The price of bitcoin topped $500 last week, and some hailed the moment as a turning point for the seven-year-old digital currency. “We may well look back on this,” said one pundit, “as the time that changed everything for bitcoin.”
Then the price dropped again, and some said it had climbed so high only because of some bitcoin-powered Chinese pyramid scheme. Yesterday, the price stood at $311. That’s about $800 below its high point in late 2013, just before Mt. Gox, the world’s largest bitcoin exchange, completely imploded amid claims that hackers had broken into its systems and stolen more than $460 million in customer funds. “The question prompted by the recent movement in bitcoin is whether it marks a resurgence for the cryptocurrency,” wrote The FT, “or merely highlights its turn in the endless parade of get rich quick schemes.” Fair question.
But for Brian Armstrong—the CEO of Coinbase, today’s dominant bitcoin exchange and a company with the backing of some very big Silicon Valley players—the price of bitcoin (see graphic above) isn’t the best way of judging the health of the digital currency. “Sometimes, I feel like running a bitcoin company must be like running a public company,” he says. “Everyone is so focused on the price, and that causes short-term thinking.”
A better barometer, he says, is how much the world is using bitcoin (see graphic below). And that figure continues to rise. Bitcoin usage has risen pretty much steadily since the brief dip it took in the wake of the Mt. Gox implosion. In fact, last week, as the price of bitcoin topped $500, the usage rate reached an all-time high, after roughly doubling over the past twelve months. “The real usage is catching up to the hype,” Armstrong says.
Armstrong’s point is that for people like him—and companies like Coinbase—the ultimate aim is to turn bitcoin into something that anyone can use to more easily store, send, and receive money. “We want the world to have an open payment network,” an Internet for money, he says. And, well, the price of bitcoin may not have much to do with that. Yes, bitcoin is also a means of speculation, a way of making money from money. And according to Peter Van Valkenburgh—director of research at the Coin Center, a non-profit dedicated to bitcoin public policy issues—the recent price fluctuations are likely driven by such speculation. But this is only part of the bigger bitcoin story.
More Bitcoins Moving
To be sure, that graph showing the rise in bitcoin activity doesn’t necessarily mean that lots of people are actually using the digital currency to pay for stuff like socks and food and apps. In early 2014, Overstock.com started accepting payments in bitcoin—becoming the largest online retailer to do so, and nearly two years later, bitcoin transactions account for only about 0.05 to 0.1 percent of the company’s sales, according to company spokesperson Judd Bagley. Armstrong’s graph shows the total number of transactions on the bitcoin network—the worldwide network of Internet machines that drives the digital currency—and that includes any movement of bitcoin from one place to another, not just people paying for goods and services.
“With basic payment applications, we do see usage creep up. But it’s important not to be overly optimistic there,” Van Valkenburgh says. “It’s fairly clear that a American consumer—someone in a developed country—has a fair number of ways to pay for stuff already.”
What’s more, a lot of that recent bitcoin activity is probably just, well, speculation. But the fact remains: more and more people and organizations are adopting bitcoin for one reason or another. The big question—and it’s not that far from the question asked by The FT—is whether bitcoin will ever become a mainstream currency, rather than just a trading commodity. We don’t have an answer yet, but there are signs that we’re moving in that general direction.
Money Without Borders
Coinbase says that more than 41,000 businesses and 2.8 million people are using its various services, which include not only an exchange for buying and selling bitcoin, but also digital wallets for storing bitcoin and making payments, as well as tools that let apps and websites accept payments. It’s signing up about 3,500 new users a day, and this rate jumped about 70 percent in the wake of last week’s price rally. And across the pond, European bitcoin payment processor Coinify says its business is growing 30 percent a month, and 600 percent year-over-year—though it doesn’t provide specific user numbers.
Meanwhile, Cameron and Tyler Winklevoss, best known for suing Mark Zuckerberg over the creation of Facebook, recently launched a new bitcoin exchange with approval from regulators in New York and other states. And an exchange called ItBit has received similar approval. Regulators, even here in the U.S., are beginning to embrace the technology in ways they haven’t in the past.
As more and more businesses and people adopt bitcoin, the currency comes closer to Armstrong’s vision of an Internet for money. If you have an open network for money—as opposed to networks controlled by banks and other big companies—we can more quickly and easily build and adopt new financial technologies. “A lot of innovation is blocked today because of the red tape—or hurdles or friction or whatever—that comes with launching a new business and accepting payments or paying money out to people,” Armstrong says.
If bitcoin goes mainstream, it would allow companies to more easily send and receive money across borders. And in the developing world—where online banking and payments aren’t nearly as prevalent as they are here in the States—it gives people a power they wouldn’t otherwise have.
Armstrong’s graph also reflects tools that are using the bitcoin blockchain—the vast digital ledger that underpins the digital currency—to handle all sorts of stuff beyond just money. Overstock, for instance, runs a new company called TØ that’s using the blockchain to handle stock trades, and in recent months, some of the big Wall Street players have followed Overstock’s lead. The Nasdaq is building a system that will use the blockchain to over stock trades in the private market (before companies go public). And the exchange believes the blockchain could be applied to the public market, too.
“The blockchain could have some pretty fundamental and transformative effects on the capital markets,” says Terry Roche, a principal analyst with capital market research firm The TABB Group.
The current trope is that the blockchain will reinvent Wall Street, but that bitcoin as a currency will never quite get there. JP Morgan CEO Jamie Dimon said as much last week. When Armstrong hears such talk, his first thought that the bitcoin’s mindshare is expanding—and that’s a good thing. He very much believes that alternative uses for the blockchain are just a stepping stone to the adoption of bitcoin as a currency.
“They’re making an iterative step,” Armstrong says of Wall Street. “They’ll do a few experiments. Maybe it’ll be a year or two. And they’ll realize that the blockchain is great, but that the biggest use of the blockchain is bitcoin. I still believe, 100 percent, that bitcoin is the future.”
It may or may not be. But as Van Valkenburgh points, the steady rise in bitcoin activity may indicate that many others feel the same as Armstrong. Some are certainly in search of short-term gain, but the wider expansion of the bitcoin community may indicate that many others see it a good bet on the future. They may be speculating because they believe it will indeed become the Internet of money.
“Bitcoin has been in the news a lot as of late, and it has been good news. People will see that and say, basically: ‘I want a cash option on the future of the technology,’” Van Valkenburgh says. “It’s like if you were able to buy a small piece of the Internet in 1994. Would you?”
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