There’s no denying bitcoin, the world’s first decentralized digital currency, had a big year.
Since the beginning of 2017, the value of a single bitcoin rose from $950 to more than $19,000 — pushing the net worth of some of the first investors to embrace “nerd money” into the billions — only to plummet, then jump back up again. As of Jan. 22, a bitcoin was worth $11,500.
What started as a system for making anonymous transactions online has evolved into a commodity as the value of the digital currency has increased. That has led to a shift in what some of bitcoin’s earliest supporters view as the best use for the technology.
In Mobile, Michael Ray has rightly earned the title of “the bitcoin guy.” In 2014, he launched a merchant payment processor for bitcoin transactions called DixieBit and began what was essentially a one-man effort to educate local businesses about the benefits of the new currency.
He also established bitcoin meetup groups in Mobile, Pensacola and New Orleans that also have seen growth as national interest in bitcoin surged. Speaking with Lagniappe, Ray said today those three groups collectively have more than 897 active members.
“There has definitely been an increase in interest in all three of the bitcoin meetups since the recent price spike,” Ray said. “We’re now frequently having to pull up additional tables and chairs to accommodate everyone.”
While the popularity of bitcoin may be growing in the Mobile area, its use in everyday transactions has not. At the height of Ray’s efforts, only a handful of businesses were accepting bitcoin as payment for services locally. Of those still in business, none has continued the practice.
According to coinmap.org, which tracks businesses accepting bitcoin, there are only two in the Mobile area today — Reed’s Jewelers in The Shoppes at Bel Air, though only for online payments, and a local photographer using a third-party service called Airbitz.
Ray said DixieBit still exists as “a latent company,” and though he says he could find a use for it down the road, he said he “miscalculated” when pushing bitcoin as a system of payment for brick-and-mortar stores.
“At the time, I thought it would be a good thing to have a lot of businesses accept bitcoin for foot traffic, but I was the only person who would actually go around and buy coffee with bitcoin,” Ray said. “In hindsight, bitcoin makes more sense for the internet than it does for foot traffic. It’s just easier to use cash or a debit card.”
What’s a bitcoin?
Ray’s experience in Mobile isn’t unique. Even among businesses accepting bitcoin, most do so for online purchases but not at the point of sale. That is due, in large part, to a problem at the very heart of the program itself.
With no centralized bank, government or a trusted third party to verify the transactions, that task is distributed across a vast computer network of users on the bitcoin system as individual transactions are requested.
Those users — or more specifically their computers — compete with one another to authenticate and encrypt those requested transactions before grouping them into what’s called a block. Each block of approved transactions is then added to the blockchain, which is a public ledger recording every bitcoin transaction since the program was created in 2009.
Unlike ledgers recording cash or other transactions, the blockchain is the only place unspent bitcoins technically exist. And because thousands of users have the same, automatically updated copy of that ledger, it is functionally fraud proof.
“If you’re playing a game of pickup baseball and you hit a base hit and run straight to third, everyone is going to say, ‘you can’t do that,’” Ray said. “What keeps bitcoin honest is that it’s sort of like the world’s largest, real time, all-the-time audit. Everybody on the network is watching every transaction, and if anybody doesn’t play by the rules, that transaction will just be ignored.”
Verifying, encrypting and updating those transactions is also what generates bitcoins, which users receive for performing that work. It’s referred to as “mining” and those who do it are called “miners,” the way gold — something bitcoin is often compared to — is mined from the earth.
However, not only does this process take time, it increasingly costs more money.
Because there are only so many miners and a limited number of transactions that can fit within a single block, many prioritize transactions by the fees they receive. The higher the transaction fee, the more likely a miner is to process it in the block he or she is configuring.
This has actually been exacerbated by bitcoin’s growth because the more transactions there are to process, the longer each one takes and the higher transaction fees can rise. Ray said the increase over the past few months has made bitcoin “highly prohibitive for smaller purchases.”
However, developers have been testing a “lightning network” that could improve transaction speeds and make micropayments possible by postponing the validation of smaller transactions, which would typically occur in real time, by taking them offline and adding it to the blockchain later.
“I was at the Silicon Valley Bitcoin Meetup back in 2014, when someone on the microphone asked, ‘who in this room has lost Bitcoin?’ Just about every hand in the room, mine included, went up in the air,” Ray said. “He went on to say that, until the people developing the tools of the bitcoin ecosystem could build tools that were easier and more intuitive to use, bitcoin was going to have limited application.”
While Ray says there have been many improvements over the past few years, he acknowledges quirks in the system created a painful side story to bitcoin’s giant price leaps last fall — sudden millionaires with no way of accessing their fortunes.
In a world where most money, even good ol’ United States currency, seems to be managed digitally, it can be tough to believe something like that is even possible. It can help to understand the differences between what bitcoin started out as and what it has grown into.
For Ray and other longtime supporters, bitcoin’s biggest value isn’t in its trading price, it’s in the original vision behind it: a decentralized currency that could rival those backed by the world’s governments and central banks, if not one day rendering them obsolete altogether.
In the early going, it was often the users of bitcoin who drove the creation of and in some cases designed applications and services allowing the system to function. As Ray put it, “Because bitcoin is still nerd money, it can be difficult for a lot of lay people to use it securely and safely.”
“In my case, I loaded a new bitcoin wallet on my smartphone, and I made up a new password of some, I don’t know, 30 characters or something,” he said. “Curiously, the application did not ask me to retype my new password a second time to ensure accuracy, and apparently, I mistyped some character in this password, because I could not, thereafter, access the wallet.”
“Bang! Bitcoin gone!” Ray added.
Ray declined to speak to what that slip of a finger might have cost him, as he doesn’t believe it wise to publicly disclose bitcoin holdings. However, a recent study conducted by Chainalysis Inc. found nearly 20 percent of the known bitcoins today have been lost to crashed computers, forgotten passwords and smartphones that took an unexpected swim.
According the report and based on current prices, those bitcoins would be worth $25 billion were they cashed out today. Instead, they’ve fallen into the couch cushions of cyberspace, where they exist only as a line of encrypted data on the constantly expanding blockchain.
Because double entry for new passwords is a well established precedent, Ray said he blames his lost bitcoin on a design flaw, not within the bitcoin programming itself, but with the particular wallet app he was using at the time.
He also noted that bitcoin’s core technology, the blockchain, securely records bitcoin holdings on thousands of devices all over the world, adding that any wallet could be reconstructed using the same private keys or passwords that granted access to it before it was lost.
“However, the private keys are recorded somewhere. If you lose them, you lose your bitcoins,” he added. “This continues to be a problem in the bitcoin realm, but the progress has been dramatic. Rome wasn’t built in a day, and neither is the bitcoin ecosystem.”
Who’s betting on bitcoin?
If you ask an economist, there are a number of factors behind bitcoin’s dramatic price fluctuations. For starters, its entire concept is based on a truly innovative technology and it also doesn’t suffer from a shortage of hype, speculation or media coverage at the moment.
It has also seemed to be gaining interest from more traditional investing forces, though not everyone is as sold on bitcoin as a serious asset just yet.
Kyre Lahtinen, an assistant professor of finance at the University of South Alabama, had some positive things to say about bitcoin but said making any firm prediction about where its value might head in the short term would be ill-advised.
He thinks cryptocurrency will need to gain more legitimacy before it becomes something the average person understands and might invest in. He said that could be aided by moving into more regulated markets that investors feel more comfortable with, though some of the initial attempts with bitcoin have met regulatory roadblocks.
“There’s been some mixed success there. There are now futures contracts which trade on bitcoin, and that’s created some additional demand,” Lahtinen said. “The thinking being, if you can get futures listed based on the value of bitcoin, it will become a more stable, well-accepted financial product, but at the same time, efforts to set up exchange-traded funds and mutual funds that are traded continuously throughout the day have been turned down uniformly.”
Lahtinen was referring to attempts in 2017 to set up exchange-traded products through the New York Stock Exchange that, in practice, would have traded like a stock by tracking changes in bitcoin’s price. That could have given investors a more secure inroad to the marquee cryptocurrency, but it was shot down by the U.S. Securities and Exchange Commission twice.
Based on the SEC’s explanation, Lahtinen said there were likely concerns that products tied to bitcoin would still come with a significant amount of risk that average investors — such as those with a 401(k) they don’t actively manage — wouldn’t grasp given its unique nature and volatile price fluccuations.
Lahtinen also made it a point to note some of the risks associated with bitcoin and other cryptocurrencies, which he said anyone thinking of jumping on the bitcoin bandwagon should consider as well.
“Several major exchanges have been hacked, and one of the strengths and weaknesses is that you can’t falsify a transaction, but you also can’t reverse one because you can’t spend the same bitcoin twice and have them both count,” he said.
“If somebody gets your private keys they can transfer your bitcoins and leave you without recourse. To implement a blockchain for a payment system can be challenging because you need to be able to undo transactions in the event of fraud, which is why we all love Visa because we can call them up and say, ‘I didn’t’ spend that!’ and they’ll take it right off. With bitcoin, you don’t have that option.”
Lahtinen is also the faculty advisor to the Jaguar Investment Fund, a student-managed investment fund at USA. When asked, he said the Jags have not invested in bitcoin but they do own stock in Square, the mobile payment company that has been publicly considering adding support for bitcoin transactions to its platform.
Asked for advice about potential investments in bitcoin, Lahtinen said those interested should be cautious and understand the risks associated with it, adding that, without being a computer scientist, investors should be able to “understand and explain how the underlying technology of bitcoin works.”
What’s more, he said bitcoin is far from the only cryptocurrency today. There are hundreds of similar digital currencies that have adopted the same structure, many of which had their own banner years in 2017 but were overshadowed by the gains made by bitcoin, which still dominates the market share.
“I think there’s still a lot of questions, but it remains a really interesting area,” Lahtinen said. “There’s lot of tech that’s been promising and really cool over the years but never works out into a broadly accepted tool or consumer device. You know, is this VHS or a Betamax? Is it DVD or LaserDisc? I don’t know.”
While there are varying opinions on what bitcoin will be mean for the future of paper money and online transaction, James “Jim” Swofford, a professor of economics and finance at USA, said he’s already seeing things that have him pondering what currency will be in the future.
He said it’s already more common to pay with a bank card, and that doesn’t include things like Apple Pay and mobile apps that allow people to pay for things before they even pick them up. Swofford said he sometimes wonders at what point it will become more difficult to give cash to someone.
“My students, they don’t have money. They don’t use currency at all, they just flash a bank card,” Swofford said. “Maybe it will be the social pressure from the line, you know? You’re holding up the line by trying to pay cash, and there’s hipsters in the back of the line saying, ‘what are you doing trying pay cash, old man?’ It’s interesting. Could bitcoin become a big part of transactions in the future? That’s up to the public accepting it.”
One thing Swofford, Lahtinen and even Ray seemed to agree on, though, was that the idea and technology behind bitcoin likely isn’t going away anytime soon, if ever. Specifically, the blockchain itself has been broadly praised, with some even calling it “the new internet.”
It’s already spawned a number of non-cryptocurrency-related functions, such as “smart contracts” that could eliminate the need for escrow accounts by using a blockchain network to vet, review and release documents and values at stake after certain contractual conditions are met.
More concerning for those drawn to bitcoin for its privacy is the possibility of governments developing their own cryptocurrencies that could track all transactions by reverse engineering the blockchain — effectively turning them into what Swofford called “cash with a paper trail.”
“I think cryptocurrencies, having been discovered, are going to be here. I don’t know that it’s going to be bitcoin,” Ray said. “It’s the first technology in history that allows an individual to send money over a distance without a third party. Something’s going to be here, and we’re going to use it.”
*Updated at 8:37 a.m., Jan. 29, to correct the number of members in Gulf Coast bitcoin meetup groups.