Say farewell to the Pound:
Millennials using the blockchain could lead to local currencies

For Generation Y, ATM's were the right technology at the right time. Now, millenials are turning to blockchainx

Successful ideas have as much to do with good timing as they do with great technology. For Generation Y, ATMs were the right technology at the right time, offering quick cash on demand and changing our relationship with money. For millennials, what's the next big thing in managing their hard-earned wages?

Move over Bitcoin, the blockchain is only just getting started

It may just be local currencies. These can be used in certain cities or neighbourhoods to shop in local stores, buy local goods and even pay bills for rent and local utilities. The timing is right for such a paradigm shift in the way we pay. Why? Because of the confluence of three key phenomena.The first is urbanisation. According to the United Nations Population Fund (UNFPA), the world is undergoing the largest wave of urban growth in history. More than half of the world's population lives in cities. By 2030 the number of urban dwellers worldwide will swell to around five billion. That means cities will increasingly become primary drivers of economic growth. And as the municipal hub becomes the global nexus for financial progress, so will demand growth for unique currencies that reflect this shift.

But there's another reason to expect a rise in local currencies, one that's more in line with the social and cultural norms which characterise the coming of age of the millennial generation: ironically, the denser living that comes with urbanisation does not usually engender community. As cities grow and we live in closer proximity, we feel less connected to each another. That's one reason that city living is linked to increased rates of depression.

But millennials famously need to feel connected, to feel a sense of community and belonging. Just look at the booming phenomenon of shared living – not just spaces such as WeLive and Common, but also the tendency of millennials to choose to live with room-mates rather than on their own. Yes, part of this is economic, but it also has to do with millennials' well-documented desire to reclaim a sense of the "social" that social media alone has failed to provide.

               

Why expensive security alarms could actually be putting your valuables at risk

That is exactly what local currencies are doing – building urban communities from the wallet up. Local currencies create this sense of community that millennials crave by giving city residents the chance to support local merchants and vice versa. Rather than seeing hard-earned cash go into invisible pockets, it stays within the locality of the spender. When money is kept within the confines of the community, it expands opportunities within, adding value to every dollar spent. Consider the American Independent Business Alliance study that found that for every dollar spent at a locally-owned business, 48 % stayed in the community as opposed to 14% of every dollar spent at a chain. In other words, we can use money itself in the form of local currencies to help create community in an otherwise alienating and lonely urban landscape, turning the city itself into a driver of economic growth and change while revitalising the way people feel about spending their money.

Take two successful examples: the Brixton Pound, a currency in south London "designed to support Brixton businesses and encourage local trade… for use by independent local shops and traders", and Tel Aviv's Pishpesh, used by 300 local merchants in the city. Again, cash in the service of a community.

But such currencies wouldn't have been the least bit valuable unless there existed the technological underpinnings to make them viable. And that brings us to the third timely phenomena enabling this shift in the way we view our money: the blockchain enables local currencies in a way similar to how high-speed internet enables Spotify and YouTube. Transactions occurring via blockchain are highly secure, corruption-resistant, accessible to anyone with a smartphone and offer real-time economic data that can be used to help meet the needs of local economies. Blockchain technology affords citizens a way to support local businesses, drive economic growth and increase job opportunities by developing and using a local currency.

In short, the confluence of growing urbanisation, the rise of the millennial generation and emerging blockchain technology is what makes the timing for local currencies so ripe. This can lead to a new way of thinking about money – one based not on scarcity and competition, but rather on cooperation. Imagine you were offered a million pounds, but it came in a box that can never be opened. Would you want it? The answer is no because money itself isn't valuable, it's what you can do with it that gives it worth. That's exactly what millennials are beginning to do with localised currencies – make money more meaningful.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

Bitcoin Price Spikes to $1,600 in Nigeria

 

Nigeria’s Bitcoin Price is Going Crazy

Nigeria is displaying an insatiable appetite for bitcoin right now. NairaEx, one of the leading cryptocurrency exchanges in the country, is trading BTC at nearly US$1,600 each. Considering how the market average is just above US$1,10 right now, the situation raises a lot of questions. Bitcoin is being embraced by the Nigerian population by the look of things, even though no one is quite certain as to the exact cause for this sudden demand.

It is not uncommon to see certain regions of the world trade bitcoin at slightly higher prices. China, for example, has paid a 5% premium for bitcoin for as long as people can remember. Indian exchanges have gone through a similar situation when the demand for bitcoin was met with low liquidity. Nigeria, however, is doing things very different from those countries, as their bitcoin premium price is much higher than one would expect.

To be more precise, trading bitcoin at NairaEx will currently cost traders 494,755 Naira. A quick currency conversion tells us that is equal to nearly US$1,600 at current rates. That means Nigerian traders are  – willingly – paying a near US$600 premium per bitcoin right now. Although this bodes well for cryptocurrency valuation in general, one does wonder what is driving this sudden demand. Moreover, it is unclear why such a steep premium price is not slowing down the demand right now.

A few days ago, it was clear the weekly bitcoin trading volume in Nigeria was on the rise. Just last week, over US$1.3m worth of bitcoin was traded in Nigeria – according to Trail Blazers Nigeria – which is quite a staggering amount. Do keep in mind this volume only represents LocalBitcoins trading and does not take exchange volumes from NairaEx into account. Interestingly enough, the current LocalBitcoins price for bitcoin is nearly the exact same as the one found on NairaEx.

Finding an explanation for this sudden development is not easy, though. Nigeria has seen an uptake in internet and technology use over the past few years, which could eventually lead to increased cryptocurrency adoption. However, there is also the threat of MMMGlobal, which now only accepts bitcoin as a payment method. Even though a lot of people know MMM is a Ponzi Scheme, Nigerians continue to invest bitcoin into this program.

Perhaps the biggest mind shift comes from the growing number of merchants accepting bitcoin payments in Nigeria. Thanks to companies such as BitPesa, it becomes easier to use cryptocurrency for everyday needs. The company recently launched a new feature allowing Nigerian businesses to transfer funds to Chinese partners over the bitcoin network. More efficient payment solutions will lead to a booming economy, all of which is made possible with bitcoin right now.

Last but not least, the local media are paying more positive attention to bitcoin as well. An article about Satoshipay surfaced on the Nigeria Today website yesterday, explaining how anyone can make money with bitcoin. All signs are pointing toward a bright future for bitcoin in Nigeria, even though it remains to be seen if these high premium prices will be sustained for long.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

 

Bitcoin – you might have heard about this digital currency, and it’s gaining some traction in payments. Online retailers like Newegg and Overstock.com accept it. There are services that let consumers convert Bitcoin into gift cards for use at their favorite retailers. And beyond that, bitcoin doesn’t seem to be going away.

Bitcoin, however, is but one piece of the conversation about emerging technologies such as blockchain and distributed ledger technology, thus it helps to first start a conversation about these concepts. You might even be more curious to learn how blockchain and Bitcoin might feature in the future for your business.

What is blockchain?

The easiest way to understand blockchain is to think of it in terms of a typical bank account. When you spend money, it’s recorded as a transaction in your bank account, right? It’s the same thing with bitcoin or other industries using blockchain technology. A transaction is recorded in a “block.” Think of blocks like your monthly statements, which neatly divide up your transactions for easy reference (month, date, time, vendor, amount, credit or debit). A set of transactions is recorded as a block once it?s been verified by distributed trusted parties.

Once a block of transactions is complete, they become part of the blockchain. They are linked together in proper order (both chronologically and in a linear fashion), and each block links to the block before and after it in the sequence – much like your bank statements for each month showing a starting and ending balance. Blocks are impossible to alter once they’re part of the blockchain, which can create a more trusted, unchanged record of transactions or data that a large network of parties can see and verify.

How does blockchain work within the use case of currency?

To understand how virtual currencies such as bitcoin and other blockchain-based systems work, we have to have a look at credit/debit transactions and cash. Credit/debit transactions are what are referred to as “pull payments.” A merchant terminal (virtual, i.e. online, or physical) processes a customer’s credit card using all of the encoded information and then decides how much money to “pull” from a customer’s account to satisfy a purchase.

Cash, and bitcoin are “push” forms of payment. In every bitcoin and cash transaction, a customer decides how much money to hand over to a merchant to satisfy a purchase. There’s no exchange of sensitive personal information, such as what’s found on a plastic card. Bitcoin and cash are not reversible and each can only be refunded by the holder who is initiating a return. This means that bitcoin and other forms of payments powered by blockchain technology are more like cash than even a debit transaction. It also means that industries outside of payment technology are taking notice of how the foundation, blockchain, could help better manage data and information.

How is blockchain being used outside of payment processing?

The mortgage title industry and diamond industry have begun leveraging blockchain technology to solve some of their most critical challenges. According to a January 2016 report by NASDAQ, these two industries are taking advantage of blockchain technology in a few ways.

The diamond industry has long faced challenges around fraud relating to the certification of diamonds, which can dictate the value of one diamond over another. Blockchain technology allows for the recording of diamond certification and for that information to be immutable and shared between insurers, law enforcement, and those who are filing claims. For the real estate sector, title fraud is also a rampant problem. By recording property titles using blockchain technology, title insurance companies can save millions each year fighting title fraud, because titles become permanent and in historical record once they are part of the blockchain. There are other pending applications for medical technology (such as sensitive patient medical information) and the credit ratings industry as well.

What’s next?

Blockchain technology has been gaining attention for some time, and several industry consortiums have developed to track and innovate with the technology and identify applications for it in business. Just a segment of these groups includes R3 and Chain, two consortium groups, and consulting specialist groups such as SolidX. Ultimately, it will take many factors to determine the applications and use cases of blockchain technology in the coming years, but it has become a promising mechanism for data management, record-keeping, and payment processing in its early stages.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

How blockchain can be a force for good in the developing world

Blockchain is a digital architecture most commonly known as the technology behind bitcoin, the virtual currency. A number of its applications have particular relevance to the developing world.March 17, 2017 —Anita is an in-home care nurse in the United States. Each month she sends a portion of her earnings to relatives back in the Philippines. These monthly gifts ensure that Anita’s two nieces can afford new clothes and school supplies, that her father can pay for quality healthcare, and that her brothers won’t have to worry about covering the costs of the family farm after an unusually harsh season.

Meanwhile, Anita’s monthly support means serious dollar signs for money transfer companies like Western Union. In 2015 alone, migrant workers sent an estimated $582 billion to relatives back in their home countries. With average fees of around 8 percent for international money transfers, the global remittance market has become a reliable cash-cow for traditional financial institutions.

While a $10 transfer fee might not sound like much, it represents nearly three times the daily cost of food for an entire low-income Filipino household. Thinking of all the uses her family might have for an extra $10 each month, Anita recently decided to switch to Abra, an online money transfer service that uses cutting-edge technology to perform secure transactions without any of the typical fees imposed by financial intermediaries. Abra – like Hong Kong-based OKLink or BitPesa out of Nairobi – is just one of a growing number of international money transfer companies that stand poised to upend the global remittance market by using blockchain, a digital architecture most commonly known as the technology behind the virtual currency, Bitcoin.

But what is blockchain?

In broad strokes, blockchain is a way to securely record transactions in a distributed digital ledger. This distributed ledger shifts the responsibility of verifying transactions from a single trusted authority, like a bank for example, to a shared effort involving every participant in a network. By allowing users to conduct secure transactions with one another directly, blockchain eliminates the need for regulatory middlemen. This allows companies like Abra to save time and money by avoiding the lengthy processing periods and fees imposed by traditional money transfer services.

Even more exciting is that companies like Abra are using blockchain to promote financial inclusion. By allowing unbanked individuals and communities to send and receive cash directly, blockchain-backed transfer services reduce the barriers that keep many of the world’s poor from gaining liquidity. Unsurprisingly, blockchain is rapidly proving to be a powerful force for good in the developing world, and disrupting the remittance market is just the tip of the iceberg. The distributed ledger at the core of blockchain has a dizzying number of applications outside of finance. While national governments have begun experimenting with blockchain-backed land registries, fresh players in the development world have started to explore alternative uses for immutable records and self-enforcing contracts.

Many of blockchain’s potential applications in the development world deal with streamlining internal operations. For example, an Italian startup called Helperbit is using blockchain to rein in the lack of transparency that often hampers disaster relief efforts. By using a distributed ledger to allow donors to monitor the allocation of their funds, Helperbit stands to promote accountability in the nonprofit sector while encouraging would-be donors to get involved. Meanwhile, a host of companies are putting blockchain to work in the field. Provenance, headquartered in London, is using blockchain to shed light on global supply chains and promote socially responsible and sustainably sourced products. A recent pilot study tracked Indonesian yellowfin and skipjack tuna from “catch to consumer” to demonstrate how blockchain can be used to verify sustainability claims and combat rights abuses in the international fishing industry.

Operating in a similar vein, the Brazilian lumber exchange company BVRio recently adopted blockchain backed timber registries to discourage illegal logging operations. The new blockchain registry provides an accessible toolkit for due diligence, encouraging sustainable sourcing in an industry long fraught with violations of environmental law. Like most disruptive new technologies, blockchain has its fair share of critics. Observers in the development sector are right to point out that blockchain’s uses might be seriously hindered by poor energy infrastructure and unreliable internet connections, conditions that frequently affect communities in the developing world.

Still, many of these claims may be overblown. As the market warms and the technology gains traction, blockchain-based services are becoming increasingly accessible to individuals in remote and technologically strained environments. Consider that multiple blockchain-backed currency exchanges can already be operated by SMS alone. With a little instruction, someone in sub-Saharan Africa equipped with nothing more than a pre-paid Nokia cellphone can benefit from blockchain.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

But there's a massive backlog of transactions in bitcoin that are waiting to happen. The number of outstanding transactions is up more than four times from just six months ago, according to data from bitcoin wallet Blockchain. This is bad for a system that has promised fast and cheaper transactions than the traditional financial system.

Because of this, a group called Bitcoin Unlimited has emerged. This faction is suggesting increasing the size of the block which would allow more transactions to be bunched together and processed. Major bitcoin industry players including Roger Ver have backed the plan. But some developers in the community suggest that increasing the block size could be unsafe.

What's this about a fork?

The real concern is if Bitcoin Unlimited gains major support, it could have an impact on the underlying blockchain technology that supports bitcoin. Bitcoin Unlimited has about an 11 percent market share of all the "nodes" in existence. Nodes are the backbone of bitcoin's infrastructure and refer to those mining the transactions as well as those tracking the movement of bitcoin to make sure it is all working correctly.

Nodes can run Blockchain Unlimited software which would signal their support for increasing the block size. If 50 percent of bitcoin miners adopted Bitcoin Unlimited, there would then be two major blockchains and a "fork" would be created made of Bitcoin Core, the current main software behind the infrastructure, and Bitcoin Unlimited. Both blockchains would continue to run as long as there are nodes running them. But there would then be essentially two different coins – Bitcoin and Bitcoin Unlimited.

So why has the price fallen?

And this is why bitcoin has seen sharp declines in price, while other cryptocurrencies like ether have gained support. "Bitcoin traders may have wanted to offset some of their exposure should a fork occur or the scaling deadlock to continue, and ether seems to be the most promising alternative. Bitcoin-ether volumes have surged since and are currently rivaling bitcoin-fiat currency trading liquidity," Aurélien Menant, founder and CEO of Gatecoin, a regulated blockchain assets exchange based in Hong Kong, told CNBC by email on Friday.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

Things to be Learned About Bitcoin From Living On It For A Week

Alan Zibluk – Markethive Founding Member

This has been a big week for Bitcoin. On Monday, the Senate Committee on Homeland Security and Governmental Affairs held the first-ever Congressional hearing on Bitcoin. Later in the day, the currency's value reached an all-time high of more than $800. That has left a lot of people scratching their heads. What's Bitcoin? How do you use it? And why would anyone want to? Read on for answers. (Inspired by Max Fisher's classic explainer on Syria)

What's Bitcoin?

Bitcoin is an online financial network that people use to send payments from one person to another. In many ways, Bitcoin is similar to conventional payment networks like Visa credit cards or Paypal. But Bitcoin is different from those and other payment networks in two important ways. First, Bitcoin is decentralized. For-profit companies own the Visa and Paypal networks and manage them for the benefit of their respective shareholders. No one owns or controls the Bitcoin network. It has a peer-to-peer structure, with hundreds of computers all over the Internet working together to process Bitcoin transactions.

Bitcoin's decentralized architecture means that it is the world's first completely open financial network. To create a new financial service in the conventional U.S. banking system, you need to partner with an existing bank and comply with a variety of complex rules. The Bitcoin network has no such restrictions. People don't need anyone's permission or assistance to create new Bitcoin-based financial services. The second thing that makes the Bitcoin unique is that it comes with its own currency. Paypal and Visa conduct transactions in conventional currencies such as the U.S. dollars. The Bitcoin network, however, conducts transactions in a new monetary unit, also called Bitcoin.

That seems really weird! Why would anyone use a payment network based on an imaginary currency?

It is weird. Almost everyone who encounters the idea for the first time (including me) has the same reaction: That can't possibly work. But so far the market has proved the skeptics wrong:

 

This graph shows the price of one Bitcoin since the start of 2011 when the currency began to adopt mainstream attention. The price has been extraordinarily volatile — it lost more than 90 percent of its value between June and October 2011, for example. But there's also been an unmistakable upward trend. Notice that the chart is on a logarithmic scale. It shows the currency's value rising from around $0.30 at the start of 2011 to around $600 today. There are almost 12 million bitcoins in existence, so the Bitcoin "money supply" is now worth around $7 billion.

Bitcoin has captured the imagination of venture capitalists. A startup called Bitpay, which processes Bitcoin payments on behalf of vendors, raised more than $2 million earlier this year. Coinbase, a startup that helps consumers buy and sell bitcoins, has raised $5 million. And last month, a Bitcoin startup called Circle raised $9 million. Why are people so excited? Bitcoin enthusiasts believe that Bitcoin's peer-to-peer architecture and low barriers to entry will allow the creation of a new generation of innovative financial services, in much the same way that the Internet's open architecture led to innovative new online services. There are also many Bitcoin fans who see the currency as an antidote to the inflationary tendencies of central banks, though, as we'll see later, this argument for Bitcoin is misguided.

This just sounds like a bubble. Do people use the currency for anything besides speculation?

I just mentioned Bitpay. It provides a good sign of Bitcoin's growing popularity for "real" transactions. In September 2012, the company announced that it had signed up 1,000 merchants to use its service for accepting Bitcoin payments. Just a year later, the company said, it passed 10,000 merchants. Bitpay works with a wide variety of merchants. Some sell online services like Web hosting or virtual private networks. Others sell jewelry and electronics. There are even restaurants and cupcake shops that sell their wares for bitcoins.

And yes, Bitcoin has significant illicit uses. Programs like Satoshi Dice allow people to gamble online. Until recently, a Web site called Silk Road helped dealers sell millions of dollars of illicit drugs. It's hardly unusual for new payment technologies to attract illicit use. Pornography was a big draw for both the first VCRs and the early consumer Internet. New payment technologies often attract criminals looking for new ways to move their funds without government scrutiny.

Another application for bitcoins that is expected to become more important in the future is international payments. Right now, wiring money internationally involves slow, expensive and inconvenient services like Western Union. Bitcoin is international, and its fees can be much lower than conventional wire transfer services. There's still work to be done to make such a system affordable and user-friendly. But it has the potential to disrupt the international payment industry.

Who created Bitcoin?

No one knows for sure. The currency was created by a person who identified himself as "Satoshi Nakamoto." While the name sounds Japanese, Bitcoin's creator never provided any personal details. He collaborated with other early Bitcoin fans through online forums but never met with other members of the Bitcoin community face to face. Then, starting in 2010 he gradually reduced his involvement in the currency's development. His last known communication came in 2011.

We don't know who Satoshi Nakamoto is, but we do know that if he ever surfaces, he will be an extremely wealthy man. Millions of bitcoins were created in the currency's first two years, and Satoshi likely owns hundreds of thousands of them. At today's prices, he would be a millionaire many times over. Before leaving the scene, Nakamoto passed his torch to a mild-mannered developer named Gavin Andressen, who is currently the project's lead developer. Andressen now works under the auspices of the Bitcoin Foundation, the closest thing the anarchic Bitcoin community has to an official public face.

Where do bitcoins come from?

In a conventional financial system, new money is created by a central bank, such as the Federal Reserve. But the Bitcoin network doesn't have a central bank. So the system needed an alternative mechanism for introducing currency into circulation. Bitcoin's designer solved this problem in a clever way. As I said above, hundreds of computers scattered around the Internet work together to process Bitcoin transactions. These computers are called "miners," and Bitcoin's transaction-clearing process is called "mining." It's called that because for every 10 minutes, on average, a Bitcoin miner wins a computational race and gets a prize. Currently, that reward is 25 bitcoins, worth around $12,500. These prizes provide a strong incentive for more people to join in Bitcoin's transaction-clearing process, helping the currency to remain decentralized.

This reward declines on a fixed schedule: Every four years the reward falls by half. So, from 2009 to 2012, it was 50 BTC, now it's 25 BTC, and starting in late 2016 it will fall to 12.5 BTC, and so forth. If you do the math, you'll find that there will never be more than 21 million bitcoins in circulation. Right now, there are almost 12 million bitcoins in circulation, so the Bitcoin money supply will never be more than twice its current size.

Isn't that a huge problem? I learned in economics class that deflation can cause economic problems.

It's true that deflation has traditionally been associated with economic problems, but there's little reason to think this will be a problem for Bitcoin. That's because deflation is only a problem if it is what economists call a "unit of account" for a nation's economic system. Right now in the United States, salaries, mortgage payments, rents and other long-term financial commitments are priced in U.S. dollars. As a result, if the value of the dollar rises unexpectedly, these "sticky prices" can cause severe economic distortions. Unable to cut wages, employers have trouble making payrolls. Unable to renegotiate their debts, homeowners have trouble making their mortgage payments. Tenants get stuck with rents they can't afford. The result is a recession.

Hardly anyone uses Bitcoin as a unit of account. You'd be insane to sign a contract promising to repay a loan of 100 BTC in 10 years or to take a job where your salary was priced in bitcoins. Even the Bitcoin Foundation, which pays its employees in bitcoins, still sets its employees' salaries in dollars, converting employees' dollar-based salaries into the corresponding number of bitcoins on each payday. As a result, fluctuations in the value of bitcoins don't cause the kinds of economic disruptions that fluctuations in the value of traditional currencies do.

How do I get bitcoins?

One option is to mine them yourself, but that's not a good choice for beginners. For everyone else, your best bet is to purchase them with a conventional currency. Web sites known as exchanges will let you trade bitcoins for conventional currencies with other users. Even more convenient are companies like Coinbase, which will withdraw cash from your bank account and convert it to bitcoins at the current exchange rate. A few Bitcoin ATMs are popping up, which will directly trade paper money for Bitcoins. Here's a video of someone using a Bitcoin ATM in Vancouver:

Okay, I bought some Bitcoins. Now what?

Next you'll need a place to store them. Bitcoins are stored in "wallets," which in this case are just files that contain encryption keys, or secret codes that allow you to transfer your bitcoins to other people. There are several options. One is to store them yourself using one of the Bitcoin programs available for Mac, PC and Android. Another option is to entrust them to a third-party Web site known as a "online wallet." A third option is what's known as a "paper wallet," where you print out your encryption keys and store them in a safe place, such as a safe deposit box.

Each has risks. If you choose to store your bitcoins yourself, then you could lose them to a hacker, a hard drive crash or a lost mobile device. But if you choose to use a third party, you need to worry about that third party swindling you or becoming bankrupt. The Bitcoin market is largely unregulated, so there are few legal protections if you happen to choose the wrong online wallet service. Paper wallets avoid the pitfalls of other methods, but they're tricky to set up correctly, and of course you're out of luck if you lose the piece of paper.

Okay, I have some bitcoins and found a secure way to keep them. What do I do with them now?

There are thousands of Bitcoin merchants online who will sell you everything from jewelry to electronics to illegal drugs. You can also spend bitcoins in "real life." To spend them in person, you need a Bitcoin mobile app. Generally, the store you're buying from will show you a QR code representing the Bitcoin transaction. You then scan that QR code with your phone, and the mobile app will send the required number of bitcoins to the store. Then you walk out the door with your purchases.

Of course, right now the options for face-to-face Bitcoin transactions are rather limited. Earlier this year, Kashmir Hill of Forbes lived on Bitcoin for a week. Because she lived in tech-savvy San Francisco, she was able to find enough Bitcoin-accepting merchants to get by, but just barely. So Bitcoin is far from being a practical currency for day-to-day use.

Should I buy bitcoins?

Probably not. There are two reasons you might want to buy bitcoins: to purchase goods and services or for speculation. Right now Bitcoin isn't a very practical payment technology for ordinary users. The software is too complicated, and the risk of loss due to hackers, forgotten passwords, hard drive failures and so forth are too large. Also, Bitcoin is extremely volatile right now, so your wallet could go from having $100 worth of Bitcoins one day to $50 the next. And right now, as Hill discovered, the technology just isn't used widely enough to make it a useful option to have in your pocket or purse. For most people, conventional payment technologies like credit cards are going to be more convenient.

What about speculating on Bitcoin? Once again, the currency probably isn't a good choice for ordinary users. The security and reliability risks of Bitcoin loom much larger if you invest thousands of dollars in the currency. You don't want to run the risk of losing thousands of dollars because you forgot a password or had an unexpected password failure. And the currency is extremely volatile. It might keep going up, but it could also lose 90 percent of its value next week. In other words, you should only jump on the bandwagon if you have a strong stomach.

If people shouldn't buy bitcoins, then what is all the fuss about?

Once again, the analogy to the Internet is instructive. Until the 1990s, the Internet wasn't a practical technology for ordinary folks to use, either. It used complicated text-based programs, and you had to be a computer expert to use it effectively. But it would have been foolish for an observer in 1990 to dismiss the Internet as too nerdy for mainstream use. Over time, entrepreneurs took the basic infrastructure of the Internet and built innovative and user-friendly online services such as Google, Facebook and YouTube.

Bitcoin boosters are betting that the same will happen with Bitcoin. The "raw" bitcoin network isn't very accessible, but startups like Coinbase and Bitpay are slowly fixing that. Some day soon, someone may develop Bitcoin's "killer app," a program that provides a financial service that has clear advantages over conventional banking. That might be an international money-transfer network with lower fees, a practical system for online micropayments, or something else that no one has thought of before.

Could bitcoins ever replace conventional money?

It's possible, but it doesn't seem very likely. People want to use the currency that most other people use, and in the United States that's going to be US dollars for the foreseeable future. And that's a good thing: if Bitcoin became the standard currency of the US economy, then its fixed money supply would create a serious risk of the next economic downturn snowballing into a depression.

However, there could be a lot of room for Bitcoin to complement conventional financial networks. After all, Paypal gained traction because the conventional financial networks of the day weren't meeting all of users' needs. Bitcoin's open architecture could allow it to be even more disruptive. People are unlikely to ever eschew conventional financial networks altogether, but there could be a substantial market for Bitcoin-based services that perform certain services more effectively or affordable than conventional alternatives.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

Whether we consciously think about it or not, banks are intertwined with our lives. We need them, but more importantly, they need us. It’s something to consider, given that there are times the banking industry can sometimes be frustrating, to say the least. Although startups like Simple are trying to bring a friendlier face to banks, it is the underlying system itself that is resistant to change. When faced with the emergence of something like bitcoin, it is worthwhile paying attention to how the banking industry behaves. Many who are working towards building a bitcoin economy believe that banks will need to change.

Risk versus reward

Banks by their nature are always looking to reduce their exposure to risk while balancing out profits from making loans as well as investments on their clients’ behalf. As it stands right now, bitcoin must seem infinitesimal compared to a bank's regular business operations that it is probably not worth contemplation.

Gareth MacLeod, who is a co-founder of Canada-based Tinkercoin, has been able to convince a bank to do business with his company.

“Banks are conservative institutions”, MacLeod says. “From their perspective, they stand to gain very little from working with bitcoin businesses, and stand to lose a lot. Even the largest bitcoin businesses would represent only a few hundreds of thousands of dollars of revenue to a bank, which is pennies to them.”

Global credit card fraud is on the rise. For payment processors, bitcoin could just complicate things. Tinkercoin has experienced rejection by a major credit card company, which is not surprising given that fraud protection is a standard accouterment to possessing plastic. “Their potential losses are in the tens of millions if the business is subject to fraud, or the business runs afoul of the regulators.” MacLeod’s experience with banks and financial companies gives an outsider some perspective on the challenges working hand in hand with the savings & trust down the street.

The onus is on bitcoin companies

The case for bitcoin may be that the companies building bitcoin businesses will simply have to find ways to comply with financial regulations before regularly interfacing with banks. Coinsetter, a bitcoin-based trading platform that bears more resemblance to currency trading than that of Mt. Gox, is geared towards that view. The CEO of Coinsetter, Jaron Lukasiewicz, has had numerous conversations with banks and is certain that the path forward is complete compliance from the start.

Coinsetter’s trading platform, still in beta, allows for investment strategies like margin trading.

“Bitcoin companies, especially exchanges, can succeed by creating strong AML programs before entering into discussions with banks”, says Lukasiewicz. “The more they can guarantee that bitcoins aren’t being sent to bad places, the better.”

In terms of entrepreneurship, this is a vastly different strategy to employ when compared to a regular startup. As anyone who has started a business or worked in a bootstrapped entity, it’s all about doing whatever it takes to get off the ground. With bitcoin, it’s going to be different: if you don’t have the right rules in place from the beginning, there is a risk that you will get shut out of the system and possibly fail.

A guaranteed market

Again, a bank’s propensity to do business with a particular person or entity comes down to risk. It may be that a maker will need to guarantee a market for bitcoins. Remember when Mt. Gox couldn’t handle the trading on its own platform and had to shut down for 12 hours? Banks do not want something like that to happen. Ever.

On April 11, 2013, Mt. Gox suspended trading on its exchange for 12 hours. Banks do not want something like this to occur. John Paul Engel, who runs the boutique management consulting firm Knowledge Capital, believes that a big player in finance is going to have to get involved in decentralized currencies. Only then will bitcoin become legitimized in the eyes of credit card companies, payment processors, and the local thrift. A respected market maker would have to step up and guarantee a market in bitcoins.

Engel believes some institutions will need to “effectively provide a bid (buy) and an ask (sell) spread on a constant basis. The organization would need to have the credibility and the resources to guarantee it. Someone like a Goldman Sachs or Berkshire Hathaway. Someone with deep enough pockets to ensure the float.” Goldman Sachs being a bitcoin market maker? It sounds like something from fiction, but it’s probably closer to reality than ever before.

Banks have two choices

Banking innovation in financial services as a result of bitcoin is likely to take some time. The process that the banking industry goes through to enact any sort of change is slow and calculated. It all goes back to that risk versus reward proposition. Financial institutions have little incentive to “fail fast”, a common method of moving forward in an entrepreneurial or startup scenario. It's what bitcoin startups would prefer to go through in order to develop products and services, but is not realistic.

Many banks are fearful that the sector is about to go through wrenching change. At this point, it appears that banking may have reached a fork in the road. They likely have two choices. Institutions could begin to work within the new, continuously evolving framework of digital money. That would require them to start by recognizing that there is a shift in financial technology and embrace that movement.

Or, they could put a friendly face on an old system. That would be the route that is being put forth with products like Simple. This is whereby a contemporary type of interface masks the traditional, antiquated banking system that is running in the background. We’ll probably end up seeing different banks choosing different routes depending on their attitude of disruptive tech like bitcoin. What do you think about banks working with bitcoin companies? Is it fair that banks don’t want to do bitcoin-based business? What do you expect banks to do when faced with the proposition of decentralized virtual currencies?

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

Hard Fork Will Slow Bitcoin Price Down

  

With the ETF decision out of the way, the focus in the Bitcoin community has turned back to the scaling debate. While some proponents of an increase in block size are in favor of a hard fork, South African Bitcoin entrepreneur Vinny Lingham feels that this would negatively impact Bitcoin.

Scaling arguments

The Bitcoin network seems to be choking at the moment, with unconfirmed transactions piling up, transaction fees shooting through the roof and a general sluggishness across the network. Microtransactions have more or less ended, with high transactions fees making them unviable. Everybody agrees that there is a problem but unfortunately, consensus eludes the Bitcoin community on what the solution should be. The Core team believes that retaining block size at 1 MB is crucial to maintaining the distributed nature of the Bitcoin network, while others advocate increasing the block size to increase the network capacity.

Bitcoin Unlimited

Bitcoin Unlimited (BTU), which seeks to transfer power to decide on the block size to the miners, has emerged as a frontrunner to handle this problem. The proportion of nodes who have “signaled support” to Bitcoin Unlimited has increased steadily to over 30 percent. It has overtaken SegWit, currently backed by the Bitcoin Core team, which has 28 percent of nodes supporting it.

The increasing support for Bitcoin Unlimited has had some unintended consequences, with a bug in the software (since rectified) resulting in a number of codes crashing and doomsday scenarios being predicted if Bitcoin Unlimited becomes successful. Once the number of miners signaling support for Bitcoin Unlimited crosses 50 percent, it is possible for a miner to generate a block size greater than 1 MB, thereby forking Bitcoin.

Why is Vinny Lingham against a hard fork?

Vinny Lingham believes that Bitcoin has the potential to reach $3000, only if there is no hard fork.

“Danger on the horizon. If Bitcoin forks, all bets are off and we can kiss $3k BTC in 2017 goodbye…”

Vinny believes that Bitcoin’s greatest asset is its brand awareness, which will get diluted if there is a hard fork. It could lead to confusion for the common man of which Bitcoin is the real one. Merchants might avoid both BTC and BTU because of the confusion. It could also result in rival factions dumping both versions of Bitcoin at exchanges, thereby depressing the price.

Vinny points out to what happened to Ethereum Classic when the Ethereum Foundation sold off their coins. Moreover, the network effect would decrease with users divided between BTC and BTU, thereby lowering the overall value of Bitcoins in circulation. While the block size debate has sharply polarized the Bitcoin community, working together would be the only way to ensure that Bitcoin’s value is not destroyed.

Bitcoin Price Shrugs Off Bitcoin

 

Bitcoin’s price remained stable as news surfaced of a bug in Bitcoin Unlimited (BU) shutting down half of its nodes. On Tuesday, BU’s node numbers dropped suddenly from around 800 to 400, with developer Andrew Stone and investor Roger Ver subsequently confirming that an attacker exploited a bug in the protocol.

 

Stone wrote on Tuesday:

“We are seeing an abnormal, hard-to-create input result in a negative outcome so we are classifying this as a network attack.”

The events unleashed a frenzy of social media activity which even engulfed some of cryptocurrency’s best-known names. Core developer Peter Todd took to Twitter to deny any involvement in the bug, about which he tweeted an hour after the malicious episode began. Responding to Todd, tech blogger Avatar X alleged that fellow developer Greg Maxwell had said that two further bugs were present in BU which had “yet to be fixed.” Meanwhile, received hostility. One BU node operator accused him and other responsible parties of “plain incompetence” as panic gripped a community to whom Ver had only last week unveiled a brand new mining pool.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

Someone Wants to Stick a Fork in Bitcoin

 

Which bitcoin will prevail?

A dispute among the people involved in bitcoin is revealing a paradox of the digital currency: The same resistance to human meddling that drove its popularity may also be its greatest limitation. It seems that the only way to get anything done is to split the currency in two.

At issue is the size of blocks, the batches in which transactions are processed and that make up the links in the so-called bitcoin blockchain. Currently, they’re so small that the whole system can handle only about seven transactions per second — nowhere near enough to compete with, say, Visa network’s 24,000 transactions per second. Some people think that’s a good thing! Bitcoin relies on thousands of internet-connected volunteers, and their operating costs should be kept as low as possible.

On the other hand, many are unsatisfied with the system’s speed. A faction known as Bitcoin Unlimited has released a new version of the software that can create bigger blocks and is now rallying the support of bitcoin miners, who process transactions in return for new currency. The plan is to gain enough minor support to build its own branch-off the chain. Meanwhile, the computer geeks who develop the core bitcoin software have offered their own solution, which not only increases capacity but also enables the creation of low-value payment channels adjacent to the main network — the idea being that people might not need every coffee purchase immortalized on a globally distributed ledger.

Bitcoin and the Blockchain

The standoff illustrates a vulnerability. Because bitcoin relies on a worldwide network of individual computers to maintain the blockchain, one group can — intentionally or not — become separated from the rest. The two networks will thus accumulate different information, creating competing chains. If the “fork” is unintentional, the networks eventually reconnect and discard the lesser chain. But if the fork is intentional, as in the case of Bitcoin Unlimited, it can continue forever.

The insurgents’ software will eventually disconnect from anyone who doesn’t support their blockchain. The most troublesome part is that both sides want to assume the identity of bitcoin. This would be like the Confederate states seceding from the Union, then insisting that they were the real United States and that the northern states had voluntarily left. Ultimately, it will be up to individual users to either choose one chain or recognize both as legitimate currencies.

This is one reason it’s so hard to tame bitcoin by, say, creating an exchange-traded fund so regular investors can get a piece of the action. The ETF filing for the Winklevoss Bitcoin Trust actually includes a provision specifying which bitcoin network it will support in the event of a split. Another ETF filing for Grayscale’s Bitcoin Investment Trust acknowledges that the fund will end up with equal values of two types of bitcoin, and must select one to keep in the fund. Thus far, Bitcoin Unlimited has secured support from the world’s largest mining operation, as well as adoption from about 10 percent of the bitcoin network. Unfortunately, the campaign suffered a minor setback this week thanks to a software bug:

Past rebellions have eventually faded. To make a credible attempt at a coup, Bitcoin Unlimited must recruit major exchanges, wallets, and other service providers. It’s not easy: People who treat their digital currency as real money tend to be risk-averse when it comes to new software. Even the developers of core bitcoin have not yet gained enough support to activate their upgrade. While the impasse might be aggravating for those who find bitcoin transactions too sluggish, it’s far better than a blockchain that is too easily modified. After all, immutability is supposed to be a feature, not a flaw.

1. Incidentally, larger block sizes increase the risk of such partitions because nodes need to transmit more data to make sure everyone has consistent information.

2. After a fork, the chain that is kept is the one that took more computational effort to create. It’s often the longer one, but not always.

3. From the Winklevoss Bitcoin Trust S-1: “In the event of an upcoming modification to the Bitcoin Network that could potentially result in a hard fork with two separate and incompatible Bitcoin Networks, the Custodian, in consultation with the Sponsor, will elect to support the Bitcoin Network that has the greatest cumulative computational difficulty for the forty-eight (48) hour period following a given hard fork, in order to engage in bitcoin transactions and the valuation of bitcoin.”

   From the Bitcoin Investment Trust S-1: “If a permanent fork, similar to Ethereum, were to occur to bitcoin, the Trust would hold equal amounts of the original and the new bitcoin as a result. In consultation with the Index Provider, the Sponsor would select a Bitcoin Network (and therefore a single version of bitcoin). The Sponsor would simultaneously isolate the bitcoin on the Bitcoin Network that it did not select to segregate it from the Trust’s Bitcoin Holdings. The Sponsor’s intention would be to distribute to its Shareholders the bitcoin on the Bitcoin Network that it did not select.”

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member