I announced to the staff of my training company today that we now accept bitcoin for payment for our classes. While we have a healthy online training business, we still make most of our money from traditional bricks and mortar instructor-led classes, so it may seem we aren’t an ideal prospect for bitcoin based transactions. I disagree, and create a blog post to explain why I am a big proponent of Bitcoin and think it’s a technology that destined to become really, really big.
As I begin to write this post on July 11, 2014, bitcoins are currently trading on coinbase.com at $636.15 per coin. Some bitcoin proponents predict $2000 per bitcoin by the end of the year while others predict less than $10 per bitcoin. I have both my money and my mouth betting on at least a double by January 1, 2015 and I predict that by the end of 2020, bitcoins will be so big and widely used that the price of bitcoins will be over $5000 per bitcoin. I think that in the next 10 years we’ll see prices over $10,000 per bitcoin. That means that 100 bitcoins, which today would cost under $65,000 would be worth at least $1 million.
Does that sound wild? Unbelievable? If you doubt it, you certainly aren’t alone. The investor I respect and admire most, Warren Buffet, is definitely bearish on bitcoin and his partner Charlie Munger calls bitcoin “rat poison”. But Marc Andreeson, who founded Netscape, is shooting for bitcoin at $40,000 per bitcoin. Who is right?
Why I am a Bitcoin bull
Here’s why I am a Bitcoin bull. I think Bitcoin will eventually do for money what the internet did for communications. I am talking about a financial revolution. Imagine if you could have invested in Visa in 1963 5 years after the first credit card? That’s a little like the equivalent of now investing in Bitcoin which was first introduced in 2009. I say somewhat, because if Bitcoin succeeds at a level that surpasses Paypal, it might be more like investing in the stock market when it opened. You see Bitcoin is more than just a currency, and it’s more than just a paypal competitor. It’s infrastucture. It’s a payment network. It’s a redefinition of the rails that the train of commerce runs on.
For those who say it’s too late to get involved and make serious money, I’ll say this. The best time to plant a tree is 20 years ago. The second best time is today. The total value of Bitcoin will one day be in the trillions. Right now, the total value of all Bitcoins in existence is still less than most New York skyscrapers. I predict one day skyscrapers will be bought and sold with Bitcoin. Sure the price will fluctuate. But those who get involved with Bitcoin while it’s still young will be handsomely rewarded. Mark my words. Investing in Bitcoin in 2014 is like investing in Internet company’s in the late 90’s. Yeah, it’s risky. Sure, stuff seems overvalued. I still wish I had put more in companies like Google, Amazon, and Paypal though, even though there’s been a lot of Yahoo’s as well.
Credit card processing
I do think the most obvious use of bitcoin is as a competitor to credit card processing. Credit card processing is expensive, confusing, and relatively hard to establish. Getting set up for merchant processing is becoming easier, but it still requires a credit check, you can’t really trust your vendor, and you have to give the vendor access to your checking account for direct withdrawals in case of chargebacks. The merchant has to trust the credit card processor when it comes to fees (which are very opaque, deliberately confusing, and impossible to accurately predict). As a business owner, I feel held hostage to the credit card industry. I pay them over $50,000 per year and receive a service so abysmal that if any other vendor tried to get me to sign a similar contract, I’d laugh them out the door.
What other vendor gets to say, “I want a piece of your business and access to deduct my fees directly from your checking account. I won’t explain my fees to you in anywhere close to a language you can understand. The statement will be almost incomprehensible and fees are subject to change at any time. If one of your customers disputes a transaction, I’ll deduct the amount of the dispute immediately from your account while I try to work it out and if I rule against you, you’ll need to pay me for the time I spend attempting to resolve the dispute.”?
The credit card industry is ripe for disintermediation. Most consumers aren’t aware of it and most business owners have accepted it as a necessary evil. It’s a cost of doing business. But still, many small businesses choose to forgo the convenience of credit cards because they just don’t want to heal with the expense and hassle. But what if credit card processing was as easy and almost as cheap as doing business in cash? That’s one of the promises of bitcoin based transaction processing, assuming bitcoin gets as ubiquitous as paypal, and I think it’s heading there.
Inflation and money manipulation
Governments manipulate the money supply. Look at the banking industry and the fines regulators put on them. While bitcoin does have some spectacular cases of fraud such as the collapse of Mt. Gox, nothing compares to the massive problems with the banking system. Mt. Gox cost bitcoin customers a total of around $450 million in value which sounds like a lot. That’s a pittance when compared with the amount numerous catastrophes in the banking industry regularly cost. The most recent one in 2009 is estimated to have cost somewhere between 6 and 14 trillion dollars. That’s equal to somewhere between 13,000 and 30,0000 Mt. Gox level debacles and before that there was the savings and loan crisis and other financial meltdowns. People make a big deal over the volatitlity of Bitcoin but ignore the fact that Bank of America regularly and repeatedly costs taxpayers tens of billions through financial shenanigans that are at least as bad, if not worse than what was done by Mt. Gox.
Paypal and Unicorn startups
Venture based startups that exit to an IPO with over a $1 billion market capitalization are nicknamed “unicorns” because they are so rare. One company, however, has spun off more unicorns than any other. The list of companies formed by ex-Paypal’ers includes Tesla Motors, LinkedIn, SpaceX, Yelp, YouTube and Yammer. We are talking about some pretty smart folks.
How to get started
First, you’ll need to download a wallet to hold your digital cash. Two of the most popular wallets are Multibit and Armory. Your wallet file is like cash money. Anyone who gets a hold of it and has the password to it can spend your money just like it was theirs and if they do, you will lose your bitcoins just as if you lost cash dollars. Therefore it needs to be protected, just like cash. Best practices for large value wallets is to store the wallet offline completely on a USB drive, then back it up to a second USB drive. You should always have at least 2 copies of your wallet.
Second, you’ll need to get ahold of some bitcoin. You can do so most easily by linking your checking account to a digital exchange such as coinbase. If you don’t have enough trust yet to link your checking account, good for you. If you want control of who you trust, you are a perfect candidate for bitcoin, as you’ll eventually learn. Think about who you trust every day with sensitive information and you’ll learn why Bitcoin is such a wonderful invention. In the meantime, you can get 5000 free Satoshi by opening a wallet at XAPO. A Satoshi is a bitcoin micropenny. 100,000,000 SAT = 1 BTC so as of the time of this writing 5000 SAT is worth a little over 3 cents.
For most people though, I’d recommend creating an account with Coinbase and buying $100 worth of Bitcoins using your checking account. If you use this link, you’ll get $5 extra after your first $100 in bitcoin clears. Once it clears, transfer the bitcoin out of the online wallet at coinbase into your personal wallet created above using either Multibit or Armory. You can store your bitcoins online at Coinbase if you want, as it is one of the more secure online wallets but online bitcoin can still be stolen, regulated, ceased or controlled by someone other than yourself. That’s what happened to people who trusted MtGox. The way to make sure your bitcoins don’t get stolen from an online exchange is not to keep your bitcoins at the exchange in the first place. Store your money in your own wallet. It’s not that hard.