NEW YORK (MainStreet) — Bitcoin generates so much buzz -- from stories about little girls accepting bitcoins at their lemonade stand to news about the digital currency's role in the illicit goods marketplace Silk Road -- that it can be difficult to separate its novelty from its long-term legitimacy: in short, does Bitcoin have staying power?
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The answer may hinge on whether Bitcoin makes prices cheaper for consumers and fees less burdensome for retailers, according to Jim Robinson, managing partner of venture capital firm RRE Ventures, who spoke at the Internet Week New York 2014 conference this week.
The Blockchain Breakthrough
The "blockchain" technology upon which Bitcoin was built was the talk of Internet Week this year. Blockchain is "a new kind of distributed consensus system that allows transactions, or other data, to be securely stored and verified without any centralized authority at all, because - to grossly oversimplify - they are validated by the entire network," explains Jon Evans of TechCrunch.
That encryption is Bitcoin's advantage -- even over electronic money transfers.
This technology, Robinson says, is a huge breakthrough. For example, he says, remitting money overseas currently involves paying as much as 10 to 20% by the time the funds arrive at their final destination: "That's highly inefficient. Now imagine you can [send funds] and then automatically they just arrive."
Blockchain could be used to verify and directly transfer everything from property to deeds to titles on a car or regular contracts.
"Let's say you're buying a home," Robinson said. "That involves title searches, insurance issues, representations from third parties, legal inspectors. There are lots of fees associated with that process. All that can happen in a much shorter time. Right now where do you store the deed to your house? It's probably in a safe somewhere. In tomorrow's world, that's digital."
The ease in solving a major consumer pain point may explain why the popularity of the virtual currency, not tied to any sovereign power, continues to spread despite negative press over the past year, Robinson said.
"Despite challenges [like the Mt. Gox collapse or Silk Road], prices stayed quite stable during that market," he said. "A lot of capital is flowing into businesses and there's a lot of innovation."
Much of the new innovation in the Bitcoin space is on the part of companies that build upon the Bitcoin premise. This is true at all stages of the ecosystem. First, computers "mine" algorithms to reveal new Bitcoins, so there's the layer of "verifying it on the back-end and saying, 'O.K., you can use this,'" Robinson says.
Then there's the layer of managing and securing bitcoins. "How to buy it? How to secure it? Coinbase does a fantastic job on how to access and define Bitcoin."
The Promise of Efficiency and Security
Almost all credit cards siphon off a percentage for the perk of maintaining credit. To boot, those who are quick to point the finger at bitcoin's security problems would do well to examine the slew of we've seen credit card breaches and hacks in the past year.
Robinson envisions a world with less slack in the system and more competition, which fosters greater efficiency and ultimately benefits consumers.
"We have to figure out the next generation of stopping theft," he says. Credit card companies act as intermediaries between merchants and consumers and bear the burden of risk, but a highly secure online protocol has the potential to serve this purpose while "potentially charging 1% [to merchants] instead of 2 to 2.5%."
Right now, major credit card companies have massive databases with the personal and financial information of as many as 100 million people, Robinson says. Meanwhile, Bitcoin transactions can be done instantaneously and completed on the spot without cash registers, without relying on credit and without the need to store so much sensitive information.
Retailers, meanwhile, understandably shy away from the risk exposure and currency fluctuations of Bitcoin, but there are some ways to insulate themselves from those risks.
"Processes like BitPay provide a way around the exposure," Robinson says. "Many retailers are taking Bitcoin already and don't know it, because [bitcoins are] being changed into currency without people seeing or even knowing about it."
Chargebacks are also a big issue for retailers — the forced returning of funds to the consumer, such as if someone files a complaint with a credit card. That causes uncertainty about whether the retailers will truly be paid for their goods or services, and whether they can count on the money they have already booked.
With a Bitcoin transaction, goods are given and paid for on the spot, rather than what is essentially a 30-day interest-free loan.
Merchants have an incentive to offer products at a lower price if the consumer pays with Bitcoin, because they would be charged a much lower fee compared to the cut taken by a traditional credit card.
"You may sell a pair of shoes for $500 with Visa or Mastercard, or $475 with Bitcoin," Robinson said. "And that $475 could even have a higher profit margin for the merchant. So you can see how quickly you might become attracted to it as long as you can solve the volatility issue."
Sp Does Bitcoin Have Staying Power?
Of course, traditional financial institutions offer stability.
"We've all been raised to think of certain institutions in certain ways," Robinson says. "We think of sovereigns issuing money and backing it; if you look at banks in terms of architecture, they're often derived from the Greeks 2,000 years ago, with marble columns and everything. That connotes staying power. This is new."
In his opinion, there's less evidence of bad actors trying to take advantage of people within the Bitcoin world so much as "no one minding the store or paying attention to details," particularly with regard to the Mt. Gox collapse.
"I think of those [incidents] as important to teach future generations so they know how to build this system . . . [Bad actors will] always be an issue but in the digital world we will have more transparency, even if there's a pseudonym in any given transaction."
Regulation of Bitcoin is inevitable, in Robinson's opinion, but he notes that instead of one entity that defines regulation, there are are state regulators, federal regulators, the FBI, the NSA, the IRS, the Treasury, the Fed and the SEC.
"What doesn't get traded off is that this is a mass move to decentralization," he said. "You can hang different regulatory issues around it but they won't change that basic column."
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In the course of sometimes hyperbolic media coverage of Bitcoin, it can sound as though sovereign currency is going the way of the dinosaurs. Robinson says, "In tech we tend to underestimate the impact of new technology but overestimate how fast the changes will happen," he said. He estimates that a brand name retailer will start to accept Bitcoin as payment within the next year or two but doesn't imagine that Americans will stop using their greenbacks on a massive scale anytime soon: "That's decades away."
--Written by Allison Kade for MainStreet
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