Bitcoin

The internet has opened the door for numerous technologies and products that have drastically altered the way we do business and live our daily lives. Bitcoin is one such technology that arguably has the greatest potential to revolutionize the world of international finance. Micah Winkelspecht, the CEO of Gem, a company that helps its customers accept and secure bitcoin transactions, sat down with me to discuss the various facets, uses, and implications of Bitcoin, as well as the challenges it faces for broader adoption.

(I am also extremely happy to announce that LiveJournal now accepts Bitcoin!)

Katya: So what is Bitcoin and how does it work?

Micah: Bitcoin, at its core, is an international digital currency; it’s like money for the internet. However, to call it just “money for the internet” is actually missing the point. It’s more like the internet of money. Bitcoin system is an internationally distributed network of computers that are running around the world whose sole purpose is to allow us to move value from point A to point B anywhere in the world instantly and with no third parties in the middle; it’s peer-to-peer value exchange. I say “value” and not “money” because there are a lot of things that can be moved on this network that have nothing to do with money. For instance, if you think of a vote, a vote has value, and for the first time in human history we have a mechanism that allows us to move votes across the network. We can now build global, decentralized, distributed, cryptographically secure, verifiable and auditable elections on the Bitcoin network. This is a technology that has the raw power to potentially revolutionize democracy around the world, and that’s one application of that technology, but here are many, many more. Therefore many different groups are looking at this, including the banking system, for moving around other types of assets, moving around stocks; so there are financial applications. The internet of things is looking at this as a way for machines to be able to talk to each other and to exchange value with each other, so it’s got very, very broad implications.

Katya: What would you say is the biggest challenge for Bitcoin?

Micah: In a lot of ways its perception. Ultimately, in order for Bitcoin to be successful, it needs to be adopted. For better or for worse, the early days of Bitcoin were really dominated by news stories about drugs and illicit use cases, and that still continues to be the pervasive story today. I just got out of an Uber and asked the Uber driver if she knew anything about Bitcoin. She said, “Oh yeah, isn’t that what they use to buy drugs with?” That’s sort of the story behind Bitcoin, but the reality is that it’s just a technology that has the ability to make massive transformations, and a lot of people just don’t understand that yet. Luckily there’s a large enough population of people who do, especially here in San Francisco. You have guys like Marc Andreessen, Tim Draper and many other VCs who have been championing that cause. I think there was about half a billion dollars going into venture capital in the last year and a half or so, and probably another billion dollars in the next year or two. There is definitely a force behind it.

Katya: So what needs to change?

Micah: I think in the early days of Bitcoin it was a very techno-libertarian, crypto-anarchist sort of movement, and a lot of the rhetoric and language stemmed from that. I’m certainly a libertarian, so I buy into the philosophy of Bitcoin, but at the same time, the broader population doesn’t quite respond to that message as well. For Bitcoin to be really successful we have to actually communicate to a much broader market. We have to understand what it is that people want. I think it’s very hard in the United States because if you just say, “It’s payments where you control your own money,” most Americans respond with, “Yes, but the payment system I have right now works pretty well. I can just pull out a piece of plastic and swipe it at a register.” So we have to figure out what is the message that people actually want to hear for broad adoption in the United States. Around the world it’s a different story.

Katya: What’s the difference?

Micah: For those in Ukraine or Russia, for example, where currency is experiencing hyperinflation, the story is much better because bitcoin is a potential alternative to escape hyperinflation, which is a real problem that is directly affecting their lives. In the United States people talk a lot about the volatility risk of bitcoin. When you’re in Argentina or Ukraine and your currency is shifting by 30% a year, you’re basically losing 30% of your wealth every year by holding onto that currency. In that case the volatility risk of bitcoin doesn’t seem so bad; it’s actually an outlet for them. In a lot of places in the world, particularly third-world countries, payment systems are basically non-existent. Most of the world in unbanked. They don’t have access to things like credit cards and easy spending, and in a lot of places, they live in a cash-based society. One of the most popular ways to pay for things in Kenya, for instance, is not through local currency, but through mobile phones trading airtime minutes. So in many places around the world alternative payment systems are actually sought after. In the United States we don’t really see that because we live in a world where transactions are fairly easy.

Katya: People say that Bitcoin is fraud-free or risk-free. Why is that? Is it true and what does it mean?

Micah: I wouldn’t say it’s “risk-free.” Essentially, one of the problems with the traditional payment system is that money can be clawed back at any time. Let’s say you’re a merchant and you accept a payment for $50.00. Somebody might have stolen that credit card, swiped the card and charged $50.00. You’ve already given them $50.00 worth of services or products, but then a week later somebody realizes his credit card was stolen and reports it to the bank. The bank refunds him the $50.00, and then sends you a chargeback where it takes away that money, plus charges you a fee for taking that credit card. From a merchant’s perspective you can lose quite a bit of money on fraudulent transactions, and the onus is really on the merchant to guard against misuse of a credit card. With Bitcoin there is no such thing as a chargeback. It’s like moving cash. When somebody spends bitcoins the transaction is irreversible. It’s as good as cash. As a merchant you don’t really have to worry about whether it was a fraudulent transaction or not.

Katya: Do most people convert bitcoin into fiat right away? If so, how does that affect bitcoin?

Micah: Currently merchants (that are accepting bitcoin) are almost exclusively converting it directly to fiat money because they don’t want to take on the volatility risk of holding onto bitcoin, and that makes sense for their businesses. They have to pay their employees and buy goods, so if the price of bitcoin radically shifts, that could actually leave them high and dry. In the longer term, what you’re starting to see now is other ways to manage that risk, rather than just sell it off in the market. Now you’re starting to see options contracts, futures contracts, and other ways to hedge risk and transfer that risk to investors. Wall Street is getting into this in a big way. There are ETFs (exchange-traded funds), insurance packages and many other instruments that are being formed. So you’re starting to get a full sweep of financial services around bitcoin that will ultimately make it safer and cheaper to hold onto bitcoin and actually use it on a regular basis.

Katya: What does your company do?

Micah: Gem is a full-stack developer platform for building Bitcoin and blockchain apps. We essentially provide you with a full-featured, highly secure wallet that you can plug into any app that touches or holds bitcoin. We handle the entire security layer for you so you don’t have to worry about losing your funds. We’re fairly unique in that we really subscribe to the ideals of Bitcoin; we actually believe that individuals should be in full control of their own money--so we’re able to provide security without ever taking possession of funds. We do that through technologies like multi-signature transactions and hierarchical deterministic wallets and a whole host of things. Ultimately we’re a little bit different than Coinbase, for instance, which holds onto your money for you; we allow you to hold onto your own money, and we provide a layer of security on top of it.

Katya: One last question that I ask everyone: do you think there is one product that is missing on the market or that’s in its very early stages that will absolutely blow up in the next 24 months?

Micah: There are a lot of different consumer plays that are being built in Bitcoin. I think a lot of those are not going to move the needle fast enough. I think if you really want to see massive, world-wide adoption of this technology it’s going to happen through the banking sector. It’s going to happen because banks move trillions of dollars in assets around the world every day, and the systems that they are using to move that amount of money are antiquated, and there’s risk associated with those transactions. Those transactions take three days, and while they’re moving around the world during those three days, there is about half a trillion dollars of float that is at risk. This is a systemic risk to the entire financial system globally. So you’re going to start seeing the banks actually exploring ways to be able to move large quantities of money around the world using blockchain technology. When that happens the world will change overnight, and most people won’t even know it, but it will set the groundwork for an entire banking system to switch from these manual processes that they have that are governed by humans and switch to a math-based economy where rules are governed by cryptography and math.