By Andrei Serpik
I first bought Bitcoins in 2012 when they were worth around $14 dollars. I had just begun my second year of law school and was looking for emerging fields where my newly found knowledge might one day prove to be useful. At the time crypto-currencies were new, flashy, and completely unregulated. While some people were vehemently anti-regulations (and remain so today), most people including myself understood that some type of oversight was inevitable, and I was fascinated by the opportunity to witness the birth of a brand new, unique regulatory framework. In 2012, Bitcoin was much more underground and ideological then it is today, but it was quickly gaining momentum. It was unclear if or how the current securities laws would be applied to something that wasn’t technically a security, or whether Bitcoin would last long enough for it to even matter. The speed of Bitcoin’s evolution since 2012 has been staggering. With the price skyrocketing to over $1,000 per coin in 2013, serious investors and institutions with funding and business experience have begun to take notice, and this attention may be the very push this decentralized crypto-currency needs.
The only exchange when I first started buying Bitcoins was MtGox. The exchange was moving thousands of Bitcoins even before the Bitcoin protocol became a truly disruptive technology. As with anything new, hiccups will occur – as those records disappeared along with 700,000 Bitcoins, when MtGox shut down its trading engine and filed for bankruptcy protection in February 2014.
The problem with Bitcoin in the past was that no one was taking it seriously. Not even the most devoted believers ever thought the price would break $1,000. It started as an experiment, and all the tech-heads jumped aboard. Unfortunately, these tech-heads didn’t have business or PR experience. When coins were worth less than $10 dollars, these shortcomings could be ignored, but with the current eight billion dollar market cap, these qualities are vital. Of course exchanges and the people that run them are really not needed for Bitcoin. The whole point of Bitcoin is that the currency is supposed to be decentralized. People could trade coins with each other while cutting the exchange out of the equation; this way there could be no central point of failure. However, Bitcoin did not evolve this way. Instead, people fled to established exchanges (MtGox controlled over 80% of traffic at one point), which made a decentralized currency centralized once again. This would not be a huge problem if the exchanges acted with integrity and transparency, but as we saw with MtGox, many of them did not. MtGox was run by a twenty-something-year-old coder, who was rumored to have Asperger’s Disease. BitStamp and BTC-E, currently the two leading exchanges, are faceless, non-transparent entities run out of Eastern Europe. The failures of MtGox and other exchanges (like Flexcoins) were not necessarily malicious. They were simply the product of management that was not equipped to deal with such large volumes of traffic and money – the infrastructure was simply lacking.
Luckily, I believe this is all about to change. With the soaring prices of Bitcoin, 2013 brought crypto-currencies into the limelight, and in 2014 it seems that VC’s and investor whales are finally jumping on board. In April of last year, the Winklevoss brothers bought $11 million- worth of Bitcoins and are now launching a Bitcoin trust. Andreessen Horowitz, a leading venture capital firm, announced that it had led a $25 million fund-raising round for Coinbase, a Bitcoin start-up in San Francisco. In March, Perseus Telecom and Atlas ATS announced a partnership to launch a first-of-its-kind exchange geared toward high-frequency trading, paving the way for large institutions to become involved in Bitcoin on a deeper level. At the end of July, venture capitalist Tim Drapper won the highest bid for 30,000 government auctioned bitcoins (currently valued at $18 million) that were seized from the underground illicit market place, The Silk Road, earlier last year. He has pledged to use these coins as liquidity for exchanges he plans to develop in emerging markets.
What does this mean for the average Bitcoiner? Well, for starters, it means that the Bitcoin protocol is evolving from an experiment to a widely recognized well-funded machine. It is getting more difficult to claim that Bitcoin is just a fad as more companies are willing to adopt the protocol. Overstock.com was the first major retailer to start accepting bitcoins and has already received over $1 million dollars’ worth of bitcoin transactions in the first month. Overstock.com has quickly been followed by Dish Networks, Dell and Newegg. The trend does not seem to be slowing down, as more household names continue to enter the Bitcoin ecosystem. It also means more financial instruments will start emerging based on Bitcoin. Bitcurex.com already has a derivatives market for Bitcoin, and this is just the beginning. We must remember that Bitcoin is an open-source protocol. It’s potential is infinite and relies on the users to develop new uses for it—where the only limit is what can be imagined. At the end of the day, I believe that while the coders are still in control of innovation, the influx of funding and managerial experience will ensure a robust, well-managed and widely accepted low-fee payment system.
BIO: Andrei Serpik is a recent graduate of Washington University School of Law and a long time bitcoin proponent, enthusiast, and trader. Andrei has been actively trading as well as using bitcoins since early 2012 and has been attending crypto-currency conferences both in California and in St. Louis where he has lived for the last three years. Andrei has also been an active investor in alternative currencies including Litecoin, NameCoin, NovaCoin and DRKcoin. Andrei plans to use his law degree to enter the field of securities regulation with an emphasis on emerging crypto-currency regulation and litigation.
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