The past couple of years have been interesting times for Bitcoin.  But for all the change, a lot has stayed the same.

We've had ETF talk (that has so far gone nowhere), price predictions (wrong and right), bubble-criers (wrong or right depending on your outlook) and big swings in the bitcoin price.

Bitcoin the speculative asset has had a wild ride, but Bitcoin the technology has stayed very stable, and has been quietly putting on some muscle.

Technology

Despite the ICO madness and the 'flippening' almost occurring where Ethereum briefly looked like it might overtake Bitcoin for >50% of the cryptocurrency market share, the market has since quieted down considerably and Bitcoin has regained its dominance, currently sitting around 55% of the entire market.

The Lightning network has been implemented, used and proven to work.  It's implementation chips away at one of the criticisms of bitcoin - the speed of currency transfer - but more importantly highlights a theme that has run throughout history with regard to technologies: that network effects matter.

In the 70s trains around the world were reaching the maximum speed that they could on the tracks they ran on.  The way the wheels met with the rails meant that at high speeds the train would just wobble too much and even fly off the rails.  People wanted to travel faster but the existing technology wasn't going to do the job.  It was time for something new.  Hover trains that worked a bit like an air hockey table - pumping air out onto a concrete rail allowed for much higher speeds, more efficient travel and much cheaper rails.  Later maglev trains allowed for even more efficient travel and faster speeds.  Today we see the same old trains with metal wheels on two expensive to maintain metal tracks.  Why?  Because even if those new concepts were legitimately much better, with a million miles of railway already in existence, it was easier to make incremental improvements than to rip it all up and start over.

Google some years ago ditched Google Plus and recently closed its Twitch clone Youtube Gaming.  Microsoft gave up on it's phone OS and more recently threw in the towel on Universal Windows Apps and and its Windows Store.  These are some of the biggest companies in the world, filled with experts in business, marketing, technology and with money to burn most countries can only dream of.  They had billions to throw at these issues and their products weren't ostensibly bad.  But they just had no foothold, and even billions of dollars can't easily just change the habits and beliefs of millions.

Store of Value

In the earlier days of Bitcoin, there was much talk about its utility as a currency, to buy coffees and pizzas.  Today a lot of that talk has shifted to talk of store of value. 

Bitcoin is a place where you can park money. 

That money stands a good chance of appreciating over time given Bitcoin's deflationary nature.  You can get at it whenever you want.  It's extremely difficult if not virtually impossible for anyone to get at it if you don't want them to.  Nobody can stop you moving it around and it may be very difficult for them to stop you from spending it too.

Network effects for modern products often work off convenience.  Value is different, but value is in the eye of the beholder, and if ever there was a network effect that is going to be hard to dislodge it is store of value.

One US dollar in 1919 would today be worth one twenty fifth of it's original value.  That's 4% of its original value, a loss of 96% of its value over one lifetime.  Yet ask almost anyone on earth today if they want a million dollars and you can guess the answer.  Gold has been money since at least 700 BC, around three millenia.  Today people still buy it to store wealth.

Currencies can and do die but it takes a major effort to bring them down.  Given the keys to the printing press it is possible to get people to feel like the prices are increasing so much, relative to the cash in their hand, and the hosepipe of money is being sprayed so profusely that they get an intuitive understanding that these bits of paper are actually not in themselves worth something.  The confidence goes and with it goes the value as the paper is dumped in preference for other assets that aren't being duplicated like somebody fell asleep on the enter key.

Bitcoin doesn't have this particular problem, and as more people talk about store of value and use it, the larger the event is required to cause a loss of confidence.

Parabolics

Bitcoin is hard to dislodge and getting harder by the day, but that isn't a bad thing, it's just the way technology works.

It is in many ways right and better that a robust system, used and trusted by millions, should remain in place and that the developers should have a more difficult or boring job of adapting it rather than just throwing it away every month when a nice new clean idea comes along.  The disruption of change has a cost, and that cost is high enough that it will wipe out all but the most compelling replacement ideas.

Bitcoin is on a path, doing what it always did, gaining ground, but the volume of noise produced by everybody trying to figure out what happens next is at times deafening.

The most vivid manifestation of this noise, aside from the news, is Bitcoin's price.  The swings both day to day and month to month are now legendary, but what's more fascinating is that, like history, they rhyme.

The above chart (produced by @100trillionUSD) colour codes the time until the next bitcoin halving.  The key point to look out for is the switch from blue to red.  That point represents a bitcoin halving, with the next being due around May 2020.

Just like the loss of value given a firehose of duplication is predictable, the outcome of the halving of supply is equally trivially predictable - price increase.

Bitcoin didn't die after the 'bubble pop' when it neared $20,000, instead it fell, hit a floor, and eventually started to climb again.  Just like it did the previous time, and the time before that, all just done on a different relative scale.

The chart above is more of a manifestation of human psychology, people's intuition about value, their confidence in the longevity of their predictions, and a huge layer of noise from the day to day trading of irrelevant random signals than it is about underlying developments.  Store of value is a slow spreading but consistent and compelling story.  Absent the a centrally-managed firehose of stupidity to turn the asset into dust, Bitcoin's story ought to be quite predictable.

The real question then is just how predictable are people en-masse?

Every time I hear a story about Edward Bernays I am surprised he managed to achieve what he did.  It was news to me when I heard it that he manipulated half of humankind (women) to smoke, and that the concept of breakfast being the most important meal of the day was his invention for the benefit of the bacon industry.

His success would seem to imply the stupidity of humans as a species but I think such an interpretation is too simplistic.  A more likely summation is that people are busy.  People are focused on a wide mix of things that are important to them, so when they pick up a cigarette in the 1940s for the first time or buy bacon for breakfast, they don't spend hours considering and analysing their decision.  They just make a quick decision with immediately available information, and move on.

Similarly, Bitcoin likely floats periodically into the conscious of most of the world, and then out again for long periods.  The halving is a predictable event with a predictable outcome but most people aren't interested until they can see it happening in the near future.

Some see it sooner, others later, but as each sees it coming, on aggregate and with some proportion, they buy in.  The price increases steadily until either the halving happens or we hit some other trigger point that causes the upwards snowball of not wanting to miss out on the next Bitcoin parabolic run.

Eventually the latecomers tail off and no longer outpace the people cashing out, pushing the price back down and maybe causing some kind of inverse parabolic (the 'bubble pop').

This situation can't go on forever, but the conditions for it to occur (that most people don't yet hold Bitcoin, aren't focused on it, and that they constitute a pool large enough to move the price significantly if they didn't want to miss out on the next Bitcoin parabolic run) likely still holds today.

In 2011 the pre-halving run up was around 300% with the post-halving parabolic around 100x.
In 2015 the pre-halving run up was around 180% with the post-halving parabolic around 33x.

As the absolute price of Bitcoin increases, the halving has less of an effect on the availability of bitcoins, and as more people get to know and own Bitcoins, we can expect the effect to be reduced.  But looking at the above numbers, it doesn't seem like a stretch to say that Bitcoin may have some big moves up it's sleeve yet, and might give us some very interesting times over the next 18 months.

Bitcoins used to transfer $700bn a year in remittances around the world, store $2,600bn in value in place of the precious metals market, process $1,800bn in internet payments and $1,000bn in mobile payments.  6.1 trillion dollars of value in total, giving Bitcoin a fully justified market cap of five billion dollars.

There's a reason the above statement doesn't make sense.  As of today bitcoin isn't at the point of handling any of those jobs at the scale quoted.  If it were, it would be impossible for it to do so with a market cap anything like it has today - around $5bn or $400 per bitcoin.

Today, many can see the potential for bitcoin in the future, but a question that often gets asked is when will this potential become manifest and lead to an increased price for bitcoin. 

Alibaba (BABA) recently IPO'd with an annual revenue of $8.65bn (projected from 9 months) leading to a market cap of $225bn (26x its revenues).  This isn't a close analogy for bitcoin since bitcoin isn't a company, doesn't have revenues or profits, and doesn't have the capacity to create new products to diversify into new areas in the future and bring in more money.

What it does illustrate though is that BABA's worth isn't just based on today's value, its based on its value in the future.  People buy BABA shares because they think they will be worth more in the future.  If someone were to assess BABA's value purely based on its cash holdings or one years revenue then the price they would pay would be much lower than the current share price.  Those people, if they exist, don't own BABA shares because there are other people willing to pay a lot more than them.  They have been priced out by people that see the future value of BABA.  This new group believes the value of BABA shares to be worth more so they are willing to pay more, meaning the price of BABA shares goes up, and the market cap is 26x revenue instead of 1x.  The new group owns BABA shares because they want them more than the first group, and they pay a higher price for the same reason.

BABA's price is set by simple supply and demand.  Volatility around the price will be created by people trying to trade short term fluctuations and make money from them but the bulk of the value is created by the demand from people that want to own BABA shares.

In the same way, bitcoin's price increases were fuelled by demand.  People around the world wanted to own and hold onto bitcoin for whatever reason, and the price seemed OK, so they bought.  As they bought there was no more seller at that particular price so the next buyer had to pay a little more to get their bitcoins.  This is the process you can observe on any exchange in the world.  

Scale this process up and you have an ongoing price rise.  Add into it the fact that sellers can see the price going up visibly and can decide to move their sale price up based on their future projections and you have an exponentially rising price.  Add into that new buyers seeing and reading about the exponential gains that they would like to be a part of and you have a bubble where the price gains in multiples then collapses after people think its gone too far, to bounce back to a new (much higher) plateau of calm.

This is the process we have seen before for bitcoin and if bitcoin continues to grow and become adopted we will likely see it again.

Below is a price chart in logarithmic scale for the duration of bitcoin's existence.  So far it follows what looks like a choppy linear line in logarithmic scale which means so far it has been growing exponentially albeit with a lot of volatility:

The three lines here are roughly the highest peak, the two most recent peaks and the troughs of bitcoin's price over time projected forward into the next few years.

If you're a believer in this chart then maybe the chart will make a new trough over the next few months keeping bitcoin around $400 but a rise looks to be on the cards soon, likely before the end of the year, increasingly likely into 2015.  When the rise does come again if you buy into this charts predictive capacity then you are looking at a new high of $10k+, maybe settling to a new plateau in the range of mid thousands per bitcoin.

Thats if you buy into this chart and its capacity to predict.  If you had bought into that when bitcoin was at $100 you would have multiplied your money buy now so it may pan out just the same again but its hard to infer much from just one chart.  When it comes down to it, the chart isn't determining bitcoin's price, it is following it.

Bitcoin's previous rises may not be quite so simple as all this though.  After the collapse of MtGox data has surfaced which shows activity inside MtGox around the big price rise to $1200/btc.  The Willy Report (link) appears to show that bots inside MtGox were responsible for a lot of buying activity which drove the recent big price rise for bitcoin.

I'm not going to get into the ethics of what happened around MtGox here or the likelihood of it being an inside job but the fact is that the bots were buying bitcoins from real users owning real bitcoins.  They may have been using money that wasn't theirs such that eventually the whole show collapsed and left a lot of people unexpectedly out of pocket but it was nevertheless a process that occurred.

The bots created demand, whether fuelled by their own money or unethically with someone elses, and this created a price rise.  This price rise was likely multiplied by real people jumping on the bandwagon to buy but the net result was a lot of demand so a very large price rise which overinflated, popped then settled.

Whether the bots were 'fake demand' and therefore this new price is meaningless and a fall to a level before these events is justified now depends on who is holding all those bitcoins now.  Are they keen to dump them on the market thereby increasing supply and driving the price down?  I would say at this point that isn't the case.  The price has had some volatility and has fallen from the $1200 peak but we seem to be roughly settled on a new (higher) price plateau for now.

The bots stoked the price rises by creating and encouraging demand but their existence hasn't collapsed confidence that bitcoins are valuable.

So if we are at a plateau now and the Willy bot revelations aren't collapsing the price what can now push the price up to create further growth in bitcoin's price? Again the answer can only be demand, more of it.

Estimates put the MtGox bots at having bought around 270,000 bitcoins.  At todays prices this works out around $112m but that wouldn't have been the actual spend since much of the buying would be at lower levels.  What we can say though is that this sustained buying of 270,000 bitcoins may have created the price jump.  The purchase of these 270,000 bitcoins alone may not have had enough effect to move the price up so high but they created a sustained increase in price which drew in further demand.

If we are looking at what might create another price rise we need to be considering demand of the same order or larger.

The Willy bot info can potentially be seen as an opportunity to quantify the cost of a significant price rise in bitcoin but it is also worth looking at the other side of the coin - supply.

Bitcoin produces one block every 10 minutes so 144 blocks per day.  The current block reward is 25btc which means a total supply of 3600btc per day or 1.3 million btc per year.  This sounds like a lot and if all of it were dumped on the exchanges every day it likely would be but there is no evidence that this is the case and miner are unlikely to be so stupid.  Instead they, more than other users, likely see the long term value of bitcoin (since they have invested so heavily into it) and will likely hold their bitcoin.

However it does also give us a useful base case, if 1.3 million btc were purchased inside a year then the probability is this would push up the price significantly since, barring a very large holder liquidating, it would almost certainly far outstrip the supply of bitcoin for sale during that year.

This reward will also halve likely some time in 2017 meaning greatly reduced supply around that time and possibly encouraging those with a desire to hold bitcoin to get in before then.

Early adopters are now in bitcoin and are likely holding it until they see major price rises, at which point they may cash out or liquidate a portion of their holdings.

Bitcoin has had a lot of press at this point and a lot of technical people already know what it is and have decided to buy in or not but we are still seeing growth.  Blockchain reports user wallets as having grown from around 1m in Jan to 2.2m now.  This is a steady and significant increase which over time appears to show (choppy) exponential growth.

Note that the price rise late last year created an increase in adoption which appears to have sustained throughout 2014.

Although Blockchain.info represents only a portion of bitcoin users around the world it is a popular service and we can reasonably posit that bitcoin's userbase is likely in the low millions of users, maybe tens of millions.

Looking at how far bitcoin could go from here, there may be 7 billion people on earth but many of them aren't in a position to own bitcoin and possibly even don't have access to the internet.  A better metric would be smartphone users around the world which in 2014 will total 1.75bn.

If we assume around 1-10m bitcoin users right now this leaves room for an increase in the user base of 175x to 1750x.  Exactly what this would translate to in terms of dollar demand isn't clear since we don't know how many of these people will be reached, when, how many bitcoin they will own and what they will need to pay for each bitcoin but we can say there is plenty of room for growth by further adoption.

Blockchain.info for 2014 appears to show pretty linear growth which, if we extrapolate it, looks like it might point to an increase in bitcoin adoption of 2x current levels in a year or so.  If we assume the rest of bitcoin is being adopted at roughly the same rate and go back to an estimate of 1-10m bitcoin users then this would translate to an additional 1-10m users by mid-late 2015.  

If we make a conservative estimate of 2m bitcoin users today then to fuel another 270,000 bitcoin buying streak these users would need to purchase 0.135 bitcoins each, or roughly $54 worth of bitcoin each at current prices.  

If we assume the need for a larger buying streak of 1.3m bitcoins equal to a years worth of mining output then then this works out around 0.65 bitcoins per new user or $260.

There are assumptions in here but the trend points toward increasing adoption.  The user counts may be some distance out but it seems possible that simple organic growing adoption could fuel a significant price rise (if not a massive one) within the next 12 months.

One important source of demand related to bitcoin growth and adoption outside of consumers are the businesses that serve them.

Investment in bitcoin companies has been growing significantly $188m invested so far in 2014 versus just $91m in the whole of 2013.  Extrapolated this would work out roughly at $250m in 2014 and, if the increase trend continues, in 2015 likely something in the range of $410m to $695m.

In 2014 so far a large chunk of this investment went to wallet startups.  Generally wallet startups won't need to hold a lot of bitcoin since they are holding it on behalf of their users.  They may help adoption and in some cases facilitate bitcoin buying but the investment money won't go into bitcoin.

Of the remainder around 20% went into payment processors, 22% went into financial services, 20% went into exchanges and 15% went into 'universal' companies.

Exchanges here likely have the most clear need to hold actual bitcoin (rather than facilitate others) and no doubt some of their invested funds will go towards buying bitcoin to create a market and fund a hot wallet.  However, even if the full total of the money invested went into buying bitcoin (clearly it wouldn't) then this would still only equate to $37m-$50m, some way short of the bounded estimate required for a significant price increase.  The far more likely case is only a fraction of their investment would be used to purchased bitcoin which would drop this well below the demand required.

Although bitcoin companies will help push bitcoin adoption, they so far don't look to be a likely candidate for the source of demand required for the next big price increase except through continued adoption.

The FBI's auction of the Silk Road bitcoins amounted to around 30,000 bitcoins (then around $18m) in total but also due to a leak gave a very useful window into future sources of large scale bitcoin demand.

Perhaps around 14 of the total 17 listed bidders are investment companies or large scale investors buying bitcoin not on behalf of consumers purchasing it from them.   However there were in total around 40 names on the list.  This would indicate that each of these were interested in buying between 3000 and 29696 bitcoins.  

If we extrapolate the number to the full list we end up with 33 bidders that likely are bidding on their own behalf. If each of these 33 were planning on buying the full set and holding it alongside normal bitcoin holders this equates to $594m of demand or 990,000 bitcoins.  At a minimum if each were interested only in one block of 3000 bitcoin this would work out at $59m or 99,000 bitcoins.

My tendency would be to put the estimate of this demand closer to the upper rather than the lower given the scale of the bidders involved (the Winklevoss twins purchased 1 million bitcoin in order to fund their ETF so we can likely expect that institutional investors are aiming to purchase a mere 3,000 for just $1.8m).

Demand on this scale seems to be easily enough to create a major price increase in bitcoin but this demand will likely not manifest in the same way as consumer demand.

Most large scale investors and all institutional investors will be aware of the effect their buying will have on the market.  In such cases they will likely pursue every avenue for purchasing bitcoins (like the FBI auction or directly from large scale miners) before turning to an exchange.  Doing so allows them to purchase large amounts of bitcoin without pushing up the price.

If they do buy on an exchange it may be via an algorithm or traders who will purchase in small amounts and may 'shake the tree' by selling larger portions of what they purchased to try and scare other traders into panic selling, creating a falling price that they can buy from.  We probably won't see the same frenzied bandwagon of buying from these types of investors leading to an emotional surge in the price.

Bitcoin will not stay at the current price forever though and, particularly as the block reward halving approaches in 2017, these investors may be forced to turn to exchanges eventually to make their purchases (only one of the 40 bidders actually managed to buy the FBI bitcoins for example), at which point the demand could push up the price significantly. 

It is also worth noting that any institutional investor that has already bought most of their quota may have an incentive to then buy the remainder from the markets precisely because it will push up the price.  If they have the ability to move the market price of bitcoin with just the last portion of their investment then they can effectively create the gains which will make their original purchases look all the more astute to clients and push up the book value of their entire holding.

So far all the situations discussed amount to business as usual but there are many events that could lead to a surge in adoption and possibly also a surge in institutional investment.

Bitcoin back in 2013 was only available through a limited set of avenues such as exchanges.  These exchanges had dubious reputations and ultimately you had to be quite committed to get through the difficulties to buy bitcoin.  Now companies are building out large scale infrastructure to allow many more to purchase bitcoin.  ATMs are popping up but on a larger scale 28,000 UK stores now offer bitcoin over the counter and 8,000 stores in Argentina started selling bitcoin as of August.  Wallets used to be primarily available on PCs but now even full SPV wallets are available on both Android and iOS.  PayPal has been making noises around bitcoin and likely can see that either they will need to incorporate bitcoin or risk being superceded by it.  As this spreads and bitcoin becomes more available and more easily purchased we could easily see less linear and more exponential growth in adoption which could lead to an organic boost in the price.  The thing to keep an eye on here would be the adoption rate of various wallets as the months go on.

One event which could have a major impact is an event similar to the bank collapse in Cypris in 2013.  Bail-in  legislation (confiscation of deposits when a bank fails) has been put into place around the world an in particular in the EU and US.  Although in the EU this legislation comes into force in 2018 it wasn't required for the Cypriot bail-in and in the event of another financial system crash it may not be required for bail-ins in the EU and US.  Bank fraud has not been prosecuted and banks have even been deigned 'Too Big To Fail' which seems to have been translated into too big to prosecute / prevent from committing further fraud.  Worse, banks are still leveraged in the extreme and appear to have very dubious valuations on their assets.  In 2013 ZeroHedge reported Deutschebank to have around 1.6% assets and $72tn in exposure to derivatives.  A year on in 2014 the situation is apparently the same:

Further, Deutschebank appears to be just one bank among many that are in a similarly precarious situation.  Bottomeuro's illuminating graphic shows that banks have failed throughout the range of capitalisation suggesting the recent Basel III push to capitalise banks better based on a 'risk weighted measure' is not helpful: 

It doesn't seem a stretch to conclude that at some point in the next few years we will see another banking crash and may see a lot more of what occurred in Cyprus.  If that does happen then bitcoin will be a safe haven that, due to the increased demand, will also be skyrocketing in value, creating the potential for a truly epic rise.

Generally speaking as bitcoin becomes better known and more accessible to people around the world it is better placed to take advantage of range of events such as bank failures, high inflation and national currency problems.  It is not possible to predict these events but it is reasonable to say that the more reach bitcoin has, the more it will experience a surge from any one of these events. 

Further developments in the pipeline such as building out remittances infrastructure based on bitcoin could lead to greatly increased demand over the next year or two and the Winklevoss ETF which could apparently be approved by the end of 2014 may also lead to a significant bump in demand.  There are a lot of concurrent projects right now just getting started which may only really begin to kick in around 2015.  As an example, Magnotti of Global Advisors Bitcoin Investment said some months ago that he had been 'flooded with requests to subscribe to his fund' and that his fund would only go live on the market in September (2014).  It takes time for these projects to get their operations up and running and 2015 may be the year when they ramp up.

All in all given the complexity of the bitcoin economy it is difficult in the extreme if not impossible to suggest a date and a price however given the bounded estimate, the trend for increased adoption and investment, and the variety of avenues for each it does seem reasonable that in 2015 and at the latest 2016 we could see significant growth in the price in the order that our original exponential price growth chart would predict.  If this is the case then the chart may well work out predictive once more and might put us somewhere in the range of $3k to $10k by the end of 2015.

Earlier today the Chinese exchange Bter.com had $1.7m worth of NXT stolen (50 million NXT in total) from their account.  A forum post on the NXT forums has been tracking developments and various options were being considered as the scene played out.

The first option is a rollback and the NXT developers have released a modified client which repeals the transaction in question.

The next option with essentially the same effect but subtly different is that those forging (equivalent to mining in bitcoin) manually repeal the transaction if they disagree with it.

The last option is that the hacker is paid a ransom in bitcoins, and they return the NXT.

What has actually played out so far is hard to believe.  

However unpalatable, the ransom may have seem like a simple way for this to be resolved - Bter pay a ransom for their security failure but return funds to their customers - and in fact many agreed on the forum.  The hacker now holds notionally $1.7m in NXT but clearly cannot realise that value in the market - NXT is simply not liquid enough to exchange 5% of its base into dollars at the drop of a hat (few assets are).  The real value of the NXT then, particularly to the hacker is far below $1.7m.

As a result it was proposed that the total payment for the returned NXT would be 100 bitcoin.  Bter would send bitcoins to the hacker in increments and they would return NXT in corresponding increments.  Bter and the hacker appeared to agree to this situation and initially it appeared to be working; Bter sent the hacker 10 bitcoin and 5 million NXT were returned to an account presumably under the control of Bter.  That all this could occur, be arranged and verified publicly is a testament to the power of cryptocurrencies and blockchains, if also a demonstration of how they can be abused.

Unfortunately, the hacker then posted some tried and tested social engineering, claiming they wanted the bitcoins more quickly, putting Bter under pressure to send the remaining amount.  Bter fell for it, sending a further 100 bitcoin.

What is incredible about this situation is that an exchange managing far more than $1.7m in assets could fall for such a basic ploy without first considering that if they sent the full ransom, the hacker would no longer have any incentive at all to return the NXT.

As we have seen with the demise of Mt Gox, poor actors in the cryptocurrency space will eventually fail, but can also take a lot of unsuspecting end users with them.  Whether this is a testament to the strength of the currency (in that it does not allow repudiation) or whether it is damaging to it (allowing end users to be burned by clearly criminal activity when it has the power to prevent it) is debatable.

If any type of rollback were to go ahead, NXT would have repealed a transaction and its claimed feature of non-repudiation would be demonstrably broken.

As a result many are crying out against the rollback in the fear that NXT will be irreparably harmed, but there are a couple of interesting points here:

1) it is clear that NXT could repudiate transactions, it just isn't clear if it will happen this time
2) non-repudiation is held to be such a critical feature of NXT that it would fail should any transaction, even a large scale admittedly criminal one, be repealed

From an enthusiasts point of view that believes in the values that NXT (and many other cryptocurrencies) espouse, repudiation of any transaction is a failure to adhere to those values and taints the system.  If it doesn't adhere to these values it is no better than any other system out there (PayPal for example).

But cryptocurrencies in general are trying hard to reach the mainstream.  The real benefits of cryptocurrencies will appear when they are widely used and easily used by people around the world.  From a typical user's point of view, there are potentially many benefits to using cryptocurrencies of which non-repudiation may be one, but it likely isn't a deal breaker.  If we imagine a future in which many average people around the world hold NXT and 5% of all NXT are stolen, it isn't much of a stretch to see the majority agreeing that the transaction should be repealed.  Whether it would be possible would be another matter.

Further evidence of clouded judgement appears with calls of a bounty to catch the hacker.  Whether these suggestions are serious or facetious these vocal members of the NXT community clearly would like to see the the NXT (money) returned to their rightful owners, but are publicly supporting an illegal and violent vigilante bounty than supporting simple repudiation of the transaction.

Time will tell how this pans out but how thinking prevails may give some insight into the distribution of the currency and its user base, particularly of those with large balances and if they are held by enthusiasts rather than with a wider distribution.

There are a number of ways this situation could work out longer term but really only one question will determine the viability of NXT in the long term - confidence.

If the transaction is not repudiated then possibly a large portion of its user base may become disaffected with NXT and its failure to act (something which bitcoin developers have stated they would do in, for example, the face of a 51% attack).  This would also leave 5% of the NXT monetary base in the hands of a known bad actor keen to launder his prize which would undoubtedly have a depressive effect on the NXT price for some time to come.

If the transaction is repudiated then those that consider non-repudiation a critical feature may become disaffected and choose to exit NXT, again damaging confidence and likely the price.

The distribution of the coin may determine both the actions taken and the result.  If NXT is widely distributed enough to those outside the cryptocurrency core then it may repudiate the transaction, may lose some enthusiasts on the way but will likely survive.

If the distribution of the coin is largely in the hands of the enthusiasts then the repudiation may not take place.  In this case the majority holders in terms of value will likely retain confidence.  How it will be viewed by later adopters and the mainstream is less clear and a depressed price could serve as an indication of NXT's decline.

Many in the bitcoin world talk of bitcoin eventually killing off traditional banks and financial institutions or at least greatly reducing their influence and use. Bitcoin is a direct corollary for a currency and since you don't need a bank to store it or other financial institutions to spend or transfer it seems perfectly reasonable that in the future it could have this effect.   Satoshi wrote in his original white paper about how bitcoin was a solution to the problem of financial intermediaries.

But what do banks and companies like Facebook, eBay, Twitter LinkedIn and Pinterest have in common?  

They are all just middle men for people to interact.

The problem for them now is that we no longer need their centralised model to interact.  Now we have blockchains to handle trusted interactions. 

Bitcoin itself it the implementation of a deflationary currency which has the potential to disintermediate the financial system.  Since it was Satoshi's goal that it be ready to achieve that upon release it doesn't need a lot of imagination to see how it is a corollary of traditional currencies and payment systems - its been designed over years to do exactly that and it does it very well.

But the blockchain model that Satoshi invented isn't just useful here, it can disintermediate a whole host of systems, DNS and SSL certificates for example, and even now we are seeing the seeds of systems which can facilitate other interactions where the centralised party really isn't providing any value over and above being a hub for that interaction: 

BitMessage is a peer to peer trustless and completely decentralised secure messaging system which allows direct messages and broadcast/subscriptions (SMS, iMessage, WhatsApp, Potentially Twitter, Facebook, LinkedIn and many others)

Twister is a platform for peer to peer microblogging (Twitter)

OpenBazaar is a decentralized trading platform for people to sell anything to anyone (eBay)

NXT has its distributed asset exchange again allowing anyone to exchange anything.

These platforms and apps may not look like much just now, and thoughts may come to mind like "they can't possibly compete with Facebook / eBay" or  "eBay has a ton of developers that are working on it every day" or "Facebook has so many users now, people won't switch over to something that doesn't have any user base" but none of these are valid.

In terms of competition, these platforms are in their infancy.  They may not work as well as the centralised platforms right now or they might be too difficult to use.  The software might not be good enough yet and these individual instances may even die out altogether but out of an entire world of developers there are plenty of developers that like the idea of Facebook/Twitter/LinkedIn without centralised control that they will work on something better.  Over time the trend will be that the decentralised versions will only improve.

Similarly the idea that eBay or any other has development resource that is constantly improving their product and adding value each day misses the point where the real value of eBays offering is - in letting people interact easily to sell goods to each other in the first place.  Facebook might add to their software every day but are they really adding a lot of user value? or are they just adding a bit more icing on the cake of user-to-user interaction (that and more ad code that benefits them)?

Lastly the idea that Facebook has so many users they have an unchallengeable monopoly and unstoppable momentum is an attractive one but it too won't hold up over time.  Like Steve Jobs said of one of Microsoft's key strengths in the well worth watching Lost Interview, "They just keep on coming".

Microsoft is demonstrating this ability right now with Windows Phone.  Windows Phone for any other company, regardless of how good or bad the software is, would be an abject failure and would already have been shut down - purely because it just doesn't have nearly enough user base to sustain itself.  But Microsoft has deep enough pockets to keep funding it.  It doesn't seem likely that it will pan out since Windows Phone doesn't appear to offer much over iOS or Android (so users don't have much incentive to switch) and even Microsoft can't sustain that kind of spend forever.

Open source decentralised software though doesn't have those same costs.  It's software not hardware so there are no production costs and essentially no ongoing costs.  It can just sit there for years being gradually improved and be picked up at any point by anyone that wants to use it.

Further, in all these cases it has the ability to offer a major plus over *any* centralised alternative, which will provide the incentive for people to switch over time - the removal of the central authority itself.

Facebook might provide a great service, but the ability to do Facebook (the app) without having to deal with Facebook (the company) will always be preferable.  The company fundamentally has conflicted interests - its trying to facilitate its users interacting but at the same time its trying to make money off its users so it has to constantly push against their privacy and apply restrictions to force people to pay for distribution.  They have to hobble their own system to make it necessary to pay them to send promotions to your own followers.

Similarly eBay might also provide a great service for users to sell things to each other but again they have to get in the way and create pain points to get money from somewhere.  They charge fees for listing, additional photos and various other add-ons.

A decentralised version doesn't have to provide these same pain points because there is no central intermediary trying to get paid for providing the service.

Decentralisation doesn't apply across the board to software companies though.  Not everything can be decentralised and the key difference that will save many of them is the addition of value.

YouTube is a centralised service that merely lets users interact to publish videos.  If you take Google out of the equation you are arguably a lot better off - no need to use your real name to post videos, no ads, no restrictions.  But if you take Google out of the picture you also lose something - very large scale bandwidth.

Peer to peer networks work well but when you upload a video to YouTube it sits on a storage system which is peered around the world to make it very easy and fast to download immediately without any (slow) propagation between users (seeding).

This is an example of a central intermediary not just acting as a hub but offering added value, whether its enough to save YouTube or whether a decentralised version can figure out a way around is another question.

Facebook, eBay, Twitter and others are large companies with a lot of resources so it could be that they can figure out some way to add real value to fend off a decentralised clone, at least temporarily, but they also bring with them significant negative points that they can't do anything about.  Over the long term, and thanks to Satoshi,  their prospects don't look good.

Much has been made in the past of the progression of bitcoin mining from home computers, to GPU based dedicated mining setups, though to FPGAs and now finally to rest at ASICs.  ASICs are a final resting place for mining since ASIC stands for Application Specific Integrated Circuit - a specialist chip purely dedicated to hashing bitcoin as fast as possible.  The technology for creating chips in geberal may get better and ASICs for SHA256 hashing may get better but we won't see the huge leaps we've seen going from home computers or GPUs to ASICs and progression of chip technology will be much slower than miners switching from one known technology to another.  From hereon in its a (relatively) slow ultimately non-exponential climb, adding more and somewhat faster ASICs to the existing huge pile.  The hash rate will sustain exponential growth from now on only in so far as investment grows exponentially.

Many have criticised ASICs as centralising mining and therefore taking away an important theoretical benefit of bitcoin - that anyone could mine them with their computer at home and therefore provide a very distributed, decentralised supply of coins.  In reality though ASICs are widely available and although it may not appear to make sense to mine at the moment on a relatively small scale this is only given the current bitcoin price.  If your assumption is that a bitcoin will be worth $100,000 in five or ten years time then it may well make sense to raise your electricity bill for the next 6 months to mine even a small fraction of a bitcoin.

Regardless of the motivations of smaller scale miners we will likely see more centralisation of mining with larger amounts of hashing power being provided by larger better funded actors.  Too much centralisation would likely be a bad thing but it may be that the market opportunity for miners will always leave enough decentralisation for it not to be a major issue.

However, despite the criticism of ASICs they do bring a benefit which hasn't been covered much but which has been a major issue for smaller alt-coins - protection from botnets.

Recently the mining pool GHash.io approached and even reached 51% of bitcoin mining power.  Much uncertainty and press coverage ensued but it didn't come to much and tomorrow turned out much like yesterday.  Though GHash.io had more than 50% of mining power, they didn't attempt a 51% attack.

There may be various groups that would like to see an end to Bitcoin but there is one (possibly only one) clearly defined group in particular that would actually go about trying to execute a 51% attack - criminals.

Almost by definition if you are going to execute a 51% attack to double spend (fraud) or some other form of stealing money from others you are a criminal.

The only other reason for this type of attack would be an attempt to bring down bitcoin.  Going down this route the largest threats to bitcoin would be those themselves threatened by bitcoin - various actors in the financial industry and possibly governments with seigniorage concerns.  

For a government to even have seigniorage concerns would require them to be forward looking, technologically adept and possibly paranoid.  For them to actually perpetrate an attack against bitcoin would likely require them to be forward looking, technologically adept, quite paranoid, probably corrupt, very cohesive, well funded and well connected which likely narrows the probability into the realms of fantasy.  

Similarly financial institutions would have to first identify bitcoin as a major threat to their existence which seems unlikely partly due to a lack of technical expertise but also due to simple normalcy bias.  For them to actually perpetrate an attack to 'kill bitcoin' would require them to judge this threat to be so great as to be worth a very well orchestrated and hidden criminal act with required hidden funding (read: direct money laundering) running into the millions or more.  Again highly unlikely.

Back to our criminals though, a criminal organisation large enough to consider a 51% attack against bitcoin would likely have both large amounts of money and a large botnet available.  Using large amounts of money to purchase mining capacity to perpetrate a 51% attack doesn't add up.  To recoup the millions spent on mining capacity the double spends at this level would have to be enormous.  Double spends might be a nice earner in theory but millions of dollars worth of double spends would be first highly damaging to the bitcoin price and would very quickly provoke a reaction amongst anyone accepting bitcoin to not accept it until the 51% attack was over and from bitcoin developers to introduce greater defenses against this type of attack.

Instead the criminals best (and cheapest) tool in the box is one that has already been demonstrated to be highly effective without anyone really noticing - the botnet.

When GHash.io reached above 50% mining power they were slow to react and slow to respond with their intentions.  This was frustrating for most but for some it was too much.  Soon after they reached above 50% GHash.io was hit with a distribute denial of service attack and their mining power dropped to around 35%.

Whether anyone agreed with this (illegal) DDoS wasn't of so much interest - the 51% issue on everyone's mind was over and everybody went about their business.  However what is interesting is that a simple (and free) DDoS, perhaps not even a very large scale one, stripped GHash.io of a massive amount of hashing power in a very small amount of time.

This means that while ASICs protect bitcoin from botnet mining they don't necessarily protect its miners from botnets.

As a criminal looking for the best payoff possible using a botnet to mine bitcoin is futile.  The botnet may be free but the reward would be tiny and just searching your botnet for credit card details will likely provide orders of magnitude more cash.

However, a fairly well funded criminal with the cash to buy some serious hashing power could use a botnet to hobble other miners, either to reduce the total pool of hashing power (and therefore increase their own share) or to allow them to more cheaply attempt a 51% attack.  While the 51% attack payoff would still likely be very dubious the ability and willingness to commit illegal DDoS against other miners could give them an advantage which might lead to this becoming a staple of mining.  Miners might end up having to DDoS other miners in order to make mining profitable.

Another cheaper, more simple but possibly less effective method of utilising their botnets would be simply to hobble miners for extortion.  Large scale miners are known to have copious amounts of easily laundered non-refundable bitcoins available and as GHash.io has shown may be highly susceptible to DDoS.  Given this they may be a prime target for extortion through DDoS.

If larger scale pools and miners were commonly attacked either for competition or extortion then this may change the dynamic of hashing distribution.  Larger pools would attract more DDoS and this would make them less attractive to pool members since they would either suffer availability problems or their costs would be raised by the 'tax' of DDoS.  This could then lead to a prevalence of smaller pools which would, ironically, be preferable to much of the bitcoin community.

It may also be possible that the same pressure could occur on larger scale miners alone.  The larger a mining operation the larger the target and the more they have to lose.  If they are susceptible to DDoS then this could change the economics of mining on a large scale which could lead back to not just a breakup of hashing power but a breakup of the centralisation back to a more decentralised mining community.

The SSL trust model has been with us for many years now and has been the underpinning of the vast majority of the cryptography on the internet.  It has protected logins to all manner of websites across the world and for the most part seems to have worked well.  We don't generally log on to a 'secure' banking website only to find that the next day an attacker has logged on and accessed to our account.

Cryptography is a chain of systems which starts with a point of trust.  In SSL that point of trust is the Certificate Authority (CA).  If you don't trust the CA, you don't trust SSL and you don't trust the security of your connection.

The way this works is actually pretty simple.  The CA is supposed to only allow the genuine owner and operator of a website to purchase a certificate.  If I want to masquerade as Google.com and have SSL connections believe me then I need to find a CA (one which is trusted by the SSL connection client - e.g. your browser) to issue me a certificate saying I am Google.com.  If I can do that then assuming I can also get the DNS changed to point to my server I can masquerade as Google.com and nobody knows I am not.

You can see just from this description that it all hinges on trust in the CAs.  If they issue certificates to just anyone without thoroughly checking their identity then the entire trust model breaks down and people can easily pretend to be websites they are not, rendering the whole system pretty pointless.  Sure you can create an encrypted connection, but to who? If you can't even be sure who you are talking to then keeping the rest of the world out has very limited value.

The cracks in SSL have been showing for some time though.  The DigiNotar hack in 2011 led to fake certificates being created and the hacker claimed that they had had access to other certificate authorities.  In many ways this serious failure was papered over and forgotten.

The attack meant that the ability to issue trusted certificates (private keys) was compromised.  It doesn't matter which CA is compromised, it only matters that one is.  This is enough for all SSL clients to trust your fake certificate.

The correct response to this to maintain SSL's model would have been to thoroughly audit the existing CAs and work out if they had been compromised and then blacklist a range of them so that SSL clients (your browser, email client, phone apps etc etc) would no longer trust those CAs and no longer trust certificates issued by them.  Although DigiNotar was blacklisted it isn't clear whether this was enough and remember that just one compromised CA certificate allows you to generate fake certificates for any website.

The recent 'heartbleed' bug in OpenSSL is in some ways much worse.  OpenSSL is in use on 60%+ of websites on the internet and the attack allows anyone else on the internet to recover bits of memory from the target server.  This has the potential to leak anything - user data, passwords, private keys for the entire secure session, server certificates.

The implications of this failing are huge.  Certificates that affected websites are using should be assumed to be compromised.  This will mean they will need to go back to the CA to get a new one.  So far so bad but it sounds fairly manageable.  The problem though is that those compromised certificates could still be used by an attacker to spoof (pretend to be) the attacked website and recover user data, passwords etc.  The certificates then need to be blacklisted so that SSL clients (your browser, email client etc) no longer trust them.  

The next problem here is that the list is just too big.  Every SSL client can't carry a list of 60% of the sites on the internet.  Just for practical purposes the blacklisting needs to be done at a higher level - at the CA level.  Rather than just seeing DigiNotar get blacklisted we could see every CA get blacklisted.  

Even the CAs at the very top issue end user certificates and will likely have issued enough that they couldn't just be included in a blacklist, so they themselves must be blacklisted.

Whether we will see this happen or not is another question.  Realistically we probably won't see all the root Certificate Authorities be blacklisted.  The effects of this would be too widespread and would essentially disable SSL even for sites that aren't affected.

That we won't see this happen though doesn't change the reality of the failure.  Most of the sites on the internet are potentially, silently, compromised.

For SSL to recover properly and become as trustworthy as it was before these hacks, it essentially has to be reset.

SSL has too much momentum to just die overnight and, despite this major failure in its security, there isn't a lot else we can rely on.

Certificate pinning (trusting each certificate individually for a particular website, verifying it through some other means) is a band-aid we might see applied a lot, particularly on high security or high visibility websites but it doesn't scale as a model and still requires the certificate to be initially verified before it can then be required for later use.

At some point over the next few years, if we are bothered at all about the security of our connections we will need to move to something that is either basically SSL but with new CAs (all subject to the same potential failures as the current SSL), or something better, like a blockchain.

Bitcoin's main focus at its inception was to become a new deflationary currency.  In my opinion it has done that and done an incredible job in a very short time.  But part of its underpinnings is a new construct in computer science - the blockchain.

Put simply, the blockchain allows digital scarcity.  It allows a trust-free way to claim ownership of something digital, that everyone knows about, and to publish information about that owned thing only if you have the private keys.

Namecoin is geared towards exploiting exactly this.  Namecoin allows you to look up the IP addresses (ultimate locations) of websites on the internet based on their name.  DNS currently serves this purpose on the internet but its managed by a central authority.  To register a domain you have to pay a company, its propagated up the stack until some organisation at the top says "your websites points to <address>".  A simple analogy would be a phone book where you can register a unique name against your phone number, then its published and people can look it up.

The problem is this isn't secure and it doesn't include anything to allow you to verify that the person at the end of that number is who they say they are.  This is where SSL takes over, the owner of the name has verified that they own it to a CA and since you trust the CA, you can now trust the website.

Break that trust though and it all falls apart.

Namecoin on the other hand has the ability to do both functions and merge them at the same time.  With no central authority a user can register themselves as the owner of a name, point it to their address, but also register a certificate which can be used to establish that the person on the other end of that address is the owner of the name, not just somebody listening in or pretending.

The blockchain is a better system than both DNS and SSL and provides a better trust model than SSL ever did.

Hopefully in the coming years we'll see this recognised and start to see apps and browsers take advantage of it, perhaps eventually even move away from CAs and the SSL trust model altogether and migrate wholesale to it.

It's been a tough time for bitcoin recently with mixed news topped off by MtGox announcing that bitcoin has a bug that has led them to discontinue bitcoin withdrawals.  This bug apparently led to users being able to withdraw their bitcoin more than once and has apparently been exploited to steal all the bitcoins from Silk Road 2 (whether this actually happened or whether it is a convenient excuse for someone operating an illegal exchange to run off with a few million dollars in bitcoins is unclear).

Initial reports made this sound like someone may have found a way to double spend bitcoin which would be a very serious bug and a significant test of bitcoin's resilience.  On closer inspection though it appears to be years old and something that MtGox should have been patched long ago.

Bitcoin prices fell after the announcement and other exchanges have disabled bitcoin withdrawals to rectify the issue.  Since then they have recovered somewhat with Bitstamp currently at $684 (after  having restarted withdrawals) and Btc-e at $645 (not having restarted withdrawals yet).

The price on MtGox on the other hand has been in free fall and has currently bounced to $450 having hit a low of $300.  Time will tell whether this is the bottom for MtGox or whether we will see it fall further but at the moment since there is no way to get any money out of MtGox either in fiat or bitcoin it is debatable what this price really represents.

This differential between Btc-e and MtGox could be due to Btc-e still allowing fiat withdrawals (MtGox suspended these some time ago) or it could be reflective of damage MtGox has done to their own reputation as a result of their own irresponsibility in spreading news about an aged bug which they should have countered for some time ago as a major new bitcoin problem.

Generally though this recent episode which many longer term bitcoin users will be hardened to raises another question.  What if this had been a serious and new security issue?

Almost all of the alt-coins available at present are based on the bitcoin code and change only the hashing algorithm.  A failure in SHA-256 would affect some other alt-coins but not all.  Litecoin for example replaces SHA-256 with Scrypt.  However since SHA-256 has been around for years in the wider crypto community and has been thoroughly reviewed, used and tested its probably the least likely candidate for a security hole.

More likely would be some issue in the protocol or other (relatively new to the world) bitcoin-specific code.  In this case all the other alt-coins based on bitcoin suffer the same issue and therefore potentially the same fate.

In the longer term a proponent of bitcoin might expect the issue to be fixed, damage to be repealed (where possible) and for the price to recover but the damage in some cases could be hard to mitigate and might carry forward in the longer term and allow any similarly widely used heterogeneous cryptocurrencies to get ahead take the lead.

Cryptocurrencies in general are in their infancy at the moment with bitcoin and its derivatives pretty much making up the entire picture however a new recently launched cryptocurrency - NXT - has an entirely new codebase.

With its new codebase it also comes with some interesting improvements that could make it the first real potential contender for bitcoin.  The most compelling of these is also an improvement that it is impossible for bitcoin to add - a 100% proof of stake model which keeps the blockchain secure without any mining and 'transparent transactions' which may allow it to achieve VISA-like (or higher) transactions-per-second rates.  A more in depth rundown is available here.

NXT has been criticised for being '100% premined' with the coins being allocated initially and then distributed via IPO and sale on available exchanges however it seems that the founders and NXT community have tried to make it clear that distribution is essential for it to gain traction and credibility (and therefore value) and distribution may now be better than bitcoin.

NXT is still relatively new but it has been on the up recently, possibly related to the recent bitcoin-negative news.  Its market cap stands at $60m right now which is below a number of other alt-coins like Litecoin, Peercoin and Dogecoin but as a bitcoin-heterogeneous cryptocurrency with some tangible improvements it seems feasible it could take a place near the top at some point.

At the very least it could make a good option to bet on the success of cryptocurrencies in general but hedge against any major issues coming up with the bitcoin codebase.

NXT has recently been added to BTER and seems likely propagate to other exchanges in the future.

Many people encountering bitcoin have a hard time understanding the difference and benefits versus existing currencies.  If you don't understand deflation, capital controls, banks, central banks, money printing and currencies in general then you are more likely to understand bitcoin at a paypal-like level and it will be hard to see what all the fuss is about.

Similarly most people don't typically understand bitcoin and the blockchain's technical merits because they don't understand what we have right now.  If you don't know about DNS and SSL certificates then you won't see why .bit domain names are potentially game changing.

Recently though on the Max Keiser show Reggie Middleton of Boom Bust Blog came up with a great analogy.

Here's how Reggie explains it (paraphrased):

Imagine you have the dollar which is a Chevrolet and it costs $30,000.

Now imagine you have a Bitcoin car which maybe cost 2 cents last year and now its $100,000.  People will look at it and say "it's a bubble", "it's a ponzi scheme" etc etc purely because of the rise in price.

But that Bitcoin car comes with its own roads, and those roads have no tolls.  The roads can go anywhere in the world, overseas, to other countries, through rivers, and that can go faster than any of the other cars in the world. And there's no way your travelling on those roads can be impeded by anyone or any corporation or government.

So taking that into consideration, which is more valuable?  The chevrolet at $30,000?  Or the Bitcoin car that went from 2 cents to $100,000?

It's a great analogy as it stands but actually it works even further to demonstrate another of bitcoin's benefits: fixed supply and deflation versus money printing and inflation.  Here's my proposed addition:

Imagine also that there are a fixed number of Bitcoin cars.  There will only ever be 10,000 made, but imagine that the Bitcoin car never breaks down, rusts or wears out.  So in 50 years time the Bitcoin car that you bought will work exactly as it does now, and could be sold as new.  The chevrolet on the other hand will have lost a huge percentage of its value.  

The number of Bitcoin cars does change, but it only goes down since, although people can make copies of their car keys, some people occasionally lose all copies meaning that car can no longer be driven.  So maybe in 50 years time there will be just 5,000.

So again, which car looks preferable?  Does the Bitcoin car still seem expensive?

The past week has seen Chase bank in the USA file a patent application referencing a payment system very much reminiscent of bitcoin.  At the same time we have had a round of warnings from central banks around the world (NZ/Australia, Europe, Switzerland) with more to come no doubt.

Whether these warnings are aimed purely at pointing out to the general public that bitcoins are at risk of theft if unsecured (the same as cash) or are an attempt at keeping a lid on bitcoin is unclear.  In either case though it seems that the banks of the world are finally waking up to bitcoin as a serious development rather than just a flash in the pan.

As I have said before the ease of creating new variants of bitcoins (alt-coins) leaves the barrier very low for large companies that either already have infrastructure to leverage or can put it in place quickly to potentially walk in and try to compete with bitcoin with their own alt-coin and Chase may be doing just that.

In filing their patent they may be taking one of a number of approaches:

• Leveraging bitcoin with their existing banking business and account holders

• Securing a patent to prevent others from developing businesses that leverage bitcoin to provide more traditional-style but flexible accounts
• Creating their own alt-coin (ChaseCoin)
• Creating a wider-spread alt-coin backed by a large section of the financial system (TBTFCoin)

At a very simple level Chase has customers that hold accounts with them and conduct transactions.  If we view the patent attempt as innocently as possible Chase may be simply trying to gain an advantage over other banks in patenting the concept of integrating a brick and mortar bank account with virtual currencies used for transfer.

Existing banks, if they recognised the trajectory of bitcoin and crypto currencies, might see that it would be important in the future for customers to have very easy ways to transfer funds between their bank accounts and dominant virtual currencies.  Certainly if banks were able to offer this function many would prefer it to the currently quite cumbersome process of transferring money to then buying and selling bitcoins via exchanges (though this will no doubt improve). 

In addition in the future if there remains significant friction between bank accounts and bitcoin we may find people basing themselves financially more and more in crypto currencies and converting back to their national currency as and when required rather than the other way around.  Removing this friction with close integration would allow both to coexist more easily and may prevent this potential exodus.

If one bank had a patent on this close integration then they would potentially have a stranglehold on other banks, forcing them to either watch customers leave or switch, or pay up for the use of the patented method.

Rather than seeing cryptocurrencies as the future and jumping on the bandwagon to create their own Chase may be more concerned with moves in the opposite direction: preventing bitcoin based companies from setting themselves up as 'Cryptobanks' able to offer people their own bitcoin based accounts and services but also branch out into more traditional forms of banking.

For those disillusioned with the existing banking industry maintaining a bitcoin based account, either with their own personal cold storage or with paid-for insurance, but which has the ability to integrate with the existing system to pay bills via direct debits and card payments might be a tempting alternative to traditional banking.

If Chase foresaw such a development they would likely be keen to prevent it and a patent covering may do that at least in their own domain. 

The most common interpretation of the patent has been that Chase plans to introduce their own cryptocurrency.  Statements reported from the Russian bank Sberbank CEO also suggest that Sberbank is considering issuing its own cryptocurrency which would lend further weight to the idea that Chase may be considering the same.  

Bitcoin though is not merely the product of its code. As we have seen already many alt-coins have tried and failed to beat bitcoin at its own game.  These alt-coins may have had some perceived improvements and benefits over bitcoin however they were not significant enough to sway general opinion and pull users away from bitcoin into their own currency.  Bitcoin has as a result gained more momentum and further cemented its place at the top with its current value a reflection of this.  As it has gained more traction it enters into a cyclical loop of gaining value, thereby becoming more attractive for miners and investment, thereby gaining more demand, thereby gaining value.  

To stop this loop would require a very significant pull to a very credible competing alternative.

Whether Chase can pull this off will depend on what pulls they can create for their new currency. Many of the benefits of bitcoin simply cannot be recreated at will by Chase.  

Bitcoin's mining network keeps it secure and this is a real threat as we have seen with attacks on smaller currencies such as Worldcoin.  In order to replicate the security of bitcoin Chase would likely have to replicate the hashing power of it which would mean investing large sums of money into ASICs.  Alternatively their network would have to be closed - accepting only predetermined nodes as trustworthy and leaving them open to more traditional forms of attack and manipulation.

If Chase chose to secure their network in the same way as bitcoin then they are essentially securing it by making an investment larger than any attacker.  Regardless of the algorithm they choose if they can purchase N hashes for $1bn then a malicious organisation could always choose to purchase N+1 hashes for more than $1bn (often less given that hardware will yield only improvements over time).

National or international cooperation within the financial industry could push this figure up and raise the barriers to attack and Chase's patent may allow them to set this up while retaining a controlling hand (and profit) from its operation.

If Chase plan to introduce an alt-coin then either they will retain or secede control over it.  Retaining control would mean retaining complete control over the mining network whereas seceding it would mean effectively inventing an alt-coin much like any other available today.

If Chase seceded control over their cryptocurrency then they are essentially in the same position as any other alt-coin today.  This doesn't mean they are bound to fail however it does mean they would need to quickly build infrastructure as fast as the bitcoin community is developing it.  Given the large and accelerating investments that are being made into bitcoin companies this would be difficult and Chase's coin would likely go the way of many other alt-coins.

Retaining control would lead to a closed system of payments that merely happened to be implemented using a bitcoin-like protocol.  From an end user perspective it is hard to see this as true competition to bitcoin except on a most basic level of being able to transfer value or process payments.  In such a case likely Chase would peg its value to the dollar meaning that any balances were held in a manipulable currency.  The benefits of deflation would be no more nor would any benefits of decentralisation and protection from bail-in or other confiscation.  In a world of bail-ins, if Chase goes down, your funds go down with it.

Still though Chase may not value these benefits and they may also believe that their end customers do not value them. In such a case if Chase can introduce and patent a system whereby any dollar denominated bank account can easily accept payments in dollars from other accounts without any significant infrastructure, vetting or fees this would still be a leg up over the existing payments set up used by most of the world.  

Whether such a system would be preferred over bitcoin would depend on a number of factors.  Given ease of use and enough of a push it is possible that merchants would gravitate to it as a simple method of accepting dollar-denominated payments however we are left wondering where the payments will come from?

Clearly large portions of the world will not be opening an account with a US bank merely to make payments to merchants associated with it.  Such a scenario is a step back even from the current payment systems.  Chase then having to choose between retaining control over they currency or not is implicitly choosing its scope at the same time.  If they retain control then its scope is limited to where Chase likely already has customers whereas if they set it free it has to compete against bitcoin purely on its own strengths along with whatever infrastructure Chase can throw up in short order.

A ChaseCoin or TBTFCoin may either way find itself limited in scope more than likely leaving bitcoin as the dominant world-wide cryptocurrency.

Even a financial-industry-wide alt-coin would be limited in scope although that scope may cover a large area of the developed world today.  Individual banks creating their own currencies and payment systems, managed by them are really no different to existing solutions such as PayPal or even Amazon Coins.  

Cryptocurrencies created within national financial industries and pegged to the national currency offer a slightly more compelling case since existing accounts, cards and payment systems could at once be leveraged to support the new system and pegging to the national currency would avoid conversions and capital gains taxes.

However:

1. This would still remain purely a payment-system play (not store of value)
2. It would retain many of the risks of the existing systems in terms of confiscation and inflation
3. Since it does not operate outside banks it would retain the controls and restrictions of existing payment networks
4. It would require very widespread and fast cooperation and investment by banks around the world to quickly pose as a contender to bitcoin while it is still in its early stages.
5. It would remain limited in its scope whereas a decentralised currency such as bitcoin has no such borders and is open to anyone on the internet
   
6. It would arguably have an image problem with many around the world since banks currently garner no love, particularly in comparison with a currency which is not affiliated with any currency or any bank.  This would only be exacerbated by any further financial crises.

What may be more likely is either a hodge podge of far smaller scale corporate and industry cryptocurrency use with bitcoin acting as the default for transfers between them and as a default for international transfers and payments, or simply with these closed alt-coin systems withering on the vine in the same way that systems such as Barclays Pingit cannot remain relevant.

As the price of bitcoin has increased in the past few weeks there has been a plenty of talk about it being speculation-driven, often with reference to a huge crash since bitcoin's adoption and usage is not necessarily keeping pace with the increase in price.

However adoption, coverage, price, speculation and usage do not each exist in a vacuum.  They are interrelated and will feed each other; an increase in adoption will bolster media coverage which will bolster speculation and price, an increase in price will increase coverage which may encourage further adoption and speculation.  This cycle is not negative - it is part of bitcoin's growth and its path to the mainstream with adoption (actual usage of bitcoin) being the demand underpinning its value.  Whether we are in a huge bubble right now is whether we are seeing pure short term speculation vs actual adoption.  This depends to some extent on the psychology of the adopters and whether they see long term value in bitcoin. 

The more small-scale drops and crashes bitcoin recovers from the more adopters will feel comfortable in holding onto their bitcoins during a drop rather than cashing out and accelerating the fall.  Further as more early adopters cash out to buy houses and such there will be fewer fat-fingered sells that cause large downward spikes in the exchanges to trigger these sell offs.  It is worth pointing out that the recent drop from around $820 (MtGox) halted at $500, still higher than any previous value before the climb, and was quickly reversed, climbing back up to around $800:

Bitcoin has the potential to make some major changes to the payments and remittances industry amongst many others and as its adoption in this space increases we can treat this as a fundamental driver of its increase in value.  If thousands of people use it daily to send money from one country to another then they need to own bitcoins to do this and this creates demand which drives up its price.

But velocity (how long those bitcoins are held before they are sent on to take part in another transaction) is a key factor in this and one form of adoption that is often left out is as a store of value.

Anyone storing some portion of their wealth long term in bitcoin is actively using that number of bitcoins even if they are not transferring them.  They are using them as a store of value and contributing to demand which is every bit as valid as using them to send value around the world.  Despite the usual 'intrinsic value' claims much of gold's value comes from demand to use it as an inflation-resistent and well accepted store of value.

Demand from the various uses of bitcoin makes up its fundamental value.  Anything over that is speculation: perceived future value which has been taken into account now and has pushed the price up in anticipation that its fundamental value will increase in the future.

Clearly there is some speculation in bitcoin and some would argue that today it makes up a significant portion of its value however this does not necessarily mean it is overbought and bound to crash to a far lower price.

If people believe that a bitcoin may be worth $10,000 in a couple of years then they are likely to be ready to pay $1,000 for one today.  If we factor risk into that equation then it changes the price they will pay; the more confident they are that it will rise to $10k the more they will be willing to pay today since they are more sure of the return.

As I have said this isn't any different to how the stock market operates.  Companies don't sell for their exact value today, they sell for a price based on their value today plus expected future gains - this is why we have P/E ratios.  Given this then, if adoption is increasing and more investors can see the writing on the wall for companies like Western Union it is not unreasonable to predict that bitcoin's fundamental value will increase very significantly over the coming few years.  At this point a speculator becomes more confident of the return that they can get (bitcoin's price rising as a result of adoption demand) and they buy.  This doesn't necessarily mean they create a bubble, but it means it brings forward the price increase - the value increases are realised earlier and more quickly while speculators wait in expectation that the fundamental value will increase.

Over time these speculators (if they are correct) see the fundamental value increase past a level they predict and they cash out in the belief that they won't get further significant returns: that any future increases will be purely driven by (incorrect) speculation or will be small enough such that they will not produce an acceptable return.  Since speculators are human things are never going to be as simple and smooth as this.  They might get excited and bid the price up beyond what they can rationally justify or get worried when they see a fall in the price and cash out early accelerating it but overall the trend will be that the increase in value will be brought forward.  If everyone is confident that demand will increase ten fold in the next 12 months then we shouldn't expect to see the price increase steadily in step with that increase in adoption, we should expect to see it increase earlier as speculators buy in, maybe overshoot somewhat and eventually settle at a price which is closer to the future fundamental value.  

How closely the value follows adoption or, conversely, how quickly the price today incorporates predicted increases in value will be a function of investor confidence, as will the volatility on the way there.