Two years ago I was gripped by the promise of bitcoin the currency and bitcoin the protocol. Blockchain, an immutable, synchronised, global, time-stamped ledger offered the prospect of many exciting use cases and bitcoin was, and still is, the most obvious one.
At that time I saw three major risks on the horizon: regulators, hostile banks and tax authorities.
The original explosion of interest in bitcoin was centred on the prospects for technology, but was punctuated by some horrendous news flow including MtGox, the failed exchange, and Silk Road, the illicit drug website. MtGox has been replaced by more solid exchanges around the world. Silk Road’s founder Ross Ulbricht is serving life in prison, a severe sentence no doubt meted out as a warning to others abusing crypto-currency.
I have spent some time with the New York Department of Financial Services, and clearly the course is now set for appropriate and effective bitcoin regulation in the US. Similarly local regulator the Jersey Financial Services Commission is now canvassing opinion on additional bitcoin regulation, much like the New York Department of Financial Services did in the early stages. The FCA have diverged slightly and taken a watching brief while strategy is formed.
Taxation appeared to be an early risk. Taxing bitcoin would have been the most effective way to kill it. However, it seems tax authorities globally have been somewhat influenced by the softening stance of regulators and governments. Indeed the UK government has been a staunch supporter and seems to have encouraged the climb down by HMRC from an earlier aggressive stance.
A number of banks and similar institutions are pursuing blockchain solutions for trade settlement and clearing. Names include BNP Paribas, Nasdaq, NYSE, BBVA, Santander, Barclays, UBS, Citi, Goldman Sachs, Swift, Visa, BNY Mellon and the Singaporean Central Bank. Some of these will be blockchain, some side-chain, and some private networks (where the “trust-less” feature of Bitcoin is not needed).
A sidechain is an “alternative” chain to blockchain that differs from bitcoin in a technical way, for example, using customised features, Bitcoin can be borrowed (or pegged) from the main bitcoin network – and then returned later. Thus a side chain may carry value, included, but not limited to, the coins used in pegging. A private network, or permissioned blockchain, is a blockchain that might be very similar to the bitcoin blockchain, or totally different. The key difference is that it will contain a gateway of access controlling who can and cannot participate in the network, but the network will still be immutable and widely distributed.
The mood with banks has shifted from hostility to inclusion. Barclays is now leading the pack from a UK perspective and, like others, is seeing itself increasingly as a player on the financial technology spectrum.
The race to understand the bitcoin and blockchain space is hotting up and we fully we expect this to accelerate, validating the technology and the currency. There is lively debate on the merits of bitcoin, blockchain, side chains and private chains but it’s worth quoting Chain, the company partnering with Nasdaq: “Without speculators, there would be no bitcoin. They provide miners, applications and other participants with liquidity. If you have bought or sold bitcoin as a speculator, you have helped enable the emerging ecosystem of bitcoin apps.”
This supports our view that bitcoin and blockchain are effectively inseparable.
The bitcoin market price has been in a bear state for almost a year and accordingly interest has been muted. But with the market bottoming out around 1 bitcoin per $225, remaining there for some time, and then the recent break upward, the bear move has come to an end. The 200-day moving average was finally crossed this month.
So with an emerging up trend in place, what will investors see when they take a second look at bitcoin as compared to a year ago?
The trading venues for bitcoin have evolved rapidly and are unrecognizable from the dark days following the Mt Gox collapse. Those exchanges that have embraced the rules that other businesses involved in finance adhere to have done the best. The bridging of bitcoin exchanges and traditional finance has been a winning recipe. Coinbase and itBit have led, while Bitstamp and Bitfinex remain more reticent. As ever continual monitoring of all 70 venues remains essential as surprises are always possible.
All in all the investors taking a second look at bitcoin, one year on, will be very impressed with the progress.
Brian Armstrong, of Coinbase, has suggested that bitcoin might replace the dollar as a reserve currency. Paul Krugman and Warren Buffet have taken the view that bitcoin will vanish. As ever the subject of bitcoin is polarising.
My view is tangential. I don’t believe it is a question of a switch from one currency system to another, but rather a case of switching from one system to many systems. Dollars, euros and pounds will exist for a long time to come, but they will probably become increasingly virtual. There will be the newer payment mechanisms that are more technologically adept, such as Paypal and Apple Pay.
There will also be several virtual currencies, some open source and trustless, some private and locally tokenised. Monotonic currency systems will broaden into a wide spectrum of alternatives, based on consumer preference, popularity and specific utility. Bitcoin will certainly have its place.
Daniel Masters is director of Global Advisors Bitcoin Investment Trust.