Notes From Bitcoin 2013

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The Not So Impressive Winklevoss Twins Presentation

I’m at the Bitcoin 2013 conference in San Jose, California. The Winklevoss twins spoke last night at the conference. They are major Bitcoin owners. They come across as pretty decent preppie guys. The type you wouldn’t mind going to a baseball game with or having a drink with, but their presentation on why bitcoins are here to stay was unimpressive.

Their presentation, and I am not exaggerating, came down to this:

1. Ghandi said that first they ignore you, then they laugh at you, then they fight you, then you win, therefore Bitcoin will succeed.

2. There was a guy who thought the automobile would never replace the horse, therefore Bitcoin will succeed.

End of presentation.

The real action was on the floor of the conference.

I ran into a number of Bitcoin entrepreneurs who left serious careers to get involved with Bitcoin, one was a medical doctor, another was a former Microsoft engineer. The ex-Microsoft engineer told me he made $30,000 last month “mining” bitcoins. The bitcoin mining process requires specialized computers calculating complex algorithms.

He said that he needs to keep his computers cooled down and so he has massive fans in the room where his computers calculate. He said he uses enough energy to run about 3 or 4 houses, he said he uses so much energy that the local police visited him because they thought he was running a pot farm in his house. I asked him about how the police knew how much electricity he was using, but he didn’t seem to understand the privacy and snooping issues the police visit raised.

The engineer said his computer was so specialized for calculating Bitcoin algorithms that it was pretty much useless for anything else. He said outside of calculating the algorithms, the computer would only be good as a boat anchor. His guess was that there were about 1,000 people around the globe who are mining bitcoins the way he is.

One thing you quickly become aware of at this conference is the number of virtual currency competitors Bitcoin has. There are many, though Bitcoin has most of the focus. I asked the Doc and the engineer which virtual currencies they were most impressed with beyond Bitcoin, The names they threw out included DevCoin, NameCoin and BitcoinX, though they emphasized that Bitcoin has about 99.9% of the virtual currency market.

Judging by this conference, the Bitcoin world is a very heavily male dominated world of the roughly 1,000 attendees, outside of women at booths working with sponsors, I saw only three females in the early going.

The sense I am getting is that the Bitcoin world is going to end up very heavily regulated. Many of those involved with Bitcoin here at the conference are talking compliance with the government. Even the Winklevoss twins brought this up as something that will be necessary. The libertarian dream of anonymity seems like a distant memory to this crowd. It will be name and social security number in the not too distant future for anyone trying to open a Bitcoin account to buy or sell bitcoins through an exchange. Thus, Bitcoin, if it is not completely closed by government, will be no more than a faster PayPal type system, with a fluctuating value. There’s pluses and minuses to a fluctuating value. During a strong price inflationary period, because of its fairly stable supply, Bitcoin could act as a virtual gold—but with the one caveat that, because accounts WILL be registered, the government will have a pretty good idea of how many bitcoins you have and be able to demand you turn it over if they so choose—something they can’t as successfully do with real gold that is buried in the backyard.

Then there is the possibility that government will attempt to shutdown Bitcoin completely. I would say about 30% of attendees fear a government shutdown, while the other 70% expect compliance with government regulations when opening an account to either buy or sell bitcoins for fiat currency. As a representative for CoinLab, an in development money- virtual exchange operator, told me, “Once we are through getting all the necessary government licenses at the state and federal levels, we will be up and running, but we won’t open any accounts until we have proof as to who the account holder is.”

All attending the first Bitcoin 2013 conference in Silicon Valley are considering it a success. There are more than 1,000 attendees and the entrance fee to the event is $350.00.Alan Safahi, CEO of Zip Zap, told me that it was important to have a conference in Silicon Valley because SV is becoming the epicenter of virtual currencies. He told me he packed up his things and moved them along with his wife to SV from Orange County. He told me that he explained to his wife, who was reluctant about the move, that if they had lived during the time of the expanding Roman Empire that they would have wanted to live in Rome and that for someone in payment systems and virtual currencies, like Zip Zap is, the place to be is Silicon Valley.The most important vibe I am picking up at the event is that there are many money players who want to get Bitcoin up and running and are willing to play by government rules, that is, register all accounts they open and take down the name, DOB and social security number of Bitcoin buyers and sellers.In this way, Bitcoin could survive, but the watchful eye of government will be there. Many of these players argue that it is impossible to battle the government, Safhai told me that “It is a period to build the baby and not send it to war [against the government.]“One major player told me that Mt. Gox, which recently head accounts seized in the US by the government, made a serious mistake by not following the guidelines that were issued by Treasury and by failing to register as a money exchange in the US.Another player, who is something of a rock star in the Bitcoin world and wanted to remain anonymous,  told me that anyone operating on Silk Road, the underground drug selling market on the internet that transacts through bitcoins, was crazy. He told me that it is very easy to track bitcoins and eventually the government will track down the major players on Silk Road and arrest them.Still others at the conference were more defiant. At one booth, Bitcoins were being sold for cash with no ID checks. Walk up to the booth lay down your money and buy your bitcoins. The money was piling up.

Those are mostly hundreds and fifties on the floor.

The less “corporate,” the more renegade seemed to be the operators and the more willing these operators seemed to be willing to challenge the government. One operator who was setting up an exchange told me he didn’t have the money to register as an exchange with the government but planned to start operating anyway. One corporate type said to me that virtual currencies are in their infancy and that lawsuits, fighting and jail time for some will occur before the crypto-currency world becomes more defined.My take at this point is that the corporate types are going to give legitimacy to the crypto-currency world. They have already formed an association, the Bitcoin Foundation. They are going to be hiring lawyers and lobbyists. I overheard Patrick Murck, the general counsel of the foundation, say that he is in a major hiring mode and that he plans to hire a combination of 6 lawyers and lobbyists in the near future.This, of course, will mean that the key players plan to set up regulations in cahoots with government. No doubt, as always, they will attempt to set up regs that will benefit them and make it difficult for competitors, but Bitcoins is a slippery animal and it will be difficult for these established operators to anticipate the best methods to regulate virtual currencies. The renegades may have a chance. Indeed, these established operators may provide cover for the more renegade operators, who will be attempting to find workarounds to government regs. The clueless regulators may think they are regulating Bitcoin but be far behind what the renegades have developed. It will be a battle and it is not clear who will win.Indeed, it is not even clear which virtual currency will end up on top. I spent quite a bit of time talking to Chris Larsen, CEO of Ripple. Ripple is an open payment system.Ripple users can trade any currency for another without requiring any broker or third-party to facilitate the trades. The process is simple: users submit buy/sell prices to the network and the Ripple protocol automatically finds the best available match and completes the trade.Ripple is also in the early stages of launching its own virtual currency XRP. They have the money and brains behind them, so it will make sense to keep an eye on them.Of note,the television network RT is way ahead of the mainstream US networks, they have a full television crew presence. I had the opportunity to spend some time with Perianne Boring (the best James Bond name in the real world) who is host of the new RT show, Prime Interest, which is being produced by former EPJ contributor, Bob English.

Robert Wenzel and Perianne Boring. Pearianne says she prefers my “nerdy glasses look.”

Boring and English managed to get interviews with most of the key players at Bitcoin 2013 and tell me they will be running segments from the event onPrime Interest for a week or so, starting Monday.

Just finished a long chat with Chad Mayer, who is one of the most knowledgeable people around when it comes to Bitcoin. A major financial globetrotter, Chad tells me that he just got back from a trip that took him to Switzerland and then Indonesia. In Switzerland, he visited a vault where among many other security measures, they weigh you before going in, to make sure you weigh the same when heading out.He tells me that Peter Theil just invested $2 million dollars in BitPay, a global peer-to-peer Bitcoin payment network. A global billionaire, who prefers to remain anonymous, also has invested in BitPay, says Chad.Chad also pointed out to me that Google has just launched an email payment service, whereby you can send payments via an email link, without going through a network such as PayPal. His point wasn’t the service that Google has set up, but that the technology is there to send money by email link and that something similar will emerge in the Bitcoin world.I also had a good talk with Steve Michaels of Keep Your Assets. He sees Bitcoin developing on a two tiered level similar to what I have discussed. He compares it to the fiat based currency system, where we have many using bank accounts that can be tracked, while other transactions are done in cash. With bitcoins, there will be a registered world and an unregistered world.Steve pointed out that most of the early developers of Bitcoin have libertarian leanings and have thought out what government moves against Bitcoin are likely to be made and they have also thought out counter-moves.Chad and Steve both pointed out that complete anonymity would be very difficult to reach using Bitcoin, but measures can be taken to make tracking extremely difficult and expensive. Open transactions  appears to be a program that can be an important tool in financial cryptography.

More than one attendee has pointed out to me that after the US Treasury made the announcement that Bitcoin exchanges must comply with money exchange money laundering rules that China seems to have started promoting Bitcoin use, even to the point of running on national television, several times, a documentary on Bitcoin.

In addition to the up and coming crypto currencies I mentioned earlier that could be competitors to Bitcoin, I heard several in the know people bring up LiteCoin and PPcoin.

One attendee tells me that Silicon Valley Bank has stopped accepting applications from new Bitcoin exchanges. This may be good news for CoinBase, which already has its foot in the SVB door, but another indication of how the shadow of government is casting a fear on banks willingness to work with exchanges. It truly is the weak spot of Bitcoin, that is, the actual exchange point between Bitcoin and fiat currency. Prior to attending this conference, I gave the edge to government, but at this conference I see there is going to be big money bringing in lawyers and lobbyists that will give Bitcoin breathing room. These big money types will play footsie with Washington D.C. and agree to register the name and other identifying information of exchange users, but as I said earlier this may well provide cover for those operating beyond the watchful eye of government. The government types may think they are regulating Bitcoin and have no awareness of how much is going on beyond their control.It will be a cat and mouse game. As I reported earlier CEO Alan Safahi of Zip Zap told me, there will be some arrests, but he also said the cat is out of the bag. Turr Demeester of MacroTrends, seemed to concur and said that a thousand heads will emerge and the government won’t be able to cut them all off. Peter Surda was reluctant to declare the government impotent and said there is a possibility that government regulation could be strong enough to suffocate what I call the second tier underground Bitcoin operators.

One of the big games at the conference has been the guessing game as to who the undercover government agents are in the crowd. Trace Mayer’s father identified a middle age woman who sat alone and didn’t meet the demographic of attendees at all.I ran into one guy, a long haired Asian, who came up to me and said, “So did you write anything up about Mt. Gox when their money was seized?”. This alone was a bit unusual since the few people who saw my name tag usually introduced themselves as EPJ readers before saying anything else. We talked for a minute and then he asked where he could read what I write, which means he wasn’t even an EPJ reader. I went back to the table I was sitting at and commented to the people at my table that I just had an unusual conversation and I thought the guy might be an agent. It turned out that everyone at the table had had been separately approached by the guy. With a crowd of around a 1,000, always be suspicious of someone who appears to be systematically approaching everyone at the conference with odd questions.

The Best of Robert Wenzel

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