By now you have probably heard about bitcoin. The decentralized currency and payment network that advocates think will change the world. Now matter where you stand on bitcoin there is no question money is pouring into the space
As of April 2014, Bitcoin venture capitalist have invested more than $113,00,000 in the first 4 months of the year.
This is a 29% increase over the total amount for the whole of 2013, which stands at $88 million. And in 2012, bitcoin startups raised just $2 million.
Bitcoin startups are well on track to receive more than $250 million in venture capital by the end of 2014. That is not bad considering it’s just 5 years old and that is the exact same amount of VC money that poured into all internet startups in 1995.
There is no question the bitcoin eco-system is maturing very quickly… but what the hell is it?
At its core bitcoin is a payment network. Just like checks from banks, Visa, Paypal, and Western Union. It allows person A to send money to person B. And for the most part it has some incredible features that the legacy systems simply cannot compete with.
Bitcoin allows any body to send any amount of money instantly. For example. At near zero cost it is now possible to instantly send $1million from person A in Brazil to Person B in China. There are no minimums or maximums on the amount and the location and identity of the sender and the participant is irrelevant.
Sounds awesome. A disruptive technology to the world of payments that has the potential to create mind blowing efficiencies. So what is with all the controversy? Well here is where it gets tricky. The way in which bitcoin achieves this is unlike any other payment network the world has seen before. The ramifications touch the world of politics, liberty, privacy, economics and much more.
Bitcoin is built on a technological innovation called the blockchain. Whether you love bitcoin or hate it, I don’t think there is anybody that would argue that the invention of the blockchain is an incredibly positive invention that will dramatically change our lives in some way. Bitcoin is merely the first implementation of a blockchain technology.
We will most certainly see the blockchain disrupt many industries, not just currency and payment networks in the next 10 years. Perhaps I will cover that in a future article, but I mention it here because from an Angel’s perspective I think this reason above all others is the most important reason to pay attention to bitcoin. There will most certainly be tremendous profits to be made by Angels in the blockchain space over the next decade even if Bitcoin were to fail miserably. Understanding bitcoin fully is the first step to identifying opportunities in these future spaces.
But let us return to bitcoin. The blockchain is simply a way to manage a ledger in a trustless, decentralized way.
Think of your bank or Paypal account. When you send a check to someone who uses the same bank as you all that is really happening is that the bank deducts from your balance and adds it to the persons balance you are paying. It is just a ledger entry. We rely on banks as trusted middlemen to manage that ledger. As we have learned many times throughout history sometimes banks are not all that trustworthy and depositors can lose their money.
Bitcon solves this problem by making the ledger public. You can in fact download the entire bitcoin ledger and see exactly how much money is in every single account and you can watch the ledger being updated in real time as people pay each other.
To protect people’s privacy though no names are associated with peoples accounts. Think of it like watching withdrawals and deposits from numbered Swiss bank accounts. You can see the balances and transactions, but you do not know who owns what.
The integrity of the ledger is maintained because not just anyone can send money from a particular account. Through a branch of advanced mathematics called cryptography it is possible for the public to check and see if the sender does indeed have the secret password giving them permission to send the funds in that account, without actually knowing the password it self.
In bitcoin this secret password is called the private key and the accounts are called bitcoin wallets.
All of this is controlled by simple open source software that anyone can download for free. In this way bitcoin is truly a trustless environment. You can review the code and know that it does exactly what it claims to do.
This is where controversy number 1 comes in. Governments and courts are used to being able to confiscate peoples money by simply asking the bank to adjust the ledger. They argue that this helps them fight crime and reduce tax evasion. Because bitcon does not rely on any third parties there is no one for the government to call to take funds. Only the holder of the private key can move bitcoins. Bitcoin takes power away from governments and puts it back in the hands of the people.
Depending on your political tastes you may perceive that as a good or a bad thing.
But the controversy does not end there. Unlike Visa, Paypal and other payment systems, bitcoin does not use a government backed currency as the unit of account in its ledger. Instead Bitcoin created its own currency (and confusingly called it bitcoin as well– the same name as the payment network) to be the unit of account. The numbers of bitcoins available are preset and hardcoded in the bitcoin software. It can never change.
Enter controversy number 2. Governments and banks are used to being able to change the money supply. Through the central banks of each country governments can simply create or destroy money. They argue that this flexibility allows them to smooth out the economy and help facilitate economic growth. Others argue that this is false and government’ changing the money supply is extremely destructive to the economy and growth. Again your political beliefs will determine whether or not you think this is a good thing.
No matter what your beliefs, bitcoin is most certainly here to stay. The bitcoin software and blockchain are already on millions of computers all around the world. Stopping bitcoin would take a policemen in every house. Governments can make regulations that either slow or speed up bitcoins adoption, but in the end bitcoin is a new reality that the world will have to deal with.
I suspect it may end up looking like the gambling industry. Some governments will be friendly to it and some will not. The investment dollars and the jobs will go to the countries where it is friendly and consumers can participate from anywhere in the world in the privacy of their own home if they want.
Either way the Angel and VC profits in this space should be electric over the next few years. It will be an interesting ride.
