In November 2011, Wired magazine ran an article titled “The Rise and Fall of Bitcoin.” The article delivered a narrative account of the digital currency and its pseudonymous founder Satoshi Nakamoto. The story was written as if it encapsulated the full story of Bitcoin, from its 2008 rise to its probable 2011 demise. Four years later, the suggestion that Bitcoin had run its full course by 2011 sounds comical.
Although Bitcoin supposedly fell five years ago, the media seems not to have noticed. Since its release, Bitcoin has “died” a total of 78 times, with major news outlets continuing to announce the death of Bitcoin all the way through 2013, 2014, and 2015. Bitcoin did not die in 2011, and it is not dead today. Nevertheless, the fledgling currency has failed to thrive to the degree that many had hoped it would. Most Americans remained unfamiliar with Bitcoin in 2015, and Bitcoin adoption rates remain slow among merchants and consumers.
There are numerous obstacles to Bitcoin’s adoption as a legitimate currency—from security issues and low incentives for use to high volatility and a reputation as the currency of criminality—but a number of startups have emerged to combat these obstacles through the development of much-needed infrastructure.
A Decentralized Virtual Currency
A virtual currency does not exist in any physical form. While the U.S. dollar is represented by physical coins and paper, bitcoins are represented virtually by unique strings of characters. Every fraction of a bitcoin has an identifier that, like funds on a credit card, can be sent and received over the Internet to make transactions. Microsoft Points, Amazon Points, and World of Warcraft Gold are all familiar examples of virtual currency.
Although virtual currencies are nothing new, Bitcoin is unique because it is a decentralized virtual currency that uses cryptography and a distributed ledger called a blockchain “to control its creation, administration and security.” Unlike traditional, fiat currencies, Bitcoin is not tied to any specific government or entity. As a result, transactions can be difficult to trace, occur faster than transactions that need to be processed by banks, and cannot be blocked. Bitcoin is not the only currency of it’s kind–similar alternatives include Dogecoin and Litecoin–but it is by far the most popular.
The Security Challenge
The first barrier to widespread Bitcoin adoption is security. Although the difficulty to trace bitcoins forms part of the currency’s popularity among current users, critics see this as a security concern, since pseudo-anonymity makes it hard to identify fraudsters. Furthermore, Bitcoin relies on the adoption of digital “wallets” for storing bitcoins and making transactions, but these wallets must be secure in order for people to start using them. Although reputable companies like Apple, Samsung, and Google have all released digital wallets for making transactions with traditional currencies, a July 2015 Gallup survey suggests only 2% of smartphone users actually use these products, with a majority (55%) of non-users citing security concerns as their primary deterrent.
The lack of oversight by a central party means that trustworthy infrastructure is hard to find, and fraud can be as simple as stealing a unique Bitcoin key like one would steal a dollar bill. This lack of security was on display in 2014 when Mt. Gox, the most popular Bitcoin exchange, closed its doors after 800,000 of its customers’ bitcoins (worth around $460 million at the time) went missing. Mt. Gox claimed the bitcoins were stolen by hackers, but they later recovered 200,000 bitcoins from their own overlooked servers. Furthermore, in 2015, Mt. Gox’s own CEO was charged with the unrelated theft of $2.7 million worth of his customers’ bitcoins. Although it appears most of the still-missing bitcoins were indeed stolen by hackers, the primary blame for the theft has been placed on vulnerabilities stemming from Mt. Gox’s own gross mismanagement rather than any vulnerabilities of Bitcoin. Whether or not Bitcoin itself is insecure, the Mt. Gox debacle illustrates some of the problems that can arise when a currency lacks mature infrastructure and centralized security and regulation.
One company, Coinalytics, has taken a back-end-focused approach to security that aims to help future companies avoid facing security problems like those faced by Mt. Gox. Coinalytics co-founder and CEO Fabio Federici explained to the HPR how his company enhances Bitcoin security by “helping companies with compliance, and assessing who they are transacting with and where their transactions are coming from.”
Ken Miller, former COO of the Blockchain technology firm Gem, told the HPR that “in order for [Bitcoin] to take off, you need people to feel as comfortable or more comfortable than they are used to.” As such, Miller explained how Gem worked for the better part of a year to develop a Bitcoin wallet with “enterprise level, better-than-your-bank-type security.”
People need to be persuaded not only to trust Bitcoin, but to trust the exchanges, digital wallets, and other services that are vital to their use.
Incentivizing Bitcoin Use
Another problem with Bitcoin is its complexity. The process of setting up a virtual “wallet” for storing and exchanging bitcoins might seem like a daunting task, and it might cause people to overlook Bitcoin as too much of a hassle. The difficulty of seeing the necessity of using Bitcoin in the first place only exacerbates the problem.
Miller illustrated this challenge to the HPR: “Taking out a credit card or a $20 bill is not that difficult to do. … With Bitcoin you are trying to replace something [traditional currency] that has its faults but by and large works pretty well. You have to build something that is not only as good, but is better—with more perks, and is faster and cheaper.”
A number of new firms are trying to solve this issue by incentivizing use through simplifying Bitcoin and emphasizing its utility. Netki is one of these companies. In the past, if sellers wanted payment in Bitcoins, they needed to provide payers with a string of dozens of random characters that represented their virtual Bitcoin wallet. Netki gets rid of confusing wallet addresses by allowing people to create and register simple, easy-to-remember wallet names like they would register a domain name. Another company, Circle, removes complexity from Bitcoin by allowing the currency to be sent quickly and conveniently from one person to the next in a Venmo-like fashion.
While companies like Circle and Netki are readying Bitcoin for wider adoption by removing complexity, other companies are revealing some of the unique uses of Bitcoin that could encourage greater adoption for the currency.
John Bailon, the CEO of Philippines-based Satoshi Citadel Industries, explained to the HPR that Bitcoin can solve cross-border money transmission in developing countries. “The Philippines is third in the world for incoming remittances,” he noted. “We don’t have credit cards, and we don’t have digital payments here, but we have a ton of cross-border payments.” According to Bailon, “this paints a perfect storm for Bitcoin adoption,” because bank-based remittances take too long, while companies like Western Union that require physical, on-the-ground infrastructure are expensive.
Satoshi’s remittance-focused subsidiary ReBit is one of many startups capitalizing on the utility of Bitcoin in the developing world. Nevertheless, it is still difficult to find any convincing uses for Bitcoin that would incentivize its broader adoption in countries that already have effective payment systems, like the United States.
Volatility and Reputation
When the currency was released, one bitcoin was only worth a few U.S. cents. Over the next few years, its value rose gradually until 2013, when the price spiked from slightly more than $13 per Bitcoin in January to around $1,200 in November. Today, the virtual currency remains volatile, and its price hovered around $250 until from January 2015 until the end of October, when it began to fluctuate again (the value of bitcoin sits around $380 today, and it was worth $460 just ten days ago). Such volatility undoubtedly turns off those who are frightened by Bitcoin’s unreliability as a consistent store of value.
In a conversation with the HPR, Netki business development manager Jeff Handler noted that Bitcoin’s volatility “really hurts on the larger consumer adoption side.” He added that the instability likely derives from the fact that a large facet of Bitcoin users treat it as a speculative investment rather than as a regular currency.
Even if the volatility issue is resolved, one final but major barrier to Bitcoin’s adoption is its reputation. According to payment solutions provider CardinalCommerce senior vice president Alasdair Rambaud, Bitcoin’s reputation as “the currency of criminals” hinders its ability to attract broader acceptance and usage.
Bitcoin’s relationship to crime was most apparent during the highly publicized shutdown of Silk Road, when news stories revealed that the infamous online black market relied on Bitcoin for the sale of everything from firearms to drugs. The pseudo-anonymity offered by decentralization has made Bitcoin popular for money laundering as well as illegal transactions, and the perception of Bitcoin as existing primarily for criminal means has slowed its adoption.
Fabio Federici of Coinalytics compares Bitcoin to the early days of the Internet, arguing to the HPR that the state of Bitcoin is “just like we saw with the Internet where the first uses were things like pornography and gambling.” Federici contends that Bitcoin’s reputation, like that of the early Internet, will improve with time. Better infrastructure and subsequent Bitcoin adoption will expose more people to the technology and will usher in greater overall use and acceptance.
As security, volatility, and complexity are solved with better infrastructure, Bitcoin’s reputation will follow suit. It can only help that more established companies are lending legitimacy to Bitcoin by investing in Bitcoin-related startups.
The Path to Currency
Some Bitcoin detractors argue that the mechanics behind Bitcoin are fundamentally flawed. According to experts like Cornell University’s Emin Gün Sirer and Ittay Eyal, the problem may be in the fundamental structure of the Bitcoin system, rather than any fault of users.
Nevertheless, venture capital firms had invested over $1 billion in Bitcoin-related startups by the end of 2015, and investors are betting Bitcoin adoption can be coaxed along to further growth through superior infrastructure. Once infrastructure exists to simplify and secure Bitcoin, greater adoption rates will improve the currency’s reputation, and solve its volatility problem.
Despite its obstacles, Bitcoin will not be dying any time soon.
Editor’s Note: The original version of this article introduced Ken Miller as the COO of Gem. Mr. Miller was no longer with Gem as of the publication of this article, and his title has been corrected to “former” COO of Gem.
Image Source: Francis Storr/Flickr