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Inside Bitcoins

John Patrick

Electronic money is not a new idea. The Electronic Fund Transfer Act was passed by the U.S. Congress and signed by President Jimmy Carter 35 years ago (1978). Other forms of electronic money include payment processors, direct deposit, and digital currencies such as Bitcoin. What distinguishes Bitcoin from other electronic money is that it is a cryptocurrency. Cryptocurrencies are a type of digital currency that is created on an infrastructure that relies on cryptography, decentralization (no central bank), and peer-to-peer networking. Wikipedia lists 47 cryptocurrencies. Bitcoin, established in 2009, was the first.

Will Bitcoin replace the dollar, euro, yen, franc, kroner, et al? Possible, but most authorities seem to be saying it is doubtful. Will Bitcoin dominate as a new method of payment, replacing Western Union, PayPal, credit cards, and various banking services? Although I am not an authority, I would say very possible. Alan Meckler, chairman and CEO at Mediabistro, recently said that Bitcoin has "all the trappings of the web circa 1995". Alan and I met at Internet World in 1994 and we both had a bullish view of the future of the Internet. We were not alone, but there were many naysayers at the time, including Bill Gates. More than a few bank and insurance executives told me that the Internet was interesting, but they would never connect their company to it. The web lacked good security, had no authentication, was slow, not always reliable, and was missing the many supporting services that would be needed to make it feasible for electronic commerce. The rest is history.

In the early days of the web, Internet World, created by Alan Meckler, was a thriving tradeshow that attracted thousands of attendees and vendors: vendors to share their vision and demonstrate their products, attendees to find out if the web was real. Mediabistro, a public company in New York (MBIS) that is a provider of jobs, news, education, events, and research for the media industry, has created an Internet World-like tradeshow called Inside Bitcoins. The purpose of the shows is to allow Bitcoin and the related virtual currency industry to share their vision. The expos provide the latest information on government compliance, marketing, managing and launching new businesses in the world of virtual currency. To see what the conferences are about, watch this video from a recent Las Vegas event. The WSJ provided a good overview of the conference.

Banks, credit card companies, and money transfer companies do not like Bitcoin because the new digital currency model threatens the status quo and related fees. In the early days of the World Wide Web, there were similar views to what we hear about Bitcoin. Music and book publishers did not like the idea of seeing their business model disrupted. Technology companies, including IBM, with large investments in dozens of different proprietary networking software did not like the Internet protocol (TCP/IP), which was a fraction of the cost of their offerings. Many derided the Internet as being slow, insecure, not scaleable, unreliable, not enterprise-ready, etc.

What about the other 46 cryptocurrencies and others likely to emerge? It is certainly possible that an alternative to Bitcoin may emerge that is superior. From my perspective, based on the history of the web, it is all about the grass-roots. There is a grass-roots movement underway with Bitcoin. You can see it in the blogs and twitter. The infrastructure of Bitcoin is built on open-source software — visible for all to inspect and contribute to. It is already evolving. It will get better and better. There are currently more than one million Bitcoin wallets and more than 2,000 vendors who accept Bitcoin. I would never bet against a grass-roots movement. I am looking forward to attending Inside Bitcoins in New York in early April.

Disclosure: I am a board member and investor at Mediabistro.

By John Patrick, President of Attitude LLC
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I am sure you know that the Alex Tajirian  –  Jan 13, 2014 8:38 AM PDT

I am sure you know that the biggest drawback of cryptocurrencies is that losing your personal key means losing all your money. Until that issue is solved, they will be a medium for small payments, albeit there was a recent report that someone bought a Tesla with Bitcoins. There is also the risk of being banned in some countries, which is what happened few weeks ago in China. Moreover, there is no strong reason to believe that Bitcoins will continue to dominate the market.

The Early Days John Patrick  –  Jan 13, 2014 10:37 AM PDT

Hello Alex. Thanks for your comments. I agree there are issues and shortcomings. You are correct that if you lose your wallet, you lose all the money in it. Some people trust banks but don't trust the Internet. In the early days, many people trusted the telephone company operators, but not the Internet. The key is adoption. If adoption (overstock.com now taking BTC) continues to grow, the supporting services and infrastructure improvement will develop. I agree with you that something better may emerge — there are already 46 alternative crypto currencies — but if Bitcoin continues the grass roots growth I see, it may emerge the winner. Beta was better than VHS, but VHS had the grass roots support. Same with https over shttp. Shttp was better but https had the grass roots support.

This is not the forum to debate Alex Tajirian  –  Jan 13, 2014 11:13 AM PDT

This is not the forum to debate the classic example of standards adoption, but the triumph of the VHS format over Betamax can be attributed to more important factors than grass roots (which you are probably using to simplify things). One important factor that may be more familiar with the forum’s community is the direction that the majority of software and complementary asset developers lean toward. Nevertheless, market forces do not necessarily end up adopting the “best” option, as evidenced by the QWERTY keyboard.

Thanks John!

Well said, and yes, by grass roots John Patrick  –  Jan 13, 2014 12:33 PM PDT

Well said, and yes, by grass roots I mean the broader and deeper concept of it.

The real problem Phillip Hallam-Baker  –  Jan 14, 2014 6:53 PM PDT

The real problem with BitCoin is that this is the fifth cryptocurrency and almost certain to go the same way as the other four: Shut down by the Feds. Just like eGold, GoldAge and the rest.

Yeah yeah, its different this time, Bitcoin has splunge! The four previous ones were different as well. The only difference being that goldAge fed a Poniz scheme and BitCoin is a Ponzi scheme.

Are you saying that Facebook, Google, and Alex Tajirian  –  Jan 15, 2014 2:37 AM PDT

Are you saying that Facebook, Google, and iPhone will go, in the near future, in the way of MySpace, AltaVista, and BlackBerry?

Facebook yes Phillip Hallam-Baker  –  Jan 15, 2014 5:48 AM PDT

I have been saying that about Facebook for quite some time. They are a band, not a record label.

Facebook is already becoming unfashionable among teens because their parents do it. AOL was big in the day.

Google is far more diversified than just search. iPhone won't go away but the price will fall.

The killer blow to BitCoin will be when the feds charge someone with all the crimes committed that involve BitCoin under the RICO statute. It will be struck down eventually but people will run for the exits first.

Ponzi John Patrick  –  Jan 14, 2014 7:34 PM PDT

You may be right, but I have some faith in crypto and in the grass roots. We shall see. I am an optimist about Bitcoin.

Currency or asset? Alex Tajirian  –  Jan 22, 2014 4:33 PM PDT

Finland’s central bank has decided to categorize the software as a commodity, and thus sets legal guidelines for how to treat it financially. Other counties are still in the process of deciding on the designation of the software.

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