VLAB Discusses Bitcoin, or Let Them Eat Cupcakes

“The whole idea of governments, nations, it’s public relations theory at this point.”  Martin Q. Blank, Grosse Pointe Blank

Last night I attended VLAB’s “Virtual Currencies Gold Rush or Fools Gold, the rise of Bitcoin in a Digital Economy” at the ever more swanky Stanford GSB. I have long felt that the next Bill Gates level  fortune will come from who every figures out virtual currencies.

A particularly strong panel included Chris Larson of E-Loan fame, the Winklevoss twins (yes, they both came), Fred Ehrsam who runs the USV-funded Bitcoin exchange Coinbase, Wendy Cheung of SVB with moderation by Forbes’ Kashmir Hill.

The event opened with GSB professor Susan Athey giving an overview of Bitcoin focusing on her belief that the value of Bitcoin is determined by the volume of transactions in the currency. Moderator Kashmir Hill describing her humorous experience trying to live off from Bitcoin for a week. Long story short, she lost 3lbs because she could only eat sushi and cupcakes as only two eateries in San Francisco took Bitcoin. She also had to walk everywhere because taxis and buses do not take Bitcoin.

Next up is Chris Larsen who provide a crisp six slide (Yes, Visuals, Thank You!) overview of the history of math based currencies and his start-up OpenCoin, creator of Ripple, a virtual currency similar to Bitcoin. He noted that Bitcoin rose during the economic meltdown of 2009 when we lost faith in financial institutions and nation-based currencies. He compared the similarities and differences of Ripple and Bitcoin and closed by asking whether virtual currencies would develop the “trust, utility and liquidity” to become  “the HTTP of money” or fade away like the Occupy Movement.

The panel moved to Q & A with Ehrsam and Larsen answering question on how virtual currencies actually work – mining, exchanges, etc.  Applications were also discussed including micropayments. One of the Winklevoss (who claim to own 1% of all Bitcoins – not sure if they remember the Hunt brothers) suggested “banking the world.” For you celebrity watchers, they came off nothing like the characters in the Social Network. They were very relaxed and affable young men.

I kept thinking about PayPal and was surprised that it was never mentioned as it seems so applicable. For years PayPal literally gave away money trying to get people to pay each other using PayPal (to solve the cupcakes and sushi problem). Ultimately they got adoption by enabling greater efficiency on a platform people use, eBay. Once the got traction, every bureaucrat from every government in the developed world showed up on their doorstep to regulate them.  Given the difficult times (July, 2002) their acquisition by eBay was a gold rush. But their upside was limited as there was basically one buyer. It is worth noting that at the time of the acquisition, the consensus of the pundits was that PayPal would ultimately be worth more than eBay. Several years later, that is not the case.

While math-based currencies are still searching for their eBay, exchanging cash instantly across borders with zero transaction costs – that would be an incredible new freedom.  On the other hand it would be very disruptive to taxation, capital formation and the financial services industry. One panelist asked “why do we need banks?” My mind moved to the killer quote above. But as Larson noted, “the financial services industry is very hard to disrupt.”