This is the 2nd post in a series of guest posts on the Safello blog. Zubair Quraishi is one of the earliest investors in Safello with an extensive IT & business background of over 30 years. Opinions of our guest bloggers do not necessarily reflect those of Safello, but we love opening up to floor to new ideas, enjoy.
Bitcoin for the Enterprise
Why Bitcoin will be power the world of enterprise transactions
by Zubair Quraishi, Stefan Holbrock, Ulrich Freiberg – July 2015
Bitcoins may be given, stolen, or passed down from father to son. I care not! For the blockchain remains proof that I was here – Zubair
Bitcoin for the Enterprise
- About me
- What is money?
- Is Bitcoin money?
- If not money, then what?
- And what is Bitcoin really worth?
My prediction is that Bitcoin will become mainstream, but not as a currency.
This is because Bitcoin is a Technology Platform in much the same way as Microsoft Windows or the Internet are platforms, and every technology platform needs a “Killer App” to succeed. Microsoft Windows had Office, and the internet had the World Wide Web (* See footnote 1). For Bitcoin this Killer App has not yet arrived because we have been looking at Bitcoin as money. This is a problem as money already exists in the form of cash and credit cards. The real potential of Bitcoin will come from Bitcoin Apps in the enterprise space, where Bitcoin will be used to timestamp enterprise transactions.
So now I can make my prediction a bit more specific: Bitcoin as money is just a temporary phase. By 2020 most large enterprises will buy Bitcoin on a daily basis to record their public financial transactions.
So, what makes me qualified to talk about Bitcoin? My name is Zubair Quraishi and I first heard about Bitcoin in 2011 from Alex Genaud, a Bitcoin enthusiast friend of mine. I was immediately fascinated and over the course of the next 3 years I bought several Bitcoins. Then, in 2014 I lost most of my Bitcoins in Mtgox, the failed Japanese Bitcoin Exchange, yet I still did not lose faith in Bitcoin’s potential to change the world.
I also have 30 years technical and business experience, having worked mostly in banking and startups. I leave it to the reader to decide whether this makes me qualified to talk about the Bitcoin ecosystem in any meaningful way.
The co-author and editor of this article is Stefan Holbrock who works with investments and IT, and has immense experience in the global financial markets. Also special thanks go to Ulrich Freiberg who has given me a lot of valuable feedback.
What is money?
A dictionary definition of money includes:
- any circulating medium of exchange, including coins, paper money
- gold, silver, or other metal
- any article or substance used as a medium of exchange
- a particular form or denomination of currency
- capital to be borrowed, loaned, or invested
So money as it stands today is a way to pay for goods and services. We use money every day, but it has no intrinsic value, just the promise that a money exchange will be honoured, backed by guns and government promises.
Is Bitcoin money?
To be money Bitcoin has to be able to:
- store wealth
- exchange wealth
- guarantee the wealth
Bitcoin can do all of these:
- store wealth – Bitcoin can store values in unique addresses. These addresses act as wallets
- exchange wealth – Bitcoin can move values from one address to another. This movement of values acts as a wealth exchange (a payment)
- guarantee the wealth – As far as guarantees go, Bitcoin is backed by a global database called the Blockchain (* see footnote 2), which uses secure digital cryptography that has not been officially broken in over 5 years, therefore it could be said that Bitcoin is secure, at least for now (* see footnote 3)
So it could be said that Bitcoin is both a store of wealth and a mechanism to exchange wealth between two parties, guaranteed by the Blockchain. In other words Bitcoin CAN be used as money.
Many executives at top companies have bought into this “Bitcoin as money” notion, and almost every day a new company announces that it is accepting Bitcoin as a method of payment. Take for example Dell, who announced in July 2014 that they will accept Bitcoin. Even if Dell gets a million dollars of orders a week (US $52 million a year) it will not make a meaningful amount of money for them! I think the real reason that companies say that they will accept Bitcoin is for the PR boost.
The prediction I made says that Bitcoin as money is just a “temporary phase”. Technically, Bitcoin can be used as money, but in reality there are currently (in 2015) many problems with Bitcoin as a currency as it is:
- Too hard to use (compared to credit cards or cash)
- Too volatile
- Too hard to store securely (or too easy to steal)
- Known to have many unknown tax liabilities
- Not instant to transfer wealth (a 10 minute wait period)
Even if Bitcoin was easy to use today then it would still be a terrible currency simply because the price is too volatile. For example, if we look at the price over the last five years it would look something like this:
- Jan 2009 – Jan 2010 – $0
- Feb 2010 – May 2010 – $0.01
- Jun 2010 – $0.08
- Feb 2011 – Apr 2011 – $1
- July 2011 – $31
- Dec 2011 – $2
- Dec 2012 – $13
- Apr 2013 – $266
- May 2013 – $130
- Jun 2013 – $100
- Nov 2013 – $1250
- Dec 2013 – $600
- Feb 2014 – $750
- Mar 2014 – $450
- Apr 2014 – $340
- May 2014 – $630
- Mar 2015 – $200
This volatility of Bitcoin is a double edged sword. Consumers do not want to use a currency which is volatile. Banks however can use the volatility to make money by using Bitcoin as a financial derivative. So even as money Bitcoin has two possible markets, one as consumer money, and the other as a business tool in the financial markets.
Even though Bitcoin may not be good as money, as a temporary store of wealth Bitcoin has gained a certain reputation as it enables money to be transferred across borders with ease, thereby gaining alot of noteriety and use among criminals, which is why the FBI and other government agencies are keeping a close eye on Bitcoins that are being passed around. However, this same ability to transfer money across borders could also disrupt the international payment market and companies such as Western Union.
A more basic problem with using Bitcoin as a currency is that Bitcoins are too easy to steal. This is because unlike physical money, Bitcoins reside on computers connected to the internet, so a man in China can steal from a man in the USA. To keep Bitcoins safe you have to keep most of them offline in “cold” storage and only have a small working amount for everyday use. In other words you have to take on the role of a bank yourself. Therefore the average consumer who barely can remember the four digit pin code for their credit card will never be interested in using something as difficult to use as Bitcoin.
Let me qualify what I have said. I think that in 2015 Bitcoin is a terrible currency, although by the year 2020 this could very likely change if:
- Bitcoin gets into more people’s hands
- The value of a Bitcoin goes up a lot making it fluctuate less. This could happen as Bitcoin is used for more and more applications, not just as a currency
- Insured wallets become available to members of the general public (* see footnote 4)
It is also worth noting what is currently causing some of the the volatility of Bitcoin. As people pay for things in Bitcoin then the payment processors instantly convert the Bitcoins to USD or some other currency. This means that the Bitcoins are not held by anyone using them, and instead are held only by speculators, causing a constant sell pressure and making the price of Bitcoin in constant decline because of the sell pressure. To stop the value of Bitcoins falling they need to be held because they are needed by someone, otherwise they are just an intermediary money transfer technology at best, and their value will stay low.
If not money, then what?
“Money” is just one application of Bitcoin. It is worth noting that in Bitcoin’s early days in 2011 most Bitcoin devotees never really thought of Bitcoin as a currency being the main use of Bitcoin. The whole Bitcoin as a currency idea came much later, when the Bitcoin hype hit the worldwide media circus.
An example of a non currency use of Bitcoin is when someone buys a house. The two parties can meet at an estate agent, and sign and verify their documents digitally, with the resulting transaction recorded on the Blockchain. Now the sale is a matter of public record and can be verified.
So, what is this Blockchain? Well, you can think of the Blockchain as a distributed database, which is distributed over tens of thousands of computers connected to the internet. But the Blockchain is not like the type of database you see from vendors like Microsoft or Oracle. The Blockchain as a database is slow. And by slow I mean REALLY slow, like millions of times more slow than a relational database, and trillions of times smaller in data capacity compared to a google data centre for example.
However, the Bitcoin Blockchain as a system is still in its early days, and can still be improved upon, to make the blockchain able to handle larger loads in a scalable way. This can be done by creating sidechains, which are Blockchains which hang off the main Bitcoin Blockchain.
The Blockchain is in fact enabling a whole series of non currency applications which are built on top of Bitcoin, many of which are far more useful than currency. Think about it, for the first time ever a transaction can be made between two parties and securely recorded without having to use a trusted third party company to broker the deal. This and many similar applications will open up the world of commerce by reducing the paperwork and administration costs in a huge way, so it could usher in a true paperless office, something which was promised but not achieved with previous technologies.
And what is Bitcoin really worth?
The price volatility of Bitcoin shows that Bitcoin’s killer app is not currency. However, I believe that Bitcoin will be worth a lot more when used by companies for transactions. I say this because it is worth comparing Bitcoins to IP v4 addresses.
In the 1990s IP addresses were almost free, but due to supply and demand a single IP v4 address now can cost $10 per month just to rent. And technically, IP v4 address are very similar to Bitcoin in many ways (* see footnote 5).
Since there are a limited number of Bitcoins, then if they eventually form a key component of the future transactional internet then this will mean that demand for Bitcoins will skyrocket, and therefore be alot more valuable in the future, especially as companies learn how to store Bitcoin securely and find uses for storing more and more data on the Blockchain. There are already many companies storing data on the Blockchain for things like timestamping documents and making digital contracts.
However, saying that companies wil buy Bitcoins directly is a bit misleading of me. What I actually think will happen is that companies will not buy Bitcoins directly, but through intermediate transaction firms, much like Domain Name Registrars today will pop up and offer transactional services which companies can use to make transactions, and then the companies will just see the results on the Blockchain, without having to even touch any Bitcoins. This constant buy side demand will push the value of Bitcoins to very high levels, as it will not be consumers doing the buying anymore, but transaction companies and banks, who will be willing to pay tens or hundreds of thousands of dollars per bitcoin, since each Bitcoin will allow several million transactions to be performed (* see footnote 6).
Another things that will push the price of Bitcoins up is the cost to store Bitcoin’s will be very high, as Bitcoin storage companies will need to have paper wallets, vaults, security guards, insurance and many things we associate with a tradition bank, and this will be an ongoing cost, which will only get more and more expensive since Bitcoins are limited in number and demand will only go up. So I would not be surprised one to day see the million dollar Bitcoin!
The alternative scenario of course is if another cryptocurrency takes hold instead, which could see Bitcoin go to 0 dollars. But so far the third party
integrations and developers have chosen Bitcoin, so it is the clear winner in the field.
I hope that this article will give the reader an alternative perspective to Bitcoin so that they will see that it is alot more than a digital currency, and that the real power and usefulness is yet to come.
In the future it will become the large companies that support the infrastructure to store and maintain Bitcoins, and Bitcoins themselves will probably become invisible to the rest of us.
*1 – The internet was around for nearly 30 years as a technology platform before the World Wide Web was invented
*2 -Underlying Bitcoin there is a global distributed database called the Blockchain which allows values (money) to be transferred from one part of the Blockchain to another in a public ledger. This transfer of values causes the illusion of currency. Explanation of the Blockchain:
*3 – The biggest risk to Bitcoin’s security would be if there were new CPU breakthroughs such as a quantum computer which could be used to guess people’s Bitcoin keys for their wallets.
*4 – Insured wallets such as the Coinbase insured wallet will mean that there is no risk of someone’s Bitcoins being stolen and not refunded by the bank
*5 – A limited number of IP V4 addresses exist, 4 billion vs Bitcoin’s 21 million
*6 – 1 Bitcoin can be subdivided into 100,000,000 Satoshis