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When you come to a fork...

When you come to a fork...
Posted: Sep 6, 2017
Comments: 1
Author: Lou Grilli

An update on where we are with Bitcoin and other cryptocurrencies

Bitcoin was once viewed as a promising alternative to the US dollar and other fiat currencies that are controlled by federal governments or national banks. Bitcoin was appealing and newsworthy because it offers near real-time transfer of value (compared to 1-3 days for a bank settlement), anonymity, and virtually free transactions versus credit card merchant charges of 1-3%.

Bitcoin: The good old days

In its first few years starting from when Bitcoins were first minted (or mined in Bitcoin parlance) in January 2009, the currency had limited practical use, limited to transfer between Bitcoin miners and a few computer geeks. Bitcoin ATMs, which allowed individuals to insert dollars in exchange for a piece of paper – the digital representation of a Bitcoin wallet – began to appear. Robocoin, the first ATM vendor of its kind, installed early Bitcoin ATMs in Vancouver and Austin, starting in October 2013. This allowed non-miners to exchange real currency for Bitcoin currency and participate in the promise of a global currency that knew no international boundaries, had no exchange fees, and could be used universally around the world.

It could be argued that December 2014 was the peak of merchant acceptance of Bitcoin, a major component of that promise. Bitpay, a startup that enabled merchants, including brick and mortar stores, to accept Bitcoin, purchased the rights to rename the St. Petersburg Bowl, an annual NCAA college football postseason game played in St. Petersburg, Florida, to the Bitcoin Bowl. Leading up to the game, Bitpay enabled many local merchants in downtown St. Petersburg and around the stadium to accept Bitcoin. Several Bitcoin ATM vendors also stepped in and installed Bitcoin ATMs.

Since then Bitcoin’s value has increased. Someone who bought one Bitcoin for $314 on December 26, 2014, the day the one and only Bitcoin Bowl was played between North Carolina State University and the University of Central Florida, would be holding a Bitcoin valued at $3000 on June 12, 2017, the most recent peak.

It’s all gone pear-shaped

Since that Bitcoin Bowl was played, many things have changed causing the promise of a truly global currency to burst. The cost and speed of a transaction, the rise of other cryptocurrencies, and the tarnishing of Bitcoin’s reputation have all contributed to Bitcoin not meeting its expectations.

One of the greatest hopes of the Bitcoin community was to have a currency that could be used around the world, with virtually no transaction fees and no exchange fees. But Bitcoin wallet vendors, looking to monetize their development and support costs, have been charging for transactions. The Wall Street Journal recently reported, Bitcoin transaction fees have swelled to more than $6.

“Because this cost is fixed in nature (unlike the familiar card interchange model) it becomes a non-starter for casual transactions of, say, $300 or less” according to Glen Sarvady, Managing Principal at 154 Advisors. Another hiccup in the Bitcoin usage model for consumers - whereas the interchange costs of using a credit card is paid for by the merchant, the cost of using Bitcoin is paid for by the Bitcoin payer. “The buyer bears the transaction cost. When would someone willingly foot this bill?” asks Sarvady.

Add to the cost of a transaction the hassle of locating and then the cost for purchasing Bitcoin at an ATM. Bitcoin ATMs are beginning to disappear. The previously mentioned Robocoin ATM vendor shut down its Bitcoin business in early 2016. Most of the remaining Bitcoin “dispensing” ATMs charge a 5% surcharge. This makes using Bitcoin to send money internationally using one of these ATMs far more expensive than using traditional remittance services.

Not so fast

In addition to the consumer-side issues there are also merchant-acceptance issues that have emerged such as transaction confirmation speed. For example, during the Bitcoin Bowl, it took less than 15 minutes for the merchant to confirm a transaction. Today, the average time it takes for a Bitcoin transaction to be verified is 43 minutes, and some transactions remain unverified forever, according to International Business Times. None of the brick and mortar merchants that accepted Bitcoin in 2014 still do, although the volatility of the currency may be equally part of the reason.

The Bitcoin network can currently sustain 7 transactions per second, although there’s efforts being made to increase the throughput. To put this in context, Visa’s payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second. The International Business Times also point out that “the result of the slowdown in transaction clearance rates has led some businesses to give up on Bitcoin completely while others are recommending users to switch from Bitcoin to alternative cryptocurrencies like Litecoin.”

But what about the fork?

A recent sweeping change to Bitcoin, one that caught many ardent Bitcoin fans off-guard, happened, in part, as a response to Bitcoin transactions being too slow and too expensive. A group of existing Bitcoin users and companies launched a new version of the cryptocurrency, Bitcoin Cash, in a bid to increase transaction capacity. All holders of Bitcoin were issued this new cryptocurrency in a process where the new version was “forked” from the existing. Only time will tell whether Bitcoin Cash (BCC, versus legacy Bitcoin BTC) will be more usable, faster, and cheaper in typical transactions. Most Bitcoin enthusiasts believe this is only the first split (or fork), possibly as soon as November.

The rise of other cryptocurrencies

The next big change since the advent of Bitcoin is the rise of other cryptocurrencies. While Bitcoin remains the most popular in terms of market cap, it is closely followed by Ethereum, which saw a 10x increase in value over the first few months of 2017 before falling back. “The reversal was fueled in part by fabricated reports of the death of Ethereum’s founder, 22-year-old programmer, Vitalik Buterin. It should raise major warning flags when such ‘news’ can have this extreme an effect on the market,” warns Sarvady.  Ethereum remains a strong competitor, but with a focus on applications built on the blockchain rather than simple payments. Litecoin, led by ex-Googler Charlie Lee, is gaining on Bitcoin by being more open to solving problems that Bitcoin still faces which is helping to drive greater adoption. There are many more cryptocurrencies, including Zcash, Monero, Bancor, Tezos, EOS, each with its own pros and cons.

Bitcoin becoming synonymous with illegal activity

The final major change that has taken place recently for Bitcoin is its strongest use case to date – enabling illegal activity with anonymity. The latest ransomware attack, malware called Wannacry is a case in point showing Bitcoin becoming synonymous with criminal activity. Without a cryptocurrency, the worst a hacker could do would be to steal files. However, with Bitcoin and its anonymous nature, hackers can freeze (hold ransom via encryption) all of an innocent victim’s files unless Bitcoin is sent to an anonymous and untraceable Bitcoin wallet address. There are less publicized but far worse examples of Bitcoin used to fund human trafficking, drug trafficking, and terrorist activity.

So is Bitcoin this year's Pokémon?

Bitcoin launched with the intention of eliminating the requirement for government controls and payments processing entities, by storing and distributing the currency over a public, transparent, and anonymous distributed ledger hosted by a peer-to-peer network. Unlike physical alternative currencies such as gold and silver, Bitcoin has no value until its representation is recorded on the distributed ledger. Every 10 minutes or so, all the transactions that have just taken place are put in a block and added to the chain of previous transactions, hence the blockchain.

When blockchain first arrived on the scene, it was hard for many people to separate the speculative currency from the underlying blockchain technology. The currency saw meteoric rise in valuation, but over time it was the underlying blockchain technology, and more precisely the distributed ledger that many realized as the biggest value. Some of those entities that recognized the potential use of the blockchain were major banks and credit unions who formed several consortiums to develop proof of concepts and trials to exchange digital contracts using blockchain, but are not associated with Bitcoin. Many of these trials using the underlying blockchain technology continue today and have great potential to be used in commercial applications.

Likewise, Pokémon GO made news headlines when it swept the world in July 2016, racking up $1.6 million a day in in-app purchases leading to over $1 billion in revenue in the first 6 months of the mobile app’s release. Bitcoin’s value has nothing physical to back it up; its valuation is based on the most recent buyer’s perception of its worth. Likewise Pokémon has nothing behind it to justify the amount of money that the players “en toto” spent on lucky eggs and lure modules. Some credit unions were making their branches PokéStops (places to find and catch Pokémon) to drive foot traffic, and create some fun.

But the real value of Pokémon GO was its underlying technology; it was the first mainstream, world-wide implementation of augmented reality. Since then, augmented reality has been used in far more useful applications, like showing repair people part numbers overlaid over the camera’s image of an industrial air conditioner unit, or more “down-to-earth” applications like viewing the night sky with your smartphone with an AR application that labels the stars. A lot of the attention given to A/R is owed to the online mobile game. Likewise, Bitcoin is due its credit for starting us down the technology path that has led to some successful distributed ledger trials including exchanging federated identity, and exchanging currency across international borders (but not using Bitcoin).

What do you think? Please comment below.

 

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Lou Grilli

Lou GrilliLou Grilli

Lou is the Director of Payments Strategy at CSCU and is responsible for providing leadership to the organization for emerging payments and industry trends, as well as managing the product portfolio.

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1 comments on article "When you come to a fork..."

John Best, 9/6/2017 5:04 PM

Lou, this is a great article. You really drilled into the important parts, one interesting thing I have discovered is that while bitcoin is still the payment of choice on the darkweb, there is a rising payment system called monero (http://getmonero.org) which is becoming the new bad guy currency (https://www.wired.com/2017/01/monero-drug-dealers-cryptocurrency-choice-fire/) Thought you would be interested. Its the number one thing to mine right now (http://www.whattomine.com). Great work as always. Love your articles.

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