Industry Perspective is a regular Data Center Journal Q&A series that presents expert views on market trends, technologies and other issues relevant to data centers and IT.
This week, Industry Perspective asks Vitalik Buterin, head writer for Bitcoin Magazine, about the current state and potential of the "cryptocurrency" known as Bitcoin. Born in Russia, he spent most of his life in Toronto, Canada, where he currently resides as a student. His interests are diverse, ranging from computer science to economics to linguistics, and he firmly believes in the power of the Internet, from P2P networks to social networking to Bitcoin, to lay the foundation for a new, bottom-up, twenty-first-century information economy. Vitalik has been a member of the Bitcoin community since March 2011 working on small-scale efforts like Bitcoin Weekly.
Industry Perspective: The value of the Bitcoin currency reached the $1 billion mark in March. Is this a signal that Bitcoin is here to stay?
Vitalik Buterin: I think it's definitely a sign that people are starting to take Bitcoin more seriously. Being a $1 billion market is a pretty important psychological barrier, and it makes the Bitcoin economy large enough for more-mainstream businesses and investors to care about.
I'll quote Ben Davenport, one of the more recent BitPay investors:
"Bitcoin businesses, until recently, have largely been bootstrapped. The reason is, until recently, when an angel or VC has looked at Bitcoin businesses, they saw a currency with a total market cap of about $150 million. That’s too small a total addressable market to be interesting. And if an investor is savvy enough to see the potential for Bitcoin itself, then they also realize they can capture that upside without the business risk, simply by buying Bitcoin. Now though, we’re getting to the size where an investment in an amazing, well-positioned team like the guys at BitPay makes a lot of sense, and will also ultimately help increase the overall Bitcoin adoption rate. I predict we’ll see the VC flood gates open within 12-18 months—I’m just trying to be a little bit ahead of the curve there."
IP: Bitcoin gained a bad rap thanks to its use in the drug trade and other disreputable markets. What kinds of positive transactions are people using Bitcoin for?
- Non-profit organizations and charities. Some good examples include the following:
* Wikileaks ($80,000+): https://twitter.com/wikileaks/status/306550274854625281
* The Internet Archive ($8274.35773763+) http://blog.archive.org/2013/02/21/employees-to-be-paid-in-bitcoin-please-donate/
* BUND Berlin ($1400+) http://www.bund-berlin.de/bund_berlinde/spenden/bitcoin_spenden/bitcoin_english.html
* Sean's Outpost (homeless shelter) (at least $700, probably over double) https://www.smore.com/mzym-sean-s-outpost
- Internet services (e.g., WordPress, Reddit, Namecheap, virtual private servers, virtual private networks, etc.)
- Electronics (e.g., http://bitcoinstore.com)
IP: Why are companies and consumers turning to Bitcoin?
VB: People like the ideals that Bitcoin represents. Very many people, from the (original) Tea Party to Occupy Wall Street, are very unhappy with the way the current financial system is set up, and they see Bitcoin as a way to opt out. Indeed, to some people Bitcoin is a way of opting out of politics and its associated bickering and strife altogether, as Bitcoin is not associated with any government, corporation or bank, and you can use it to interact across borders just as easily as you can with your own neighbor.
IP: Could Bitcoin eventually compete with national currencies like the dollar, even for in-person transactions?
VB: I'm not sure if Bitcoin will ever grow to be large enough to be a threat to the dollar itself; I think the better comparison is to think of Bitcoin as competing against methods of money transmission—PayPal, credit cards, Western Union and the like. Given that Western Union has already expressed a potential interest in Bitcoin, I think it can definitely get there.
IP: How does one move dollars (or other currencies) to Bitcoin, or accept Bitcoin for payments?
VB: To buy Bitcoins, the simplest thing is to go on a Bitcoin exchange, which allows you to deposit other currencies and then trade them for Bitcoins on the site. Popular exchanges include BitStamp in Europe, Mt. Gox everywhere and Coinbase in the U.S. To accept Bitcoin for payments, there are a number of payment-processor-like platforms to help you do that: Coinbase (http://coinbase.com), BitPay (http://bitpay.com) and BIPS (http://bips.me) are three examples. All three also offer the optional feature of converting any Bitcoins that you receive into USD or other currencies as soon as you receive them, which is very convenient for merchants who still have all of their expenses in other currencies and also completely protects merchants from price volatility.
IP: What are the regulatory hazards, current and potential, of using Bitcoin?
VB: Recently, FINCEN released a guidance report that suggested how the agency would deal with Bitcoin in the future. Basically, if you are not an exchange, you are generally free and clear; accepting Bitcoins is as legally harmless as accepting any other currency. The regulatory load now falls entirely on Bitcoin exchanges, which will need to get money transmitter licenses over the next few months. In general, though, legal opinion on Bitcoin is still not well developed, but most people suspect that the situation will be similar. If you're just accepting Bitcoins for goods and services, or paying your employees with it, as long as you're paying taxes the chance that you'll incur legal risk is very low.
IP: In March, a Bitcoin glitch caused the value of the currency to fall briefly. How safe is Bitcoin?
VB: As an investment, it's still quite risky. I would not recommend anyone to put more than a fifth of their life savings into it (unless they are under 22 and don't have any serious life savings to speak of). The point of Bitcoin as an investment is (1) to be part of a diversified venture-capital-style portfolio, where you're betting on at least one of a hundred high-risk but unlimited-reward investments getting big, and (2) to serve as a hedge against the rest of the financial system. The Cyprus bank bailout, for example, pretty significantly contributed to Bitcoin's price going up, so if you were in Cyprus and had a significant quantity Bitcoins you probably came out roughly even. When gold collapsed by 10% recently, Bitcoin did not really move. The most important thing in keeping your wealth safe is not keeping all your eggs in one basket, and Bitcoin's advantage is that it offers a basket that's pretty far away from all of the others.