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Can Bitcoin Win the Digital Payments ‘Gauge War’?

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Simon Johnson is a Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management.

The following article originally appeared in Consensus Magazine, distributed exclusively to attendees of CoinDesk’s Consensus 2019 event.


The promise and potential of bitcoin as a technology is frequently described in terms of a platform. On top of bitcoin’s permissionless blockchain, the argument goes, all kinds of things could be built to reduce the power and profit of trusted intermediaries. If you fear and resent monopolies, particularly those that are becoming more obnoxious as the digital age progresses, this is an alluring future.

It may also be an illusion. Not only are the use cases so far rather limited, but increasingly implementations – upon closer inspection – turn out to be “permissioned” blockchains, which are actually some form of relatively centralized shared database controlled by trusted intermediaries.

The terminology and rhetoric may have changed, for activities such as organizing supply chains or clearing financial transactions, but the reality looks remarkably similar to what existed before bitcoin was invented. Bitcoin’s arrival, and the disruptive potential it vaguely represented seemed to goad various industries into exploring an old form of distributed database technology. But this is hardly a revolution.

Will bitcoin ever have a more meaningful impact on society than this?

Before we ponder that more deeply, let’s pause and reflect on what definitely already exists. Bitcoin has proved to be a remarkably robust means of making certain kinds of payments. It is also a store of value, albeit one that is highly volatile. Of course, bitcoin has also spawned a variety of other cryptocurrencies, which range from being reasonable propositions to completely unappealing.

In speculating on whether bitcoin and its imitators can progress beyond these modest beginnings, one important historical analogy is useful: the development of railways in the UK. Some initial railways were highly profitable (e.g., the Liverpool-Manchester line) and others were miracles of engineering (the Great Western) but in various senses less successful. Many of them were more humdrum. There was excessive competition in what became known as “The Gauge War,” as well as crazy moments of speculation and plenty of outright fraud. It was the first big capitalist boom, and it set the tone for pretty much everything else that followed.

A case study in disruption

What did railways really accomplish? There were three major impacts, some but not all of which were clear at the beginning.

First, railways broke the grip that canals had on the movement of heavy goods. Turnpikes, or toll roads, were fine for small-scale movement of passengers, but anything heavier needed to go by barge. Not surprisingly, canal owners were generally opposed to railway development, spawning fights that went on for years. This pitched battle was obvious to everyone who understood the transportation element in the pricing of coal and other traded goods.

Second, railways encouraged people to travel. The number of people traveling by rail, for example between Liverpool and Manchester, quickly surpassed the number who had been brave enough to take a stagecoach.

Third, railways created new jobs, but they also destroyed livelihoods. The people who ran and otherwise benefited from turnpikes did not do well. Over several decades, railways were a net positive on the jobs front – including many occupations that were relatively well-paid (although other jobs were most definitely dangerous and underpaid by any reasonable metric). The scale and scope of the economic and social impact was impressive – and likely a surprise to most people.

Most canals eventually went out of business, but what’s striking is how long it took. Some waterways remain financially viable at least until the end of the nineteenth century – roughly 60 years after the railway proof of concept was fully established – even though canal owners had done nothing new or clever to assure their survival.

A canal is a canal; there’s not much you can do to invest or upgrade this kind of physical infrastructure. The response on the side of the roads was quite different.

Over time, road surfaces improved a great deal. And the internal combustion engine, which gave rise to the automobile, proved to be a technological shift just as profound as putting a steam engine on wheels. Nothing lasts forever, as the owners of railway company stock discovered.

Take all of this back to bitcoin and assume that only the narrow version survives – solely a payments system. This could still be a major potential competitive threat to all forms of financial gatekeeper, but only insofar as bitcoin can outcompete its rivals among other means of digital payments. Various companies in this arena are trying to build railroads – some focused on functionality, others aiming for more elegant solutions.

But for the customer, it’s just about getting from A to B fastest at the lowest cost.

You really don’t care how Venmo works, or what happens when you use Apple Pay in a cab or receive a confirmation from PayPal, or even how your credit card works in a foreign chip & PIN sign system. All you care about is: did you know what the price was going to be, and could you settle in a way acceptable to both the payee and you. Various entities are holding risk within that payments system, but not you – at least not in a way that gives you any concern.

Bitcoin’s opportunity lies in how well it too can enable more seamless, low-cost digital transactions for people. (I don’t see bitcoin as a rival for cash, which will rise or fall in various societies, depending on whether people like immediate anonymous settlement – and how they feel about carrying around physical bundles with that characteristic.)

We go with what works

How will this shake out? Let’s take a lesson from Isambard Kingdom Brunel, builder of the Great Western Railway. Impressive engineering is good, but interoperability trumps it.

Brunel’s railway had a broader gauge than most other British lines, but it was eventually forced to adopt those standard gauges to connect with other lines. In the end, the network effect prevails – we go with what works more often and in more places.

Bitcoin may have helped spark the railroad age but there is no guarantee it will win. In fact, currently, it looks more like the Great Western – gets the job done, but at relatively high cost in a small community of users, and with features that can only be regarded as strange.

(The oddest part of the Great Western operation was a century-long contract (!) that required all London-Bristol trains to stop in Swindon, where there were monopoly providers of refreshments to that line. Lesson for crypto developers: long confirmation times and erratic spikes in transaction fees may seem attractive to some engineers; to ordinary customers these are discouraging.)

Bitcoin could still win the competition to provide better, cheaper, more reliable payments. Recent steps promised by Bakkt, for example, can be regarded as encouraging if they bring bitcoin closer to being used in mainstream commerce (e.g., for Starbucks). And every time I hear about the Lightning Network from a colleague at MIT, I also feel that the system is moving in the right direction toward low-cost, peer-to-peer payments.

Still, remember, the railway customer does not care if the railway will strengthen or undermine existing landowners or shake up the structure of power. Similarly, whether particular intermediaries will rise or fall is generally a matter of some indifference.

All that matters is: will the trains run on time, and how much does it cost to buy a ticket?

Boiler room image via Shutterstock

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Robinhood Zero-Fee Trading App Officially Launches in New York

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American stock brokerage Robinhood Crypto has officially launched its zero-fee crypto trading app in New York, the company announced in a blog post on May 23.

Following the acquisition of a BitLicense by the New York State Department of Financial Services (DFS) in January 2019, Robinhood now allows New York citizens to trade in seven major cryptos with no commission fee using its Robinhood Crypto platform.

From now, the Robinhood Crypto service is available in 39 states in the United States, including California, Washington and Florida, among others.

The Robinhood trading app allows for the trading of bitcoin (BTC), ethereum (ETH), bitcoin cash (BCH), litecoin (LTC), bitcoin SV (BSV), ethereum classic (ETC) and dogecoin (DOGE). Robinhood users can also track price alterations and updates for those cryptos and 10 additional coins, the blog post notes.

Earlier in April, Robinhood applied for a bank charter with regulators in the U.S. in order to offer traditional banking products and services.

Previously, the DFS granted a BitLicense to a institutional-grade crypto trading platform Tagomi Trading, enabling the company to offer trade routing and order execution services for non-security cryptos including bitcoin, ethereum, litecoin and bitcoin cash.

Recently, on April 18, Bloomberg reported that the ICE was considering acquiring a New York BitLicense to launch bitcoin futures, citing anonymous sources familiar with the matter.

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Here’s Why Bitcoin, Ethereum and Litecoin is undervalued at Spot Rates

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Bitcoin, Ethereum and Litecoin are still incredibly undervalued as present valuations stand. This is on account of the potential of these coins and planned upgrades to make them better according to a crypto trader and enthusiast.

Yes, Bitcoin may have rallied back to possible bull territory. However, it is still fair to say that the coin sits below its true and projected position as a currency and security. Bitcoin came about as an alternative currency with decentralization as a catch for investors and enthusiasts alike.

Bitcoin is resilient and has shrugged off legitimacy questions from naysayers time and time again. The price volatility is just a consequence of intense speculation and uncertainty common with new inventions. Nonetheless, Bitcoin’s transcendent ability to transform the financial world remains effectively eliminating borders and regulatory overreach.

Bitcoin as Digital Gold

Bitcoin is a finite currency. Notably, every fiat currency will return to its inherent value of zero at times of hyperinflation. This is clear from the Venezuelan Bolivar which is worth less than its printing paper at the moment. In this light Bitcoin can become an alternative to collapsed currencies especially in failed states.

It’s become a trusted alternative when fiat money’s value is corrupted by politics”

-John McGinnis and Kyle Roche of Wall Street Journal.

The limited availability means Bitcoin can efficiently store value at times of financial crises. This is eerily similar to gold which is also a great commodity to store value that rises in value in hard times for fiat. This has led to some proponents calling Bitcoin digital Gold and rightfully so. As such, the value of $8,000 is momentary as the developed world economy is still doing well.

Ethereum And Litecoin As Alternatives

Ethereum is a great alternative for Bitcoin. That said, the price of $270 is still on the low because of the incredible potential given the possibilities of Smart contracts. More significant is the upcoming Serenity or Ethereum 2.0 upgrade. This upgrade will significantly improve the coin by incorporating technical improvements that improve scalability and performance. At the premier Ethereum Supermeetup, hosted at Token2049, Vitalik Buterin explained the update as follows;

“(It is) a way to bring technical improvements, like PoS and sharding, together to improve the Virtual Machine, Merkle Trees, the efficiency of the protocol, and a whole bunch of small technical things that you have never heard of.”

Ethereum is in this regard still on the downside price-wise. The upgrades are necessary and timely to keep the protocol efficient.

Litecoin, on the other hand, is essentially a better version of Bitcoin. This is because the coin, while having essentially the same possibilities as Bitcoin, is more adaptable to change such as the introduction of smart contracts.

Charlie Lee, a former Google employee, who founded Litecoin, has also given financial support to the Lightning Network.  There are also possibilities of incorporating Mimble Wimble that will inherently scale the network while introducing better security and privacy for the end user. When we add the halving mix in the equation, investors and traders are convinced that we are in the early stages of a mega bull run that will propel asset prices, valuing them fairly.

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Smart contract platform Fantom chooses Binance Chain for interoperability

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Binance Chain, the blockchain from cryptocurrency exchange company Binance, and DAG-based smart contract platform, Fantom, announced today they will be working together to create a multi-asset and cross chain ecosystem.

The Fantom team said it will be supporting a multitude of tokens including the ERC-20 standard, native Fantom token (FTM) standard, along with the BEP-2 token standard on Binance Chain.

“Our reason for choosing Binance Chain as our interoperability partner over any other blockchain is simple, we’re seeing an increasing trend of great projects moving towards Binance Chain, and we want to contribute to the Binance Chain ecosystem so that all these great projects may garner added value from our contributions. Binance and Binance Chain are in a rare position of having the strongest centralized exchange and liquidity on one end, and a very cohesive decentralized ecosystem on the other end, and we believe that there is no better partner for Fantom in its push for greater interoperability within the industry.”

The Fantom Foundation

The collaboration will offer Fantom users a chance to transact and trade FTM while being in custody of their own tokens on Binance DEX.

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Robinhood Opens Trading for 7 Cryptocurrencies in New York

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Robinhood, the popular stock and crypto investing app, has officially launched bitcoin, ethereum, and other cryptocurrency trading in New York.

Silicon Valley-based Robinhood received a BitLicense from the New York Department of Financial Services (NYDFS) in January 2019 and on Thursday opened access to crypto trading in the Empire State.

From the press release:

Currently, you can invest in seven cryptocurrencies on Robinhood Crypto: Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Ethereum Classic, Litecoin, and Dogecoin. You can also track price movements and news for those and 10 additional cryptocurrencies.

New York is unique and problematic for crypto traders because all purveyors must apply for a BitLicense, most notably for companies that are “storing, holding, or maintaining custody or control of virtual currency on behalf of others,” according to NYDFS.

Many crypto startups have avoided the requirements entirely by becoming BitLicense refugees and refusing to do business in the state.

“Here we are two miles from the Statue of Liberty and you cannot sell CryptoKitties in the state without that license. That’s the absurdity of what’s happened here,” ShapeShift CEO Erik Voorhees complained in 2018 when asked about the controversial license at CoinDesk’s Consensus conference in New York.

Image courtesy of Robinhood

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Generation Bitcoin: 90% of Millennials Prefer Crypto to Gold: ETF Expert

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By CCN: The US investing industry stands on the precipice of a dramatic upheaval that could see bitcoin and other cryptocurrency assets replace gold in investor portfolios.

That’s according to Nate Geraci, president of the ETF Store, an independent investment advisor. He revealed in a Bloomberg TV interview that his millennial clients are clamoring to hold bitcoin in their portfolios – if only the SEC would let them.

Crypto in a Landslide: ETF Expert Says Millennials Plan to Kick Gold to the Curb

Responding to a question from Bloomberg analyst Eric Balchunas about whether he would ever invest client funds in a bitcoin ETF, Geraci stunned his fellow panel members when he said that millennial investors overwhelmingly desire to hold bitcoin instead of traditional hedge assets like gold.

How overwhelming? Ninety percent.

“When we talk to our younger clients – we have a core gold allocation in our portfolios, and they’ll ask about that and say, ‘What about crypto?’ And if you talk to, primarily millennials, and ask them which they prefer, bitcoin or gold, it’s a landslide. It’s not even close, it’s like 90% prefer bitcoin.”

Geraci’s bold claim was more anecdotal than scientific, but there’s plenty of hard data that demonstrates that younger investors are vastly more comfortable with holding cryptocurrency in their portfolios than investors who grew up in the pre-digital era.

In April, a Harris Poll survey found that 18 to 34-year-olds are “very” or “somewhat” likely to purchase bitcoin within the next five years. That might not seem overwhelming, but consider that only 37% of Americans in that demographic currently own stocks.

Similarly, a February eToro survey found that 43% of millennials trust crypto exchanges more than stock exchanges, even though crypto trading platform hacks dominate the mainstream news cycle.

ETF Would Reduce Crypto Investing Risks

bitcoin etf vaneck bitcoin price

ETF Store President Nate Geraci said that there is rabid demand for a bitcoin ETF, especially among millennials. | Source: Shutterstock

Nate Geraci further pointed to the success of the $1.5 billion Bitcoin Investment Trust (OTC: GBTC) as proof that there is sufficient market demand for a crypto ETF.

He noted that the over-the-counter product regularly trades at a staggering premium to the underlying value of its BTC assets. That’s because GBTC shares fluctuate based on supply and demand, not just the price of bitcoin. An ETF, he said, would flatten that premium and thus reduce investor risk.

“It seems a bit incongruent to me that we have that product out there trading, where investors really could get hurt if they don’t understand that premium, but we don’t have a bitcoin ETF.”

“The demand is there,” he concluded.

SEC Kicks the Bitcoin ETF Can Down the Road

Unfortunately for crypto bulls, millennials aren’t the ones manipulating the levers of the Securities and Exchange Commission (SEC), which holds unilateral authority to approve or deny bitcoin ETF applications.

The SEC, as CCN reported, continues to punt on the issue. Last week, the regulatory agency extended its long trend of delaying ruling on cryptocurrency products when it postponed its decision on the VanEck/SolidX Bitcoin ETF to August 19. Most industry insiders expect the SEC to delay the VanEck/SolidX product again, pushing its final ruling until October 18.

Dave Nadig, the managing director of ETF.com, said that he believes the SEC is still in “information gathering mode” but that there is a “reasonable chance” regulators approve the first bitcoin ETF before the end of 2019.

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