• WisBusiness

Thursday, February 20, 2014

Jennifer Sereno: Bitcoin sparks fear and loathing, spurs entrepreneurial activity

By Jennifer Sereno
It's been scorned by Jamie Dimon, CEO of JP Morgan Chase; it's been the target of U.S. law enforcement officials and yes, it's one more thing that's been banned in Russia. Is it any wonder people are talking about Bitcoin?

In Madison and other tech-savvy communities, they're innovating with it, too.

On a recent Saturday, some 30 members of Madison's tech community gathered at Madworks Coworking in University Research Park for a "hackathon" or code writing session to create new applications related to the cryptocurrency. Teams competed for bitcoin-denominated prizes in a daylong session fueled by coffee, bagels, Coke and pizza.

"It's exciting to see this many people here," said Brian Samson, president of Ten Forward Consulting and an organizer of the Madworks Cryptocurrency Hackathon. "It speaks to the interest in the underlying technology, which is amazing. People criticize Bitcoin for a variety of things, but it is still in its infancy and the capabilities are still being developed. It's like when the Internet started. People could have said, yeah, but you can't watch TV. Well, now you can."

So, what exactly is a bitcoin? Depending on how you define a "store of value," the volatile virtual currency may or may not be money, although some traders have been charged with money laundering.

The peer-to-peer payment system and digital currency appeared as open-source software in 2009 thanks to an unknown developer or group of developers working under the pseudonym Satoshi Nakamoto. It's called a cryptocurrency because it uses complex, encrypted computer code to establish an online environment that enables the creation and transfer of units with perceived value.

"It really is geek money right now," says Monty Schmidt, a hackathon organizer and founder of Madison computer consulting company Wuntusk. "You almost have to have a degree in computer science to do anything with it."

Participating miners using candy bar-sized devices are paid at regular intervals in bitcoins for solving mathematical problems. These help in securing the blockchain, Bitcoin's public online ledger.

Meanwhile, numerous domestic and international bitcoin exchanges have sprung up to facilitate trading, their action chronicled by financial journalists with outlets ranging from Forbes to blogs.

At the moment, bitcoin prices vary wildly among the exchanges, ranging from less than $300 to more than $600 per unit. While some might consider the gap an opportunity for arbitrage, Samson and Schmidt said it's more a reflection of the difficulty investors have in actually completing a transaction or converting the virtual funds to dollars due to software glitches at some individual exchanges.

In one sign that more consumer-friendly options for conducting transactions with bitcoin may be on the way, Robocoin of Las Vegas plans to install its first U.S. bitcoin ATMS in Austin, Texas and Seattle, Wash., in the weeks to come.

Even at the high end, some might say current prices are a relative bargain compared to the high of more than $1,200 per coin reached last year. Based on the mathematical rules governing the ecosystem, the number of bitcoins will cap at 21 million, a total that likely will be mined by the year 2140.

"Given the volatility, the uncertainty surrounding various exchanges and the difficulty of completing transactions, you might wonder why it's worth bothering with," said Schmidt, a serial entrepreneur who also launched Sonic Foundry in 1991. "But even if Bitcoin fails, it will lead us somewhere. The underlying technologies that make it run are amazing."

It's that capability that has open-source software developers — and increasingly, intellectual property lawyers – buzzing. The blockchain, which also serves as a ledger for transactions, provides unprecedented capabilities for:
* three-party transactions requiring two of the three parties to verify a deal before it closes, yet eliminating the need for a bank's involvement.
* time-stamping work for intellectual property protection within a system that provides transparent, independent authentication.
* a new path for lowering financial fees and escrowing value for future transactions.

At the Madworks Coworking hackathon, it was those types of applications that won the day. First place was awarded to Kenny Younger and Matt Snyder for a WordPress plug-in that uses Bitcoin to moderate comments. The plugin allows users to post a comment immediately without waiting on moderation by submitting a micro payment via Bitcoin.

The working demo can be found at http://sheerfocus.com/pay-post-hackathon-demo/ and the source code at http://github.com/kyounger/wordpress-bitpost.

Samson and Schmidt would be the first to agree that Bitcoin won't solve the problems of the world financial system. But, with the potential for open-source innovation, participants in the system are likely to solve at least a few things troubling the New Economy.

"There are some very good reasons for not letting a bunch of geeks get in and play around with the international monetary system" the way people are now able to freely innovate with Bitcoin, Schmidt says. On the other hand, "when 40 million credit cards are stolen, we have a problem. There hasn't been enough innovation in the banking system in the past 30 years."

-- Sereno is a former business editor of the Wisconsin State Journal who has written about new economy trends for various publications. Send email to sereno.jennifer@gmail.com.

Software expert and serial entrepreneur Monty Schmidt shows off a bitcoin mobile wallet at the recent Madworks Cryptocurrency Hackathon in Madison. The wallets feature a QR code that allows users to pay for purchases using bitcoins stored in their accounts.


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