www.forbes.com/sites/saranyakapur/2013/0...-first-u-s-exchange/
Bitcoin Ready To Go Mainstream With First U.S. Exchange
Recently armed with $500,000 in seed funding and a partnership with Silicon Valley Bank, Coinlab, a startup based out of Seattle, is bringing its innovative Bitcoin project closer to the U.S. market.
Considered the domain of nerds, conspiracy theorists and shady internet characters the move could push Bitcoin more mainstream.
Bitcoin is a crypto-currency; a decentralized, open source, peer-to-peer network based medium of exchange that for years has enabled online transactions to be made more simply and securely. Bitcoin also has its dark side, its anonymity allowing users to make purchases of contraband online.
The deal brings over the North America-based book of Mt. Gox, one of the largest and most widely used bitcoin to currency exchanges. According to Coinlab CEO, Peter Vessenes, the book is worth nearly $500 million in annualized trade volumes, which he expects to grow nearly ten times over the next year.
Silicon Valley Bank, a company that provides financial services to emerging growth companies, will be holding deposits of bitcoin and dollars for Coinlab. However, they will not be providing insurance for these deposits. The move will allow North America-based Mt. Gox users to directly convert money from dollars to bitcoin, without having to pay the hefty transaction fees associated with transferring money abroad.
Vessenes believes that the inherent appeal of bitcoin lies in the fact that you don’t have to deal with a company to make transactions. He says, “For example, if you get a lot of donations in a short period of time, PayPal will arbitrarily freeze your account. This wouldn’t happen with bitcoin.”
Another reason for bitcoins’ popularity is the fact that it is a “deflationary currency.” Unlike dollars, bitcoin does not have a central issuing authority; an algorithm on the bitcoin network allows their supply to slowly increase. They are distributed to bitcoin ‘miners’ who solve complex mathematical problems that are expensive or time-consuming to solve and require a lot of trial and error. As the bitcoin network has expanded, these problems have become harder and harder to solve, with one ‘block’ of bitcoin requiring over a million times more work than it did when bitcoin was first beginning to gain popularity.
But like any other market, bitcoin markets are also subject to speculations and panics. In 2011, the value of bitcoin crashed from $13.50 to pennies, as a panic about hacked bitcoin accounts led to a selling spree.
Vessenes believes that while the vagaries of the market can never be fully controlled, the bitcoin market has matured since 2011 and now has enough demand and liquidity to weather short-term crashes. Last Thursday, a user sold half a million dollars worth of bitcoin which led to the price careening downward, but the market soon rectified itself and the price has been climbing ever since.
And as the use of bitcoin has risen in popularity, it has received increasing mainstream attention. While Anonymous, the vigilante hacking group, has always accepted donation in Bitcoin, more mainstream websites like Reddit and online gambling sites have increasingly begun to accept bitcoin as a means of simplifying their online payment methods.
Investment banks and traders have also allegedly jumped on the bandwagon, if only to reap the spreads from the highly volatile bitcoin market. A Reuters report from late last year claimed that traders at Morgan Stanley and Goldman Sachs visited online Bitcoin exchanges nearly 30 times a day.
As bitcoin goes more mainstream, its markets could become deeper and less volatile, thus making it a better investment. But don’t go running to buy bitcoin just yet. Research conducted by Adi Shamir, one of the pioneers of the RSA algorithm for public-key cryptography which forms the basis of online security today indicates that bitcoin markets indicated that all the large bitcoin transactions over the past few years seem to have the same originating source, related to a single large transaction that took place in November 2010.
The research, sponsored by the Citi Foundation, found that not only was it possible to track down bitcoin “addresses” and relate them with previous transactions made by the same address (thus compromising the idea of “anonymity” that many bitcoin users cherish) but also that while bitcoin markets may seem to have gotten deeper, liquidity in the market may simply be driven by a few large players in the market buying and selling bitcoin from multiple addresses.
Yet, Vessenes remains optimistic. He believes that the inherent simplicity of using bitcoin for online transactions will lead to it becoming more popular. “When I go out to coffee with my friends and someone pays, we pay each other back in bitcoin,” he says. “I can pay my friends in, say, Pakistan, easily and immediately. Just try it, buy yourself a few bitcoin online and make a payment using them. You’ll see the difference yourself.”
