Got bitcoin? Despite early setbacks, some say it is stronger than ever
By Scott Cohn
Bitcoin, the digital currency that captivated the world just three years ago before being tainted by scandals, may be making a comeback.
In fact, many experts say it never really went away despite wild swings in its value.
“I think the future of digital currency is bright,” said Marco Santori, a partner at Pillsbury Winthrop Shaw Pittman in New York, and leader of the firm’s digital currency and blockchain technology team. Blockchain refers to the virtual ledger that powers bitcoin and other cryptocurrencies.
“This is probably the most important invention since the internet,” Santori said in an interview with CNBC’s “American Greed.”
From the beginning, the concept has been alluring if not utopian. Imagine a currency that is not tied to the whims of politicians, the foibles of central bankers, or the fortunes of a particular country. Rather than relying on a government to mint a currency, users could “mine” their own bitcoin by running software — contributing their own computing power to verify other bitcoin transactions. Or they could simply buy bitcoin on one of several online exchanges, investing in it like any other currency. To many, it seemed like a good bet.
By the fall of 2013, with the U.S. government locked in yet another showdown over raising the debt ceiling and facing the specter of an unprecedented default, interest in virtual currencies like bitcoin peaked. The price of a single bitcoin reached a high of $1,108.80 according to Coinbase, the first licensed U.S. bitcoin exchange.
But the frenzy would be short-lived.
Around the time prices were reaching their high, U.S. authorities were exposing what they considered the dark side of bitcoin, busting what the FBI called “a black market bazaar for drugs and illegal services” — an underground web site known as Silk Road. In a case explored in the latest episode of “American Greed,” the FBI arrested the site’s 29-year-old founder, Ross Ulbricht, who was eventually sentenced to life in prison (he is appealing his conviction). And the government seized more than $30 million worth of Silk Road’s currency of choice: bitcoin.
Meanwhile in Japan, the world’s largest bitcoin exchange, Mt.Gox, was spiraling into bankruptcy amid allegations it was a conduit for money laundering.
Within two months of Ulbricht’s arrest, bitcoin lost nearly half its value. The price would continue to decline for more than a year, hitting a low of $203.77 at the beginning of 2015, according to Coinbase.
But lately, bitcoin has been rebounding, hitting $757.77 in June. The price has leveled off since then but is still roughly three times its 2015 lows. Santori says an even better indicator of bitcoin’s apparent rebound is volume.
“After the Silk Road was taken down, we did see a hit in volume,” he said. “It confirms that bitcoin was being used on the Silk Road and used in earnest. But volume went back up again, and now it’s many, many times what it was back then.”
Indeed, according to the Luxembourg-based technology firm Blockchain, more than 200,000 bitcoin transactions are taking place daily now, compared with just 90,000 at the peak of the frenzy in 2013.
“Digital currency today is so much farther along than it was even back in 2013 when it arguably started to reach its height and peak in sort of mass market popularity,” Santori said.
But bitcoin still faces challenges — some old, some new.
Bitcoin is no longer the only game in town. Other cryptocurrencies have sprung up, most notably ethereum. It expands on bitcoin’s blockchain technology, allowing users not only to engage in basic transactions, but also to execute “smart contracts” that automatically enforce themselves.
Meanwhile, the law surrounding virtual currencies remains a work in process, with conflicting court rulings about how to define them.
“Are they commodities? Are they property? This is going to be a very long road for virtual currencies in general to kind of settle in to a particular legal class,” Santori said.
Then of course there is the issue of crime. The value of any currency depends in part on its reputation, and in that respect the Silk Road case was a huge setback for bitcoin. But Santori says that is unfair.
“Are bitcoins used for crime? Well of course. But so are a lot of other currencies. So are a lot of other technologies,” Santori said.
Many experts agree that bitcoin is actually less useful to criminals than other currencies, because contrary to popular belief, it is not anonymous. In fact, one of the IRS agents who helped to finally unravel Silk Road says it was bitcoin that ultimately led law enforcement officials to their man.
“Back then, criminals are operating under the impression that bitcoin was an untraceable currency and law enforcement wouldn’t ever, maybe never, be able to figure this out,” Tigran Gambaryan told “American Greed.” “Well, when you fast forward it to 2014-2015, that was no longer the case.”
So will bitcoin and its fellow cryptocurrencies eventually replace all the money in our wallet? Not necessarily.
Even some of the most enthusiastic boosters, like Santori, say that contrary to some of the early expectations, it is hard to beat the U.S. dollar.
“You can complain all you want about the banks, but the U.S. dollar is strong,” he said. “It’s a good currency. It’s a good store of value. it’s a good medium of exchange. It does all the things we want money to do.”
But he says other countries with less stable currencies could find bitcoin to be a useful alternative — a medium of exchange for them, and a source of investment elsewhere, including in the U.S.
And as the technology develops, we may all have to expand our concept of the meaning of money.
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