caleb Reeves (GMP 16, 2014)
Even though there are organizations and industry groups educating government officials, the most influential education is going to happen when Bitcoin finds a killer use case. So far, that case hasn’t emerged, but once those use cases start solving real problems for large groups of people, governments and financial institutions will be compelled to take it more seriously.
Bitcoin’s appeal of anonymity seems inherently flawed for storing large values in an age when the threat of identity theft through electronic eavesdropping and in-person, gun-to-the-head demands for access and asset transfers are a growing menace. Will anonymity be relinquished as regulation and controls increase?
—Rob Kautz (MBA 1987)
Many argue that anonymity is one of the key disruptions Bitcoin introduces. I think anonymity is valuable only in the early days and for a specific group of people. If we want Bitcoin to become more
mainstream, identity layers are going to be built on top of the protocol that will make anonymity an afterthought. I think the Bitcoin public ledger will eventually hold so much valuable information that some very interesting analytics companies are going to emerge to make sense of the data.
Has there ever been a “currency” anywhere at any time in history that had such extreme volatility as Bitcoin, and does volatility impede transactional utility? In other words, can Bitcoin really function as a “currency”?
— Jay Precourt (MBA 1962)
Bitcoin has been volatile, though it has had periods of stability (in 2013 it held at around $100 for months, and in early 2014 it held at around $450 for months). I don’t expect volatility to go away anytime soon, as it is still highly speculative, highly concentrated and doesn’t have enough liquidity yet. Most people think gold and silver have always been extremely stable; but looking back between 1977 and 1985, we saw the price of silver go from $5 to more than $40, then back to $5, then again to $15 and then back to $5. The pattern and ranges are similar to what Bitcoin has experienced, though Bitcoin’s volatility is compressed over a shorter period of time. That volatility creates some challenges when processing transactions, but if the merchant’s goal is to leverage Bitcoin to reduce transaction fees, then they can get in and out of Bitcoin within a very short period of time, shielding them from the extreme volatility.
What type of companies will need to be created to support Bitcoin (infrastructure, regulatory, security) so that it can become a globally accepted medium of exchange?
—Joseph DiSorbo (OPM 41, 2011)
So far the ecosystem has been working on creating the basic infrastructure for bitcoin to operate: exchanges allowing people to buy and sell; wallets enabling people to secure their bitcoins; and merchant services allowing merchants to accept bitcoins. There are already early breakout companies in each of those categories, so now the focus is shifting slightly into building applications on top of the rails. I’m seeing a lot of interesting companies working around security, identity, analytics, remittances, derivatives, and other financial platforms.
I understand how Bitcoin can work as long as the buyer and seller have confidence in it and continue to use it as a means of exchange of equal goods. What I don’t understand is why it is a good investment, or why the value would appreciate higher than inflation of the competing currency(ies). I also don’t understand how it can be “legal” tender for any period of time since, in general, governments want to control everything, especially money, if possible.
— Pete Pifer (PMD 20, 1970)
Another big Bitcoin believer:
Tim Draper (MBA 1984), who won an auction for about $19 million in government-seized bitcoins in July. “Bitcoin frees people from trying to operate in a modern market economy with weak currencies,” Draper noted in a statement.
Most governments want to control their own currencies, as that not only gives them some kind of nationalistic pride and identity but also allows them to leverage monetary policy, one of the most significant tools that governments have to affect their economies. However, we’ve seen countries like Ecuador getting rid of their national currency in favor of the US dollar, to make a strong statement and gain the trust of their citizens. We’ve also seen more complex processes with the EU adopting a single currency as part of an effort to coordinate actions and act as a strong block. In terms of the speculative nature of bitcoin, given the limited supply, if we believe it is going to partially replace gold and/or fiat, the price will continue to rise. We can make many assumptions; but if we believe bitcoin will replace low single-digit percentages of gold and fiat, then we get to a value that’s way beyond where it currently is. We know there’s limited supply, by design, so if we believe adoption is going to increase, then inevitably the price will go up.
Epilogue from Santi
Bitcoin is still small compared with the US dollar and other major currencies, but it is starting to become more relevant. Bitcoin has larger money supplies (M1) than more than 100 countries. It is also exciting to think that bitcoin can disrupt not only major companies like payment processors (more than $400 billion in market cap), remittances companies and financial software providers, but also other non currency–related industries like ticketing, title companies, and many more. Bitcoin has the potential to becoming the biggest disrupting trend in many decades.
Class of MBA 2009, Section D