Think bitcoin is dead? Here’s why it’s making a comeback

Since the digital currency crashed in early 2014, consumers have been leery. So why is Israel’s bitcoin community growing, and why are venture capitalists investing in it like crazy?

Simona Weinglass is an investigative reporter at The Times of Israel.

Illustrative image of bitcoins (Courtesy BitsofGold)
Illustrative image of bitcoins (Courtesy BitsofGold)

Across the street from the gleaming glass facade of the Tel Aviv Stock Exchange sits a modest storefront where nine men in their 20s and 30s are holding a meeting.

Some of the men are wearing dress shirts while others sport Birkenstocks and beards, but they don’t look like revolutionaries. Yet if you spend a few hours in their presence, you realize that they are the closest thing the tech world has to a movement with a vision for changing the world.

It’s the June meeting of the Israel Bitcoin Association, held at the Tel Aviv Bitcoin Embassy.

“We need to educate and lobby the government about bitcoin,” says Eden Schochat, a partner at the Aleph Venture Capital firm, which has invested in at least one bitcoin startup, COLU. “If we could get (Prime Minister Benjamin) Netanyahu to say something positive about bitcoin, that would be a great start.”

Inside Tel Aviv's Bitcoin Embassy (Courtesy)
Inside Tel Aviv’s Bitcoin Embassy (Courtesy)

In August 2014, the Bank of Israel formed a committee to study the bitcoin issue; it has yet to issue any guidelines.

But the men gathered at the Bitcoin Embassy believe history is on their side. The bathroom walls are covered with graffiti. “Bitcoin is an international language of liberty that destroys barriers and oppression!” reads one. Or “Bitcoin is the Moses of the third millennium.”

Fervor rekindled

You would be forgiven for thinking bitcoin is an idea whose time has passed.

Back in 2013, the digital currency rose from a value of $20 to $1,242 per coin in a single year. Then the currency began to plummet, followed by a series of high-profile losses and scams. The Mt. Gox bitcoin exchange collapsed, losing $477 million worth of its customers’ bitcoin to hackers. Another $11 million have reportedly been lost in bitcoin scams since 2011.

One website found that bitcoin has been declared dead in the media no fewer than 71 times.

But the folks at the Tel Aviv Bitcoin Embassy don’t seem to have gotten the memo. While the number of global bitcoin transactions has held steady since all the bad news emerged at the beginning of 2014, quietly, under the radar, Israel’s community of bitcoin enthusiasts is growing. In 2013, the Israel Bitcoin Meetup Group had 100 members; today it has 1,800. The number of businesses accepting bitcoin has grown from a handful to 230, and there are currently 30 bitcoin-based startups, according to Gitai Zakh, a consultant to these startups.

Eden Schochat is just one of the venture capitalists prowling for opportunity in the bitcoin trenches. In January of this year bitcoin-based startup GetGems raised $400,000 from Magma Partners, while the same month COLU raised $2.5 million from local and US-based funds. The amount of venture capital going to bitcoin-based startups globally has spiked from a mere $98 million in all of 2013 to $229 million in just the first quarter of 2015.

As Marc Andreesen, one of the world’s most celebrated venture capitalists, put it recently, “One can hardly accuse bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe bitcoin is, and what a growing critical mass of technologists believe bitcoin is, remains enormous.”

Jonathan Rouach (left) with his brother and cofounder Youval Rouach at the Bitcoin Embassy (Courtesy)
Jonathan Rouach (left) with his brother and cofounder Youval Rouach at the Bitcoin Embassy (Courtesy)

Jonathan Rouach, a Technion-educated engineer and the founder of Bits of Gold, told The Times of Israel, “If you focus on the price of bitcoin, that’s a mistake. The original enthusiasm about bitcoin was about two things. There were people who looked at the price going up, at nerds getting rich really quickly. But there were also people who made the effort to understand the underlying technology, like Bill Gates, who fell in love with the mathematics of it.”

Nouveau riches

In this view, bitcoin is not just a currency. It’s a groundbreaking new concept and a paradigm shift.

“Bitcoin is an invention that opened up a brand new way of moving value and tracking ownership of things,” Rouach said.

The problem that bitcoin solves, according to Rouach, is that before the Internet, you could just give someone cash without any need for a middleman, but that’s not the case anymore.

“Once we moved to the digital world, one person couldn’t hand cash to another. We’re forced to ask a third party, like a bank, to please move 50 shekels from my account and add it to your account. This is a loss of freedom.”

With bitcoin, he says, anyone can transfer money to anyone else in the world with a click. It goes directly from person A to person B with no intermediary, no wait and a negligible fee. “No entity in the world can stop me.”

The way this works is through a ledger known as the blockchain, which plays the record-keeping role that a bank or PayPal would otherwise play.

“You take this huge ledger and make thousands of copies, which are distributed on the Internet among participants in the bitcoin network. They update that ledger on a timely basis to reach one consensus after another.”

In other words, the records of your transaction are not kept in a bank, but in a decentralized ledger.

This dis-intermediation of banks has practical benefits. For instance, the bitcoin Embassy frequently gets visits from foreign workers who convert small amounts, say 200 shekels, into bitcoin and send it back to their native Nigeria.Bitcoin is important for two reasons, says Rouach: the practical uses it has now and the creative ways engineers and developers are building on it.

“It’s cheaper than Western Union,” he notes.

“It also lowers barriers to entry for businesses and prevents haircuts,” says Rouach, referring to the practice of tycoons receiving loans, then having them erased if a company under their control fails. The practice of haircuts has been a source of popular anger in Israel because some see it as a form of subsidy for the wealthy by the rest of the population.

In addition, bitcoin makes micropayments easy and effortless, allowing readers to pay 5 cents for an article they enjoyed or contribute $1 to a Kickstarter campaign. Micropayments have been touted as one way to save the journalism industry but have been impractical to implement before bitcoin.

Decentralizing the Internet economy

But the really hot topic in the cryptocurrency movement these days, the one that gets bitcoin activists fired up, is decentralizing the Internet.

“The blockchain didn’t exist five years ago,” notes Ayal Segev, an architect who donated his studio to what is now the Bitcoin Embassy.

“It allows computers to work together in a synchronized way without there being a server or central computer coordinating their activity. This is a very big deal. As humans, we can work together in groups of four or five without a commander. But 50 people need a commander and 500 people need some sort of management structure. Because they can do very fast computations, computers can work together in groups of millions with no hierarchy.”

What this means is that you can use the blockchain to create organizational structures that are peer-to-peer instead of hub-and-spoke. Segev cited wildly popular social sites to make his point.

“Facebook is a benevolent dictator. Mark Zuckerberg or Jimmy Wales at Wikipedia are in charge. But what happens to the system when they go? Whoever comes along can introduce censorship. They can control your access to information.”

Segev says that a system where so much power is concentrated in the hands of companies with centralized servers, like Google or Facebook, is a temporary phase.

“If we could copy social networks to a technology like the blockchain, there would be no Facebook. It could run without a manager.”

Matan Field Courtesy)
Matan Field (Courtesy)

According to Matan Field, a theoretical physicist and CEO of BackFeed, this decentralization idea has become the next big thing in the bitcoin movement over the last six to twelve months.

“A lot of people had the same idea at the same time in different places around the world. People realized you can do much more with the blockchain than just a monetary system or currency.”

He credits this idea to Vitalik Buterin, the 21-year-old Russian-Canadian whiz kid who in 2013 founded Ethereum, a platform for building and running decentralized applications, which raised $18 million last year purely through crowdfunding. Ethereum was followed by Augur, OneName and Storj, to name a few startups, as well as the Israel-based companies Synereo, GetGems, Lazooz (also founded by Field) and BackFeed.

What these startups have in common is that they seek to distribute the rewards and income of the digital economy more broadly. For instance, a musician whose song gets listened to 100,000 times will not have to stand by as Spotify or Pandora reaps the profits from his creativity. A photographer whose photo gets shared will receive micropayments from viewers, rather than letting Instagram or Google monetize her labor through advertising. A decentralized Uber would more or less be a cooperative of taxi drivers. Earlier this month, OpenBazaar raised $1 million for a decentralized version of eBay. The tech and business media went crazy, with Fortune magazine declaring, “OpenBazaar could be America’s most dangerous tech star.” Writ large, a decentralized Internet will bolster the middle class and reduce income inequality, its boosters claim.

Needed: Trust

Inside the Tel Aviv Bitcoin Embassy, four “ambassadors” are chatting, eating pistachios and working on their projects. An electric sign flashes the bitcoin-shekel exchange rate, while visitors pop in to convert shekels to bitcoin at the embassy’s ATM machine.

“I created this space,” says Segev, “for the community, because we need more than digital forums. We need a physical space where people learn to trust each other and make personal connections.”

Using the Bitcoin ATM machine (Courtesy)
Using the bitcoin ATM machine (Courtesy)

In Israel, Rouach estimates there are 10,000-15,000 bitcoin owners, with estimates worldwide at about 10 million.

Meanwhile, bitcoin has staunch detractors.

“The most important reason I wouldn’t transact in bitcoin is it’s not backed by anything. A US dollar is backed by the US government,” says Ari Dobner, CEO of FinTech startup ClearShift. “A single regulatory change can send bitcoin’s value to almost nothing in a single day.”

Dobner adds that while he admires the blockchain technology, “it doesn’t mean that bitcoins themselves are worth anything.”

Segev admits that most people involved in the bitcoin movement are tech professionals

“Right now we’re creating the infrastructure. We need non-techies who understand this to translate it to a wider audience. If a million people came and said, ‘give us bitcoin,’ we can’t support that yet,” he says, referring to the fact that the blockchain can currently only support four to seven transactions per second. This is the case despite the fact that bitcoin has been largest human endeavor in terms of computation for last two years, according to Rouach.

So is bitcoin doomed to die?

No, says Rouach, who half-jokingly describes bitcoin as a life system of its own that uses humans to perpetuate itself. But rather than empowering the middle class, he predicts bitcoin will empower artificial intelligence.

For instance, there could be a drone delivery service paid with bitcoin. When a drone earns enough bitcoin, it orders parts for a new drone on Amazon and pays a human to be its eyes and hands and assemble the parts, adding a second drone to its fleet.

“Humans are merely labor for the machine. Humans become irrelevant and bitcoin becomes its own power.”

Rouach says bitcoin or another cryptocurrency is historically inevitable because now that bitcoin exists, someone somewhere will get computers to run bitcoin. Because the system is decentralized, this process can’t be stopped.

“There are incentives today –and they will continue to exist tomorrow — for this experiment to run forever. Or at least that is the belief of most people in this community. This experiment has now reached a point of no return. We want to see where it goes.”

Yes, but is the outcome utopian or dystopian?

Rouach smiles. “That depends on us.”

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