Bill Gates called Bitcoin a "technological tour de force." Enthusiasts believe it will become a more viable form of money and may even replace fiat currencies like the US dollar. Detractors point out that many bitcoin exchanges like Mt. Gox have been hacked, and bitcoin can be stolen from computer-based wallets if its proprietors are not careful. To be fair, one must point out that many sensationalist news articles have mistaken these third-party exchange problems for flaws with bitcoin. As bitcoiners correctly assert, bitcoin is quasi-impossible to counterfeit, and despite a descent in the price of bitcoin from its 2013 peak of around $1,200 to a current price in the $300s, it is still up tremendously from just pennies at its inception in 2009. Beyond its exchange rate, the ease with which one can transfer bitcoin from peer to peer with no intermediary and its deflationary, limited supply have been cited as revolutionary catalysts for more decentralized global finance.
But perhaps the revolution is already upon us. The bitcoin Blockchain is the distributed protocol used to create and transfer the currency, and its exponential growth in users and transactions has some very important implications. In simple terms, the Blockchain uses the computing power of thousands of specialized computers to solve very difficult mathematical equations that make the bitcoin network more secure. Because this network is "distributed" and does not rely on a single central database, it is much more robust than transfer means currently used by most financial institutions.
Imagine a set of irreversible, super-sticky dominoes where it is immediately apparent if someone attempts to cheat. You can&'t take the faulty domino off the table, so you just go back to the last legitimate domino and use it to continue the game in a different direction while banning the cheating player. The only way you can attack the Blockchain is through transparent, domino-like means that leave the culprits exposed to relatively straightforward corrections known as forks. In short, no one can fool mathematics.
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators. Various developers are making attempts at Blockchains similar to bitcoin, each with its own digital currency.
The Next NXT team has assembled an interesting Blockchain that is much quicker than bitcoin for confirming transactions but lacks bitcoin's security by several orders of magnitude. Bitshares has interesting functions, but its creators make outlandish claims about potential financial performance that don't bode well, given the regulatory scrutiny that the sector is certain to attract.
The Ethereum development team includes Vitalik Buterin, who is very well respected in the cryptographic world, and is proposing some fascinating technological advances, but the end product is way behind schedule, even though the team raised a tidy sum from investors six months ago.
The Ripple platform has garnered a lot of venture capital funding, and there is talk of alliances with banks. Despite its financial resources, however, it lacks legitimacy among many bitcoin faithful, because its native currency was distributed primarily to its creators and continues to be owned by a single corporate entity. This type of ownership structure is antithetical to what most developers who take an interest in digital currencies are trying to build, because it leaves out the component of a distributed stake.
Part of the elegance the bitcoin Blockchain, derived from its distributed design, is that its infrastructure is strong and secure but also flexible. The code is organized so that autonomous developers can build various layers on top of it, incorporating and innovating toward many potential uses.
Counterparty is one platform loyal to bitcoin's protocol. The developers appear to be in tune with bitcoin's purpose, and their stated goal is to provide "reliable functionality" for the current bitcoin Blockchain versus creating an alternative model. Counterparty's aim is to harness the immense power of the Blockchain for uses like secure, distributed contracts, escrows, asset creation, and gaming. Though the Counterparty platform does have its own currency, XCP, the developers point out that the "address" used to store the currency can also be used to store bitcoin and vice versa. Counterparty's currency was established through an innovative process called "proof of burn," where users of the platform were able to "burn" bitcoins by sending them to a verifiably unspendable Bitcoin address and redeeming XCP in return. This transparency established legitimacy versus other bitcoin offshoots, whose developers treated themselves to opaque amounts of whatever digital asset is used to power their platform. Moreover, Counterparty seems to strike a healthy balance between the organic developer community necessary to build a strong platform and the venture capital investment required to make that platform a reality.
Counterparty has recently attracted the interest of Patrick Byrne, chairman of Overstock.com, a public company with $1.5 billion of online sales. Byrne committed at least a few million dollars by hiring two of the Counterparty developers to create Medici. Byrne hopes Medici will leverage the power of the bitcoin Blockchain and Counterparty's functionality to create a more transparent and less centralized market for stocks and other assets. The project's lawyers are in regular contact with regulators and hope to work within an evolving legal framework for digital currencies.
Byrne is no stranger to Wall Street; his vendetta against naked short selling led to litigation where he had extensive conflict with established players. However, he has been able to turn Overstock.com into a force to be reckoned with, despite competition from much larger rivals such as eBay and Amazon.com. This time, by investing in a platform compatible with bitcoin, Byrne has the established dominant player on his side. Counterparty could theoretically be ported to another infrastructure, but it is currently joined at the hip with the Bitcoin protocol. This could either help or hurt the chances for Counterparty and investors in its XCP digital currency, who, by virtue of XCP's high volatility and tiny market cap of $11 million, are likely headed toward a binary outcome where they will make many times their stake or lose it all.
[David Bensoussan, a member of the Digital Currency Council and an independent financial adviser, is owner of Gray Swan Asset Management. He bought some bitcoin and Counterparty in 2011 and 2014, respectively, and currently owns 100 bitcoin and approximately 10,600 XCP. This article discusses extremely speculative items (that are not viewed as real assets by most people) and should not be construed as investment advice. Please contact your financial adviser before investing in any risky endeavor.]David Bensoussan is co-president of Gray Swan Asset Management, a registered investor advisor in San Diego, Calif., specializing in stocks and other equity investments. David spent his childhood in both California and France, giving him an international perspective. In 2000, ... View Full Bio