What’s Not Being Said About Bitcoin by Coinbase Founder Brian Armstrong

Before I get to today’s excellent article by one of the co-founders of “next-gen” Bitcoin company Coinbase, I want to add a few of my own updated thoughts on the Mt. Gox fiasco.

While I am not at all surprised by the end of Mt. Gox (I predicted it in my piece several weeks ago), it happened much faster and in a much more spectacular fashion than I imagined. So the question here is: What comes next? Well that’s a two part question in most people’s minds, there’s the price action and the future of the protocol itself in the long-term. Let’s start with the first point.

For a while now, I thought the price pattern in Bitcoin might resemble what we saw following the last 10x run up and crash. In that case, we saw a six month consolidation from last spring to the Silk Road shutdown, after which the price exploded 10x again. If such a pattern was to reoccur, we’d be looking at the next move in Bitcoin around June. So we are still very much in a price consolation phase with wild moves within a wide trading range. I continue to work under that assumption.

What concerns me about the “missing” 750,000 bitcoins from Mt. Gox is that we don’t know who has them now. What if it is the feds, or some banking interest? The feds already own a lot of Silk Road coins, so let’s hope this is not the case. That would be the worst case scenario for the price in the near-term. Still, even if they do have these coins, they can only dump them on the market once. It’s also worth considering that the market has already priced this in. After all, the Mt. Gox Bitcoin price was already trading at a massive, bankrupting predicting discount for weeks before the actually filing.

As far as the future of Bitcoin, the protocol itself as well as peer-to-peer, decentralized crypto-currencies in general, I have no doubt the future is extremely bright. It’s the financial equivalent of the invention of the internal combustion engine.

However, this point is much more eloquently made by Mr. Armstrong of Coinbase. So here are some excerpts from his recent article: What’s Not Being Said About Bitcoin.

Over the past few weeks, we’ve seen a string of issues in the Bitcoin space, from the transaction malleability bug that ultimately closed Mt.Gox’s doors to a corresponding distributed denial of service (DDoS) attack that delayed transfers on multiple exchanges and services. These attacks, along with recent phishing scams and money-laundering arrests, have cast doubt on the Bitcoin space and caused consumer panic — which is fair.

But what hasn’t been communicated well is how those who are truly invested in the future of Bitcoin remain totally confident, because with every attack, breach, and arrest, Bitcoin is getting stronger and proving to consumers and businesses it is not going away.

Here is what is not being said about Bitcoin that should be.

Open networks keep growing even if individual participants fail.

It is critical to understand just how different an open payment network is from the proprietary payment networks that exist today. To illustrate this differently, let’s look at another open protocol: email.

Email is a good example of an open network with a standardized protocol; and this standardization is one reason why email is fast, free, and works just about anywhere in the world. There is no single company or country who controls the email protocol (just like Bitcoin), so thousands of different clients and implementations have been created all over the world giving it great reach and driving down prices for consumers who have many email options to choose from. You may have noticed you can successfully send emails between different service providers (such as Gmail to Outlook). This is also due to the open nature of the protocol.

If an individual email provider has a security breach, or loses the integrity of its customers, this doesn’t reflect on the concept of email generally — it merely reflects on the integrity of the individual provider. Further, the beauty of open networks is that they provide a low barrier to entry for competing services to come in and vie for your business as a consumer. Bad actors are quickly weeded out of open networks because consumers have choice — the choice of many new entrants coming on the market to vie for their business. Open networks do a great job of keeping incumbent companies honest, because if they make a mistake and lose their customers’ trust, their customers will be gone in a flash.

Unlike Bitcoin or email, our financial institutions and payment systems today are proprietary. This limits the ability for consumers to easily switch between payment providers and creates less competition for services. If the provider of a proprietary payment network isn’t serving its customers’ needs, where else will their customers turn? There is only one company you can use to access a proprietary payment network — the company that owns it. This higher switching cost has a few side effects: less competition in the market, higher fees, limited geographic reach of any individual network, and less innovation around things like speed of transactions.

Clearly open networks offer a number of benefits, so why hadn’t an open payment network existed previously? Until recently, many people thought it wasn’t possible to build a payment system on an open network. The core issue was around preventing duplicate spending without using a central company to verify each transaction. Nothing prevents you from sending duplicate emails multiple times, for example, if you wanted to do this.

This problem (the “double spending” problem) is what Bitcoin solves, and in this sense it truly was a technological breakthrough or invention (one that I think will be viewed as very important historically). If you’re someone in the business of verifying transactions on a proprietary network, the invention of Bitcoin cannot be safely ignored. It will change or disrupt the providers of most proprietary payment networks in the coming years.

 This problem (the “double spending” problem) is what Bitcoin solves, and in this sense it truly was a technological breakthrough or invention (one that I think will be viewed as very important historically). If you’re someone in the business of verifying transactions on a proprietary network, the invention of Bitcoin cannot be safely ignored. It will change or disrupt the providers of most proprietary payment networks in the coming years.

Just like email, there are growing pains for any new technology. Spam, phishing, and hacking have “attacked” email for two decades, but with each new breach comes the ability to make the protocol stronger, to innovate (as Google has with machine learning to detect and prevent spam email). These technologies weren’t developed overnight, or even conceived when email was created. Yet they were key to making email stable and reliable in people’s minds, until it became a part of their everyday life.

Within the coming years, disrupting the Bitcoin network will become increasingly more difficult as Bitcoin wallet software and the protocol become more mature and resilient. Like the spam filters developed on top of email, the best Bitcoin services providers will develop the best software to iron out any details the Bitcoin protocol has still left open to abuse.

Beyond lower fees and instant transactions, companies are also waking up to the fact that accepting Bitcoin means acquiring new, sophisticated, wealthy customers (top line revenue growth). Take Overstock.com, which began accepting Bitcoin on January 9. To date, Overstock has seen over $850,000 in Bitcoin purchases, with an average cart of $216, or 30 percent higher compared to customers paying in U.S. dollars. These were “almost all new customers,” according to the CEO, Patrick Byrne.

Around San Francisco, New York City and other major cities across the globe, Bitcoin acceptance is rapidly moving into brick-and-mortar shops, restaurants and even professional businesses like dentists and law firms. Consumers are paying with a quick scan of a QR code or using technologies like NFC and Bluetooth low energy. Merchants are enjoying instant transactions at lower fees, and this momentum will only accelerate in 2014 – with thousands more companies beginning to accept Bitcoin.

As a major payment processor, Coinbase is in a position to know about these trends.

If there is one positive takeaway from the collapse of Mt.Gox it is the willingness of a new generation of Bitcoin companies  to work together to ensure the future of Bitcoin and the security of customer funds. Going forward, the security and solvency of Bitcoin companies will be verified in several ways. First, through the traditional audit industry (the big four accounting firms), as they’ve done for many industries. Second, through novel techniques using cryptography to prove ownership of funds with Bitcoin’s public blockchain ledger.

Mt.Gox is in no way the end of Bitcoin — quite the opposite, in fact. Just as the closing of Silk Road in 2013 led to the biggest boost in value of the Bitcoin to date, weeding out immature companies and bad actors is paving the way for a legitimate Bitcoin marketplace. While it may be coincidence that during the Mt.Gox debacle, Coinbase hit 1 million consumer wallets, it is also representative of what legitimate Bitcoin companies have known through the big ups and the low lows – Bitcoin is fundamentally the best payment system for the Internet era.

I highlighted an excellent interview of Brian late last year. You can watch it here.

In Liberty,
Michael Krieger

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