A $500,000 Bet on BitCoin.

It’s no secret that I’m somewhat bearish when it comes to BitCoins. Fundamentally I think the idea is sound as cryptocurrencies have the potential to revolutionize the currency and exchange industry in the same way the Internet did for the communications. The current implementation though is plagued with non-technical problems mostly due to how easy it is to influence the price with transaction volumes that aren’t particularly large. Transaction volume has been increasing however and when this is coupled with conversion stability we will have the potential for cryptocurrencies to move out of the tech niche they’re in and become a fully fledged means for transferring wealth around the world.

Getting BitCoin to work then relies on making it a desirable currency to use in place of more traditional means. For the most part people have focused on using it either as an add-on to their existing business (we now accept BitCoins!) or creating a new business from scratch based solely around the idea of using BitCoins. If I’m honest the latter feels like people seeing BitCoins as an opener to their 4 Hour Work Week style businesses which, especially if their only distinction from the competition is accepting BitCoins, don’t do too well in today’s aggressive market place.

Apart from these types of businesses and the ancillary ones that surround every currency (exchanges, banks, gambling sites, etc.) I hadn’t really seen much innovation in the BitCoin space right up until I read an article about CoinLab.

CoinLab is in essence a library for game developers that allows users to generate in game currency in exchange for using their idle compute power to mine BitCoins on the network. The idea is that oing this will net the companies much more dollars per user than advertising or micro-transaction due to the seamless nature of it and the tendency for people to do almost anything to get something for free. The idea isn’t particularly new, there have been many products that have paid users to use their extra computing power, but the integration with BitCoins certainly is. The question then becomes how sustainable such a business model is and going off the fact that CoinLab just netted $500,000 from investors to prove the idea would lead you believe that there’s some merit to this idea.

The last few months have been rather good for BitCoin with the price being stable at around $5. Additionally the transaction volume has remained relatively steady showing that there’s base level demand for the currency that can be depended on. This works in CoinLab’s favour as a business model that was viable during the speculative bubble last year would not be long for this work, but at a stable and predictable rate of conversion you’re far more likely to hit on a sustainable business rather than a flash in the pan. What’s working against them however is the increasing difficulty built into the system which will make generating new coins harder over time.

This is somewhat counteracted  by increasing user numbers which gives you more compute power and thus more chance at getting coins, but it’s the difference between the two that will be the deciding factor in how far the business can scale. The end game for such a company would eventually be a transaction processing house using their legions of computers as a big exchange network and taking transaction fees instead of mining but whether that’s sustainable or not is a question I don’t yet have the answer to. It will be very interesting to see where CoinLab goes with this and I hope they’re as open with their figures as the rest of the BitCoin industry has been thus far.

BitCoins are definitely a catalyst for new kinds of innovation in an industry that’s typically been glacially slow to integrate with new technologies. Startups like CoinLab are doing the hard yards to make cryptocurrencies viable for everyone else by increasing the base transaction volume so the price isn’t as susceptible to wild manipulation like it was in the past. I may still be bearish on the BitCoin idea but many of my initial complaints are starting to be overcome through innovative uses that I hadn’t once thought of. I’ll be watching developments in this area keenly and who knows, I might even dive into it myself.