I wrote an article for Coindesk, the leading news and information site about virtual currency, about an example of how banks are trying to stop Bitcoin. I repost the piece here, the orginal article is here. 

It seems banks have started to realize that bitcoin could be a major threat for them.

In the US many banks don’t accept any bitcoin businesses as clients, possibly because of regulatory concerns and money laundering risks.

Individuals aren’t free from bitcoin banking issues either. CoinDesk reported recently that a Swedish bank froze a customer’s account for selling just 5 BTC.

Now it is the Netherlands’ turn. A bank has taken matters a step further and simply blocked most of its customers from buying bitcoins at exchanges.

According to an article in the Dutch press, Rabobank cancelled 99% of its customers’ transactions with bitcoin exchanges on Tuesday and Wednesday.

Rabobank did not give a reason for this, but a spokesperson for Dutch bitcoin exchange BTCNext said it was because transactions are seen as potential fraud.

However, many clients of Rabobank could not finalize and complete their transaction, even after calling to confirm that their transfers were not fraudulent.

Coincidentally, I have an account at Rabobank that I have used to buy bitcoins. This worked well until September, but after that transactions did not get processed reliably. I assumed it was problem with the bitcoin exchange I was using, and accepted that I could not buy additional coins.

I now wonder if the bank may have been behind this issue all along. Could it be that the Rabobank has been intervening in its client’s transactions for far longer than just the past two days?

Technical problems, really?

Because the bank claimed that the problems were technical and had been solved, I decided to try to buy five bitcoins just now through Rabobank.

The transaction went through until the moment I hit the pay button. Then I got an error message saying that my account number was not correct.

I tried this several times and each time I got the same error. Then I tried to transfer a small amount to someone else as a test, and guess what? The transaction went through right away! So Rabobank is still not allowing people to buy bitcoin.

I understand why a bank would try to do this, of course. This is money that people may normally leave in their savings accounts. When a customer decides to use it to purchase bitcoin the bank has less money on its books, meaning that they can’t lend out as much as before. If just a few people would do this, it would not be a big issue. But when the general public starts to adopt bitcoin it could endanger part of the bank’s business.

Banks need to innovate and embrace bitcoin

If I was running a bank, I would not try to stop bitcoin, but instead actively look at embracing the cryptocurrency.

Why not set up or buy a bitcoin exchange, or create an easy-to-use wallet and make sure that people keep their bitcoin deposits with you? Not only would it be great PR, but it could create a lot of new customers as well.

I understand that banks are conservative, but they are making the same mistakes as the music and newspaper industries did over the past ten years.

You can’t stop financial innovation. If you can’t beat them, then you’d better join them.

 

Craiglist ad from a Chinese student selling his/her car

When I was in university I had several jobs, mainly teaching first year students mathematics & statistics and tutoring high school students. With that money I could afford to keep my car running, a 13 year old Citroen Visa. It seems at least some Chinese students in Vancouver have a different university life! Good for them, but I am glad I did not have the money yet to buy a Lamborghini during my studies.

Or is the ad fake? The color of the Murcielago in the picture is certainly not Grigio Telesto.

Although I am a big believer in Bitcoin, I do realize that there is a risk that the currency won’t make it and that my holdings may eventually be worth a lot less than they currently are. I am used to taking investment risks and am prepared to lose all the money I put into Bitcoin, because I think the potential upside is much bigger than the downside.

What could happen to Bitcoin? I think there are 3 main risks: speculation risk, government risk, and something that I would call the ecosystem risk.

Speculation risk

Speculation risk is more of a short-term risk to me. It means that the people that currently have large Bitcoin holdings would suddenly dump them onto the market. Without any new buyers the market will crash, something that happened in April for example (prices dropped from $266 to $70). This is not unlikely, especially because I believe that most of the Bitcoins on the market are currently held by speculators.

There is no real solution to this, but the longer Bitcoin exists the smaller the risk becomes. Not only because the market cap and number of Bitcoins on the market gets higher every day, which means that the volatility will be lower and more people need to sell in order to crash the market. But also because the ecosystem gets better all the time: when more people use Bitcoin for normal transactions, there is a larger base that won’t sell when there should be a price drop.

Government risk

Government intervention seems to be the biggest risk to many people, but I am not so sure about that. Governments will surely try to regulate Bitcoin and that’s fine because it makes Bitcoin more legitimate. When people see that the government regulates something that will lead to more widespread adoption. This week there are hearings in the US about Bitcoin, I look forward to reading about the results of those talks. Several other countries have already announced basic rules for Bitcoin, and in that way legitimized the currency. This is important for merchants, because uncertainty will lead most businesses to avoid Bitcoin for now.

There may be a chance that the government will try to stop Bitcoin because they can’t control it and it threatens the current system: it makes printing money useless! It’s a good tool for money laundering and tax evasion, and that’s something they don’t like. You can take your Bitcoin with you wherever you go and nobody will know that you have them with you (e.g. on your phone or as a piece of paper in your paper Bitcoin wallet). Are there ways that the government could pull this off? At first I thought they can’t do this, but now I am not so sure anymore. Although I don’t expect them to ban Bitcoin outright they can make it very hard for normal law-abiding citizens to buy and sell Bitcoin.

One way to do this would be to add VAT to every Bitcoin transaction. This is something the UK is planning to do, but I am not sure if they realize what they are proposing. The current idea would actually mean that if you change British Pounds to Bitcon, you would have to pay VAT on that transaction. The reason is that they classify Bitcoin as coupons, and for those the similar VAT rules apply. If this would become legislation (which is far from sure at this point) the UK would shoot itself in the foot, because if would not be part of the Bitcoin economy. In the short run that may seem like a smart move, but in the long run they may lose out on a lot of growth.

The main problem right now is that governments just don’t understand what Bitcoin really is and what it can be used for legitimately. Maybe they will try to start their own cybercurrency and say that it’s safer than Bitcoin. In the past they could have pulled this off easily, but in the current age of social media I am not sure if people would still believe them.

Ecosystem risk

Likely banks will do their best to stop Bitcoin, because they are starting to realize it will disrupt their business and may make them (partially) obsolete. If banks to refuse to work with Bitcoin companies, or (more extreme) even ban individuals that use Bitcoin, there will be a chilling effect on the market. Right now many US banks are not taking Bitcoin companies as clients, although it’s not completely clear if this is because of Bitcoin itself or because they don’t want to have potential anti money laundering risks. However, if US banks will keep on doing this it means that Bitcoin companies will set up operations in different parts of the world. In that case Bitcoin will thrive in Asia and Africa first. It won’t stop Bitcoin, but it will slow down its innovation and adoption. This is what I call the ecosystem risk.

If the ecosystem does not grow, the price of Bitcoin might not be sustainable. The current rates are much higher than what they should be based on daily transactions because many people buy Bitcoin for speculation purposes. That’s fine, as long as the ecosystem can catch up in the short to mid-term. This is the same as with stock prices, that are forward looking as well. But if the ecosystem should not grow people will realize the value of the Bitcoin may be lower than the current exchange rate and they could dump their holdings.

The development of the ecosystem is still in its infancy, although new investments in Bitcoin companies are announced every week now. But most companies are still in their development phase. That may change in a few months, and that’s the moment you might be able to see whether Bitcoin is overvalued or not. Will people start to use Bitcoin to make transfers to for example India or Africa? Will there be easier-to-use wallets on the market? Do more websites offer prices in Bitcoin? If so, a high price for Bitcoin might be justified. If not the market may crash. But even if it should crash there is a good chance that it will eventually recover when the Bitcoin ecosytem takes off at a later time.

Summarizing, Bitcoin is going up extremely fast at the moment and there are 3 main risks that I see. The speculation risk, where people dump their holdings. Government risk, where the government would actively try to stop the growth of Bitcoin. Or the ecosystem risk, where people don’t adopt the currency fast enough, which may lead to a crash. I follow all the news with keen interest and will keep using this blog to keep you up to date with how Bitcoin develops.

Over the past week Bitcoin fully recovered from its weekend flash crash (from a top of $395 down to $290) and seems to be going in the direction of $500. The growth is still way too fast in my opinion, but with my Bicoin holdings I don’t complain of course.

At the moment I spend 1-2 hours per day reading about and analyzing Bitcoin, and based on this I believe that the current spike in prices is mainly coming from China. Why? Because Chinese see Bitcoin as a new asset class. Most Chinese can only invest in the domestic stock market (which is perceived to be full of inside trading) and real estate. They can’t invest outside China. Bitcoin gives them something new to invest in and many are jumping on to this new opportunity without really knowing too much about it and just hoping to make a lot of money. Right now most people do well, but of course a crash may happen when everybody should start selling.

Next to that Bitcoin also gives Chinese a relatively easy way to obtain foreign currency without going through the grey or black market. The Chinese Renminbi is not freely convertible, so you can’t just go to a bank to change them to US dollars. However, you can change RMB to Bitcoins, and these Bitcoins can be changed to US dollars. From personal experience I know this is an important issue, even for some Chinese friends in Vancouver that can’t get their Chinese money out in a legal way (money they legally earned, but that’s stuck in RMB bank accounts).

Because of these speculative effects it’s impossible to predict where the Bitcoin will be 3 to 6 months from now. It all depends on how many Chinese will enter the market. Looking at volumes on Chinese exchanges I believe this is still the beginning of what is to come and part of a self-fulfilling prophecy: the price goes up so more people buy, which causes the price to go up even further. One day there may be a crash and then the real value of Bitcoin becomes more important.

But what is this real value of a Bitcoin and more importantly, how high could it be eventually? With eventually I mean a timespan of 5-10 years, the time that I plan to keep most of my Bitcoin. The value mainly depends on what Bitcoin will be used for. For example, I strongly believe that one of the first things that will happen, is that Bitcoin will take over all the current business of Western Union (money transfers to less developed economies). Why? Western Union charges about 10% in fees! Bitcoin is virtually free and transactions happen instantaneous. Based on the current value of Western Union you can calculate the implied value of Bitcoin, which would be around $880.

I think Bitcoin will be much bigger than just Western Union. What will happen if it takes over the role of Paypal (which is also very likely)? In that case the implied value of Bitcoin would be $1950. And you should add up these figures if you believe that Bitcoin will disrupt both Western Union and Paypal’s business.

It gets really interesting if you start looking at what would happen if Bitcoin would take over just a small share of the gold market. That is, if people would use Bitcoin as a store of value instead of gold. In a way that is what is happening now already in China, although it’s probably not a substitute for gold. In case Bitcoin woul just take over 1% of the role that the gold market has, its implied value would be almost $8000. Of course if it takes over 1% it will likely take over more after a while, so watch that closely if you hold Bitcoins.

Some people are even more bullish than this, for example the Winklevoss brothers. They announced this week that the market cap of Bitcoin could be 100 times the current value. They are among the biggest owners of Bitcoin, so this may be wishful thinking, but the fact that they say this publicly means that they at least have some belief in this.

In the short run a lot can happen to Bitcoin. For sure the volatility will remain extremely high and possibly there will be a big crash because speculators cash out before more people really start to use Bitcoin. But in the long run I believe that Bitcoin has real value. The Bitcoin protocol has so many potential applications that there will be a big ecosystem built on top of the crypto currency. For that reason I remain very bullish on Bitcoin, despite the crazy increase in price over the past days and weeks.

To keep things in perspective, tomorrow I plan to publish an article on this blog about the risks I see for Bitcoin.

During a trip to San Francisco in mid October I landed at SFO just before 10:30 PM and took the train to the Hertz rental car desk. I have been using Hertz for years and I have disliked them for most of that time. It’s just like with most airlines, you don’t like their service and attitude but you have to use them because there is no better alternative. Car rental companies always try to upsell you with insurance (I don’t need it, which they should know after declining it tens of times already), they force you to top up the fuel before bringing back the car (otherwise you pay draconian prices for it), and they let you wait in line when you are tired after a flight. And in nicer cars they disable the GPS so you are forced to rent one at crazy expensive prices!

So in October I arrived at Hertz around 10:30 and there was a loooong line. Well, what can you do? Just wait in line for half an hour until the service people on duty are ready upselling stuff to other customers. I observed the process and came to the conclusion that their system is so inefficient. They take their time to scare people into adding unneeded options to their rental contract and even as a regular customer you still have to go through the upselling process (“You declined insurance, sir, do you know that you won’t be covered if you have an accident?” Well, actually I am covered by my own insurance but there is no use to discuss this with them). You need to sign several documents and then you are finally allowed to walk to your car.

At least, that’s normally the case. But not last time at SFO: for whatever reason cars were not ready yet and I had to sit down and wait before they had a car for me, just like all their other customers. It was around 11:15 PM by that time, and I was tired and just wanted to leave the airport and drive to my hotel.

So I started tweeting about the Hertz experience, and guess what: new car rental company Silvercar saw my tweet and told me to check them out next time. Because I had enough time on my hands I went to their website and was surprised to read about how they are trying to disrupt the car rental experience. I immediately decided to give them a try during my next trip to SFO.

Well, this week I was back in Silicon Valley and we (Frank and I) booked a car through Silvercar. With the company you always get a silver Audi A4 Quattro, so no crappy US or Japanese cars anymore, but a decent German car with a reasonable (2.0 Turbo) engine. Maybe not as good as our regular cars, but much better than what Hertz normally gets you. And for a very reasonable price, I think we paid something like USD 85 per day for the car, that comes standard with GPS (no need to pay for a separate GPS unit), wifi and satellite radio. Also no need to fill it up when you come back, they do that for you and you pay the normal gas price plus a $5 service fee (sensors calculate how full the gas tank is). And best of all: no lines and no upselling!

The experience started off a bit bad, because our executive assistant had booked Silvercar for us and set up her own account for that. We did not realize this would lead to problems, but when you use your own Silvercar account the confirmation code does not work. Normally you open the app the moment you get off the plane and you let Silvercar know that you have arrived. A concierge will pick you up from the arrivals hall or from the car rental area (at SFO you have to take the train to car rental, because SFO does not allow them to pick you up at arrivals) and drive you to the Silvercar parking lot. However, when we tried this the app told us we did not have the right permissions. However, Dave (our concierge), had seen that the plane had arrived and sent us a welcome text message. We tried to reply the message and call him, but for some reason (related to Google Voice) we could not reach him.

At the Silvercar waiting area at SFO there is a phone you can use to call them, but the phone was out of order… So we had a little problem, because we could not reach Silvercar. But then I remembered that they monitor Twitter, so I sent them a tweet. And that worked: within a minute I had a reply and Dave was on his way to pick us up. He apologized for what had happened and we had a nice chat about how Silvercar works.

At their car lot we could choose the car that we wanted to take. They are all the same so we took the one closest to us. You scan the QR code on the front window with your iPhone and the doors unlock. It worked perfect! No waiting line, nu upselling, just scanning the code and driving away. I added myself as the second driver, which took just a minute and there was no extra fee for that (at Hertz it takes a much longer time and you have to pay for the privilege). Excellent!

We used the car for 3 days and liked the vehicle a lot. It has Sirius XM built in (all their cars have this, and it’s included in the price), so I could listen to the same satellite stations as in our cars in Canada. The Audi even has a toll tracking system built in so you can easily pay electronic tolls without having to stop, also something which is not a regular feature at Hertz. And it even has wifi built in, but I only found out about that after I returned the car (I did not read the short manual, my own fault).

The car itself drove very well, the A4 Quattro has a a good suspension and accelerates reasonably fast. I actually started to appreciate Audi more than I did before. Their dashboard is well designed (actually better than the current low-end BMW and Mercedes models, something I had not expected), and I may even consider to buy an Audi in the future. Something a bit bigger and faster than an A4 Quattro though!

When we dropped off the car this afternoon the process was very efficient. You can just drive into the parking lot where sensors register that you are back. The sensors also calculate how much fuel you used and bill you for that at local rates (plus a one-time $5 fee) and they know if you had to pay toll fees anywhere. You immediately receive the bill in your email.

A concierge will drive you to the airport in your own car (so you can leave the luggage in the vehicle). Very convenient, especially because he drops you off at the terminal where you need to be. We had a quick chat with the manager to talk about their start-up and give some advice, we are investors after all. He immediately gave us a corporate discount and an another one for XPCP’s portfolio companies. That’s called Service with a capital S!

We’re now at the airport having a glass of wine in the lounge, and probably for the first time I look back at a great rental car experience. I will use Silvercar again during our next trips to the Valley and I will promote it to my friends as well. I hope Silvercar will manage to disrupt the car rental agency, I will support them!

Silvercar currently has rental cars at San Francisco, Los Angeles, Dallas (DAL & DFW), Houston and Austin. Prices are similar to what you pay for a Toyota Camry at a traditional car rental service. All cars have standard GPS, wifi, satellite radio and toll tracking. Check out the company at www.silvercar.com.

Yesterday I was a guest in Dutch Internet talk show Fast Moving Targets again (the same show I appeared on about a year ago). It’s a show that’s broadcast live from Amsterdam each Tuesday night at 9 pm, and the audience is encouraged to interact via Twitter. The show is always quite lively and fun, with the presenters drinking a Palm beer during the program. I actually wonder if Palm sponsors them?

Anyway, yesterday the topic was ‘Bitcoin for beginners’ and because I write so much about Bitcoin on Facebook, Twitter and on this blog I was invited to join the discussion. I am based in Vancouver so I called in via Skype video, which worked well. The program was fun as usual, discussing the basics of Bitcoin and answering questions from the (sometimes skeptical) audience.

Interesting was that presenter Roeland Stekelenburg realized right before the program started that he had bought some Bitcoins about a year ago. So while waiting for the show to start he was trying to find back his virtual wallet (he did not even know where he had set it up) and right when we started he found it back. It turned out that the EUR 100 that he had put in was now worth over EUR 1000, so that was a good start of the show for him! To show how fast and easy Bitcoin is he then transfered a small amount to Rutger van Zuidam, which arrived in his Rutger’s wallet immediately.

Unfortunately the show is in Dutch, so most of the people reading this blog won’t be able to watch (or better, understand) it. But in case you speak Dutch I embed the YouTube version of Fast Moving Targets below. If you want to watch it on YouTube, the link is here. There will likely be a follow-up show where we will go into a bit more detail about Bitcoin and where Peter Verhaar (a Dutch banker who Twittered during the show that he does not understand why the Euro is not good enough) will also join the discussion.

Last week Twitter went public on the New York Stock Exchange and its IPO was considered a success with a large pop on the first day of trading. Because of US Securities and Exchange Commission (SEC) rules there is always a quiet period around an IPO, meaning that companies can’t talk publicly about their business. ‘Coincidentally’ 2 days before the IPO the book “Hatching Twitter: A True Story of Money, Power, Friendship and Betrayel” came out. Of course I don’t believe in this kind of coincidences and think it was a smart marketing move by the company to create extra publicity for the stock.

I have been following Twitter from its early days and was an early adopter of the platform (originally with username @marcvanderchijs, later I changed to @chijs). Although Twitter has changed a lot over the years I am still on it, although not as much as in the early days. So when I saw that this book was coming out I pre-ordered it right away and finished it last night.

It’s a great read, but I did not realize that Twitter had been in such a mess for the first 5 years of its existence. Every start-up has its ups and downs, but at Twitter nobody seemed to be in control. The outside world did not really see this, but this book tells it all. It must have been hard to have been an investor in Twitter and see that your millions are at risk because the founders were simply incapable of running the company.

Before reading the book I sort of admired the Twitter founders Jack Dorsey, Biz Stone and Ev Williams. They ran a company called Odeo back in 2005, of which I was a user.  Odeo did something very similar to the original idea of Tudou: audio podcasts. I still remember reading about Odeo on the front page of the New York Times, about 2 months before the public launch of Tudou, thinking that they were on the wrong track. At that time Tudou had already made the switch away from audio to video, but Odeo still needed a year to figure out a new business model, which turned out to be Twitter.

I especially liked Jack Dorsey, he seemed to be a second Steve Jobs. However, after reading Hatching Twitter I realize he would like to be the new Steve Jobs (and therefore he copies many things that Steve did), but he is far from it. He almost ran the company into the ground, did not listen to his co-founders and later successfully managed to get his former friend Ev fired as CEO. Although getting Ev fired may have been a good thing (Ev also wasn’t the best person to run a company like Twitter), generally Jack seems to be an unfriendly, egoistic person. But he is a new billionaire now, so he probably doesn’t care.

It’s actually a miracle that Twitter survived its first years. Only because the product was so good and grew virally they managed to stay alive, and to eventually grow into one of the largest web companies in the world. This book shows the inside story about the company: how did the founders get the idea, how did they get started and how did they get to where they are now.

I loved to read it and would recommend it to anybody who is involved in an Internet start-up or who would like to do one one day. It’s a 300-page book that’s easy to read, and you can probably finish it in one evening.

Update: the predicted crash happened about 12 hours after I wrote this post, see details at end of post.

Since I started following Bitcoin the price has been very volatile but mainly been rising. If you had bought Bitcoin around the time I started blogging about it you would have made a very decent return (360% in less than 5 months), however most of these gains were realized over the past couple of weeks and especially the past couple of days.

One month ago Bitcoin was still at $135, a week ago the rate was around $220, but right now it hovers around $370. It’s great when you plan to make a quick buck, but I see Bitcoin as a long-term investment (or speculation as some call it) in a crypto currency that has the potential to change the world of finance. In that case such a fast increase is not desirable, because it looks like a hype. And I believe what we are seeing right now is a hype, many people seem to be buying in the hope of higher prices.

I believe that in about 2 years from now Bitcoin will be at $1000, based on fixed supply and increased demand because of more transactions taking place in Bitcoin. But I hope we won’t hit that in a few months already. At the current rate of increase (sometimes over 20% per day) I feel like a crash is imminent.

Most current demand seems to be from China, which explains why Bitcoin goes up most during daytime in East Asia. A lot of people don’t fully understand the long term potential of Bitcoin and will likely try to sell to get out of it, making the crash even worse. I won’t sell and will try to buy at the low end of the crash, which should be higher than the last flash crash that ended at lows of $185. But I still hope that it won’t happen because it will undermine the confidence people have in the currency.

So on the one hand I am extremely bullish on Bitcoin, but in the short run I feel the high price may not be sustainable yet. Maybe (hopefully) I am wrong, and the current demand is really based on more people buying with the intention of holding the currency for a long time or to use it for transactions. But if not I would not be surprised to see a flash crash happening soon.

I am normally very bullish, but the current pattern is scary and it reminds me patterns that I learned while studying economics of what happened during the Tulip Bulb rally in 1637 or right before the Dow Jones crash in September 1929. Bitcoin is fundamentally different from what happened there, but it seems that ‘dumb money’ is now entering the market, just like it happened during those times. Time will tell, and if it happens I will of course blog about it.

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Update: a crash indeed happened about 12 hours after I wrote my post. At first the drop was quite scary:

But I hoped the market would find a bottom and it did indeed. Two days later the market is almost back where it came from:

The growth is still too fast, but at least some of the speculators have probably left the market.