Here’s How To Look At Bitcoin

Estimize | Mar 26, 2014 10:28AM ET

Tuesday afternoon Marc Andreessen (@pmarca) tweeted “My actual quote: “Track record of old white men who don’t understand tech crapping on tech they don’t understand still at 100%.” The clarification came after the Andreessen Horowitz founder’s comments at bitcoin conference, CoinSummit, set off a financial media firestorm. Andreessen’s controversial reply came as he was asked to respond to legendary investor Warren Buffett calling the cryptocurrency a “mirage”. As Andreessen later made clear on Twitter, the point of the comment was not to disparage Buffett, but while everyone is entitled to their own opinions, people shouldn’t make bold claims as an expert in areas outside their own realm of understanding. To drive the point home Andreessen ended his barrage of tweets with the quote, “I myself know nothing about railroads. Correspondingly have no view on them.” And not many people know all that much about bitcoin, but everyone seems to have their own opinion on it. Since not everyone has a grasp of the technology behind bitcoin, not everyone yet understands what it’s capable of.

The Issue Of fees

One of the defining features of bitcoin, in addition to the fact that its digital and pseudonymous, is that transaction fees are very low. Its extremely easy for someone to transfer bitcoin to another party and costs are nonexistent. While everyone, not just the technologically inclined and brave early adopters of bitcoin, would love to transfer money through Automated Clearing Houses (ACH) at no cost, few actually have the stomach to hold bitcoins because of the fear associated with the cryptocurrency’s volatility and currency risk. That’s why they there is a massive need for more apps and services to be built on top of the underlying the bitcoin protocol and why Andreessen is betting big as a bitcoin venture capitalist.

Think of the bitcoin protocol like the internet. It’s just another way to transfer information. The internet doesn’t let you search for things, that’s Google’s job. The internet doesn’t let you buy music on iTunes either, Apple does. In order for bitcoin to achieve mainstream success, useful apps and services will need to be built on top of the underlying bitcoin protocol just as apps and services have been built on top of the internet protocol.

A Bitcoin ACH

One of the most logical places to start would be to have an ACH that transfers large amounts of funds using bitcoin between two parties willing to identify themselves to the ACH and make a real time transfer with US Dollars. Through this type of service it’s possible that two parties could transfer tens of thousands of dollars for only pennies and never need to get their hands dirty with the nuts and bolts of actually using the bitcoin protocol themselves. What would have to happen is that a bank, or highly regulated financial institution creates bitcoin wallets for both parties, immediately converts cash from party A into bitcoin then automatically and instantly sends the bitcoin from party A to party B, and finally instantly exchanges the bitcoin back to cash for party B. This way the transferer can send dollars to a receiver who can also accept dollars. Only the ACH needs to touch the bitcoins, and money can be transferred at a very low cost. Only 3 obstacles stand in the way of a this type of service going bitcoin mainstream.

The first is that someone needs to the build the app to automatically create public wallets for both parties, exchange dollars and bitcoins, and move the coins from party A to party B.

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The second challenge is that a trustable and regulated financial services company would need to get involved and store a large supply of bitcoins to make the transfers possible in an instant. To avoid liquidity problems the company would need to hold about 2 times the largest allowed transfer worth of bitcoins. Maybe that means they hold $2million of bitcoin and cap individuals to transferring a maximum of $1 million once per minute each.

Hedging Risk

The final and perhaps most daunting barrier is that the transfer company will need to find a way to mitigate or hedge the currency risk of holding all the bitcoins. No one wants to take on a couple million of dollars of currency risk for only a few cents on every transaction. But it seems obvious that $30 wire transfers will soon be a thing of the past. Check out the Western Union Company (NYSE:WU) EPS graph, this thing could wipe them off the map.

Written By: Estimize

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