Bitcoin is in an odd spot. The cryptographically generated digital currency is becoming big enough in the financial and tech world to spawn alarming headlines when the largest Bitcoin wallet and exchange essentially collapsed, as happened last week when the Mt. Gox exchange and wallet stopped letting people withdraw currency. But ask people outside of tech and financial centers, and most of them will shrug and wonder what you're talking about.
That's exactly the right timing to launch a new Bitcoin exchange, believes SecondMarket CEO Barry Silbert.
Silbert believes the currency will eventually prove very useful for consumers to do things like transferring money across borders without the fees or inconveniences that banks impose. "Money is digital, it shouldn't take three to five days, and you shouldn't have to pay $25 to send $50 to your family in the Phillippines," Silbert told CITEworld.
It's not just a consumer play either -- he sees lots of business uses for the currency, including online micropayments, e-commerce, and paying foreign contractors, as startup Expensify started enabling last year [link: http://www.citeworld.com/cloud/21632/bitcoin-takes-big-step-mainstream-support-expensify ]. (For background on exactly what Bitcoin is and how it works, check out this FAQ.)
But the currency is too immature to make it a reliable store of value today. Right now, most Bitcoin trading is driven by speculation, and prices can vary wildly, often within the same day. That makes it a dubious way to store value. "Imagine right now if you go to the Bitcoin ATM machine," Silbert says. "Depending on when you get there, 3 minutes later or earlier, you'll be getting 5 percent higher or lower."
There's also not enough liquidity, meaning that it's impractical for very large retailers who would need to convert Bitcoins immediately back into local currency.
"If you wanted to send $5 million from New York to the Philippines, and you used Bitcoin to do it, the service provider would have to exchange dollars to Bitcoin, then Bitcoin back to the Philippine peso. The problem is the depth of the exchange market on either end of the corridor. It's not deep enough, not liquid enough, without somebody losing some percentage on exchanging." That makes it impractical for the largest retailers, like Amazon or Wal-Mart, to accept Bitcoin today.
To alleviate these problems, Silbert is setting up a New York-based exchange where selected participants can trade Bitcoin, just like traders do with stocks on the New York Stock Exchange. (The news was first reported by Fortune.) Instead of allowing prices to fluctuate continuously based on real-time demand, the exchange will run an auction among all buyers and sellers and set a spot price twice a day, as is done with gold. Seats on the exchange will be limited; retail traders or other businesses would then trade through these members. Silbert is hoping that the big remaining Bitcoin wallet companies, like Coinbase and Circle, will participate, as well as banks and registered money services businesses. (Silbert is an investor in Coinbase as well as Bitpay, a startup that allows merchants to accept Bitcoins on their web sites and in mobile apps.)
SecondMarket is also spinning out its existing Bitcoin businesses, including its Bitcoin investment trust -- think of it as a way to invest in Bitcoins equivalent to exchange-traded funds for gold -- and its 11 individuals who are market makers for Bitcoin today. SecondMarket will also put $20 million in cash and Bitcoin assets into the new organization.
Silbert admits that Bitcoin will remain a speculative investment for the near future. "It's akin to investing in gold, a higher risk version of gold." But once the monetary base grows from the $6 or $7 billion where it is today to $100 billion or so, and the daily transaction volume goes from about $100 million today to $1 billion or more, that will change. "With enough exchange volume and velocity, Bitcoin can emerge as a more efficient remittance platform, a more efficient money transfer platform."
He believes Bitcoin's growth is inevitable, despite what happened to Mt. Gox this week.
"What you're seeing is well-run well-capitalized businesses, Coinbase, Bitpay, are investing heavily in technology and management and they are keeping up with the pace and growth of the industry. Other businesses, either because they're poorly managed or because they're undercapitalized, are not. That's healthy growth."