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Bitcoin technology has been the focus of some very large scale venture capital investments over the past year, representing a complete 180 degree turn from the previous year’s uncertainty in terms of values, and litany of high profile, reputation-damaging events including the downfall of MtGox, and the seizure by the US Government of anonymous marketplace Silk Road.
Gradually, Bitcoin has reached the elevated levels of the institutional electronic trading industry, represented by vast venture capital investments, and the presence today of three senior executives from the Bitcoin community at the Shift Forex FXIC conference in New York City.
In a very detailed discussion hosted by Michael Casey of the Wall Street Journal, whose charismatic and incisive prose engaged Daniel Gallancy, CEO and Founding Member of SolidX Partners, Jaron Lukasiewicz, CEO of Coinsetter and Todd McDonald, Partner at R3 in a very candid discussion about the distinction between Bitcoin and the technology which operates it, Blockchain.
The reason for the sudden turnaround in interest from institutions, investors and regulators in Bitcoin, and the large scale venture capital investments which include 21 Inc’s record $116 million round of funding earlier this year, may be that the underlying technology, Blockchain, rather than the actual Bitcoin itself.
Mr. Lukasiewicz began by explaining that “The dark days of 2013 with the demise of certain exchanges and extreme volatility feels like a long time ago. Pretty much none of the companies that were popular back then still exist. There was a speculative run up in Bitcoin, have to compare natural buyers and sllers versus speculative buyers and sellers.”
“That’s been great to see, and now there is a steady group of people who are buying Bitcoin every day. It is growing, slowly in a way, but it is growing especially as licensing with regulatory oversight such as BitLicense and other federal licensing is starting to develop.”
Serious volatility ahead as VC funded technology companies will sink or swim
Mr. Casey then posed the question “2014 was a year of criticism, and some commentators deemed Bitcoin to be the worst performing currency in the world, but it survived. What is your take n where we have come?”
Mr. Gallancy responded by stating “I would say that temporarily we seem to be stable, I would be very surprised to see this level of muted volatility that we have seen over the last few months. There are a variety of catalysts coming in the next few years which will push the price lower or higher, but will not remain stable.”
“This is because there are a lot of venture capital backed companies that were funded last year, which will either be successful or will run out of cash and go away.”
“There are interesting technical developments regarding Bitcoin’s functionality, and in particular the Blockchain, which will also be a catalyst but the new hot potato is the internet of things. There is a thesis that Bitcoin will be the money for the internet of things, and although I cannot put a date on it, 2016 will be a big year so betting on stability is not the right bet.”
Mr. Casey’s interest was heightened by this suggestion. “Some of the mini applications that some people see as a mainstay for Bitcoin are interesting. I will ask the attendees here a question. How many of you own Bitcoin, and how many are unfamiliar with the technology and ethos behind it?
The result of this was remarkable. Of the 150 delegates, 50% confirmed that they own Bitcoin, and absolutely none of the delegates were unfamiliar with the technology and what Bitcoin’s functionality is.
Bearing in mind the high level of understanding among institutional FX industry participants in Bitcoin technology, especially here in New York, one of the world’s nerve centers for virtual currency with regulated exchanges and top of the range infrastructure in place, Mr. McDonald continued “Internet of things is very interesting, but it will be way bigger than what we are talkking about now.”
“I spent 15 years in FX, and was lucky enough to start in the mid to late 1990s before the entire market changed to electronic, and if you look at Bitcoin today, it is FX in the 1980s and 1990s. I am not sure if you realize, but the market is crazy. Liquidity is hard to come by, its all OTC trading on Skype with people you know, and its traded on a web of trust which is a really weird concept” continued Mr. McDonald.
Blockchain is critical to other, mainstream businesses
At that point, Mr. McDonald revealed the very possible reason for the tremendous investment interest in Bitcoin by large institutions – the idea of using Blockchain for other businesses outside Bitcoin, despite its inseperability from Bitcoin.
“We view the exciting part of Bitcoin as the discovery of the actual Blockchain itself, and the ideal situation is to wake the banks up to Bitcoin as a distributor in the financial world so that the blockchain can be opened up into aspects of the financial industry such as central clearing.”
Mr. Casey required elaboration on this, as it is a very interesting matter indeed. Mr. McDonald added “There are tons of third parties that are not just banks but service banks, and that is the sector to work with.
“Hedging tools and sophisticated exchanges may well be part of the modern Bitcoin ecosystem, things will calm but its still wild out there. What willl happen?”
Mr. Gallancy’s perspective is that there are many industry participants who say things and have no idea what theyre talking about.
“It is essential to understand how the Blockchain technology is competitive, and who is using it. There is growth in the remittance use these days, so it is slowly displacing Western Union and MoneyGram at sometimes similar rates, and can be even done at much less cost, a tenth, but no consumers really try that. Companies are also trying to rival Transferwise which is taking Bitcoin into direct competition with deliverable FX” said Mr. Lukasiewicz.
Mr. Gallancy elaborated on the expansion of Blockchain into mainstream financial instititions, and its functional advantages. “The settlement and record keeping uses of the Blockchain are important. The majority of technology in Bitcoin is not appreciated outside Bitcoin industry. We are seeing alot more interest in Blockchain than in Bitcoin, but heres the catch: For a traditional Blockchain, you cannot have one without the other. Bitcoin is the economic unit which enables miners to provide security to the blockchain. Without that, the security components cannot do their work.”
“For record keeping, and quasi-database functions, bearing in mind the amounts of Bitcoin involved, there are inherent scarce resources in the Blockchain and as we see more settlement and record keeping functionality, which would use resources, some of which include space on the blocks, this would push the price of Bitcoin up as there would be limited supply on the blocks, and increased use, despite Bitcoin’s presence only there because it cannot be separated from Blockchain.”
Mr. Lukasiewicz then explored the subject of the decentralized nature of Bitcoin and how it could speed up transactions if the technology is used within fiat currency.
“If bitcoin comes to you from somewhere, you don’t have to trust the institution or counterparty, and can credit an account quickly because of that. When you start creating Blockchains or tokens for fiat currencies that can be turned around really quickly and can speed up bank transfers which is important for the FX industry, but for this to work, trust relationships have to be built up between all institutions.”
“In theory it makes sense to biuld up US dollar tokens but to get this accpeted as a form of payment is very difficult. It is like an imperfect solution but the best way to solve the problem of very fast transfers” he said.
“In conclusion, Mr. Gallancy stated “There is a question of semantics. Within the Bitcoin community, when I refer to the Blockchain as the trustless ledger, others outside the Bitcoin community refer to it as a permission ledger, and this is an interesting perspective. We can have a permission ledger that can facilitate fast transacitons but I refer to the Bitcoin blockchain as the trustless ledger.”
“Having a great exchange means diversifying every component. Coinsetter has prop shops, and this was achieved by us offering a FIX API, and by having built a system which is a replica of other trading systems in other markets, we created this for Bitcoin and offered system on top of it, allowing hedge funds to plug directly into the market. Bitcoin is unique because the first market participants are sellers” concluded Mr. Lukasiewicz.