Reflections on Bitcoin

Posted by John Patrick on

Bitcoin machine

The value of Bitcoin has been volatile and recently declining. The purpose of this post is to reflect on the possible reasons and an opinion on where things are headed. My friend and former IBM colleague, Irving Wladawsky-Berger posted his reflection on Bitcoin last week. As usual, Irving did not shoot from the hip; he read the opinions of others and developed a thoughtful point of view. I cannot disagree with Irving, but I may be a bit more optimistic. No one can deny that Bitcoin may go the way of Napster or Webvan.  However, I continue to feel that Alan Meckler’s comments in December 2013 that Bitcoin has all the “trappings” of the early days of the World Wide Web were prescient.

Why has Bitcoin appeared to stumble? I would say it is mostly due to a temporary lack of confidence. When people are less than confident in the U.S. economy and its currency (or any of the global fiat currencies), holders of the dollar sell and the price relative to other currencies declines. What caused the lack of confidence in BTC? In large part, it has been the problems at Mt. Gox, based in Japan, is one of a number of exchanges that allow users to exchange Bitcoins for U.S. Dollars or other currencies. Technical problems prevented Mt. Gox from being able to properly and timely handle customer requests, particularly to sell a portion of their BTC holdings. Mt. Gox initially blamed the problem on the BTC infrastructure or protocols. This would certainly cause a lack of confidence. Mt. Gox later admitted that the technical problems had to do with how Mt. Gox had implemented the BTC protocols, not with the protocols themselves — a very big difference. Nevertheless, when the baby stumbles, some parents wonder if their is something wrong with the baby. The same thing happened in the early days of the Internet.

In the early 1990s, IBM had a proprietary network technology called systems network architecture (SNA). Most global enterprises used the SNA software (called VTAM) and it generated nearly a billion dollars in annual revenue for IBM. The executive in charge of that line of business pointed to the weaknesses of the Internet protocols (TCP and IP) and highlighted why SNA was superior. SNA was a deterministic network protocol. When a company sent data via SNA, there was a 100% assurance that the data would get to the desired destination. TCP/IP is a probabilistic network protocol. That meant that when you sent a packet of data, the data would “probably” reach the intended destination, but not always. In the twenty years since I attended Internet World in 1994, the technology industry, via guidance from the Internet Engineering Task Force (IETF),  has developed numerous enhancements to TCP/IP to make it faster and more reliable. In 1995, IBM made a company-wide commitment to support TCP/IP for every hardware and software product it produced. It then bet the company on e-business.

The Bitcoin Foundation is not as comprehensive as the IETF, but it is attempting to standardize, protect, and promote the use of Bitcoin cryptographic money for the benefit of users worldwide. The Foundation says that it is determined to keep Bitcoin rooted in its core principles: non-political economy, openness, and independence. They hope to advance standards and security, with a goal to act as both an organizing body for Bitcoin and be inclusive of the general Bitcoin community. Sounds very familiar to 1995 to me. The board of the foundation consists of people I never heard of — they all look younger than my children. Most people could have said the same thing about the IETF back in the early days.

Will Bitcoin succeed? Irving summarized his view by saying “It remains to be seen whether the resulting platform will still be called Bitcoin or something else will have taken its place.” As I said at the outset of this post, I cannot disagree, but I am hopeful and believe that if confidence is restored (seems to be happening) and the grass roots continues to expand (definitely happening), BTC will be successful and an important piece of the future. I see BTC as more than a currency. The Motley Fool had an interesting article about 3 Game-changing Uses for Bitcoin that Have Nothing to do with Money. I buy-in to their story and see BTC as a platform that has the potential to provide Internet-based processing of payments, contracts, securities, wills and trusts, and much more.

During April 7 & 8, Mediabistro Inc., where I am a director and investor, will be presenting a trade show called Inside Bitcoins at the Javits Center in New York City. The event could be significant, and expected attendees include developers; entrepreneurs;  financial professionals, private equity, corporate, angel, and venture capital investors; banks and financial institutions; brick-and-mortar merchants and online retailers, founders of early stage and emerging growth companies, and numerous other interested professionals. I plan to attend and look forward to gaining further insight to the future of Bitcoin.

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