The Journal The Authority on Global Business in Japan

The meteoric rise in 2013 of bitcoin led to talk of a currency revolution. Over the course of a year, the cryptocurrency rose from a value per coin of less than $100 to more than $1,100.

Concern over the currency remains, however.

Today, bitcoin trades at the $200–$300 level. Which begs the question: does bitcoin have any traction today? Is it a worthwhile investment for individuals? Should companies be getting into it?

Traci Consoli runs the Pink Cow, a restaurant and bar in the Roppongi district of Tokyo, which accepts bitcoins. For Consoli, the currency represents a break from the bonds of traditional banking.

“The way the modern banking system is set up is [reminiscent of] old-school feudalism,” she says. “There used to be a physical exchange of money. Now, they push a button to move it from point A to point B and charge a ridiculous amount [for the transfer].”

Bitcoin is, to some extent, free of the “ridiculous” charges of which Consoli complains. By accepting the cryptocurrency, she says she has attracted tourists who see the Pink Cow as an Internet-savvy trailblazer.

Some of her customers, such as students, believe bitcoin to be a safer bet than government-regulated currencies such as the dollar, euro, or yen. But Consoli admits getting the currency accepted in the Pink Cow, which also has a bitcoin ATM, was not easy.

“It was a lot more effort than anyone expected,” she says.


It’s complicated
As relatively new and complex financial tools—bitcoins were launched in 2009—cryptocurrencies are difficult to regulate. Should they be considered currencies? Are they commodities? Or are they something else entirely? There is no broadly accepted answer.

After much flip-flopping, the government of Japan decided to leave bitcoins largely to their own devices. With a regulatory environment that does not get in the way of innovation, the potential is there for companies to emerge that can become global leaders. But that will take a lot of work.

Tokyo-based companies, such as bitFlyer Inc.—founded by former Goldman Sachs Group, Inc. employee Yuzo Kano—have speeded up the process for creating accounts on exchanges, and offer the security woefully lacking at Mt. Gox, Co., Ltd., from which approximately 850,000 of its customers’ bitcoins (valued at some $450 million) have disappeared. The latter enterprise was, at the time of writing, undergoing bankruptcy procedures in Japan.

Services at bitFlyer, meanwhile, are user-friendly, but that, perhaps, is not enough.

“In Japan, people probably won’t use [bitcoins],” says Tetsuya Saito, an associate professor of economics at Nihon University in Tokyo.

“We have several alternatives, such as Suica [rechargeable smart] cards. But it would be nice to use [a cryptocurrency] abroad, [as] we wouldn’t have to exchange currencies.”

Saito became interested in bitcoin because of its wide-reaching potential. But he is unsure about the direction of the currency’s value.

“If users increase, the currency will stabilize,” he says. “No economist has a good model for predicting [bitcoin’s future value]. So now we are trying to build one using traditional methods. In my view, it can go up to $600 [per bitcoin] again. Maybe. But I don’t see volatility in the coming years.”

Sources: CoinDesk, CoreLogic, S&P Dow Jones Indices, Money Morning Staff Research

Sources: CoinDesk, CoreLogic, S&P Dow Jones Indices, Money Morning Staff Research

New lease on life?
Increasing the number of users could prove the complicated part. Vitalik Buterin, a programmer and winner of the World Technology Award for IT Software in 2014, is working on a cryptocurrency transaction ledger technology platform—called Ethereum—to be used for creating “smart contracts.”

With the potential to underpin bitcoin, the technology acts as an automated ledger, tracking cryptocurrency transactions.

Ethereum is “a block chain [transaction database or ledger] for anything,” Buterin told The Journal. The technology, which is close to general release, essentially eliminates the need for escrow—traditional contracts for third-party agents, who disburse money and documents on behalf of primary transacting parties—in numerous processes.

“In general, you can think of a block chain as being a computer,” Buterin says. “In bitcoin’s case, it’s a very specific computer; with Ethereum, it’s a fully decentralized computer.”

What Ethereum proposes is the foundation from which developers can offer apps—including smart contracts for managing digital transfers of cryptocurrencies such as bitcoin—that bring about a new version of the web, one that eliminates the need for third parties in many of our transactions.

During his recent visit to Tokyo, Buterin said: “even with things like [crowd-funding platform] Kickstarter and so forth, there’s a lot of human effort [that] goes into those applications, particularly if [the application] is financial and you care about security.

You need a lot of people to be involved, because lots of stuff has to be done over and over again. Here, you just have one platform and it’s already done. You can assume that everything on the computer is just going to keep on going. There is a lot of labor that can be saved and particularly a lot of monopoly profit that can be taken out.”

While previous technology has pushed generally unskilled labor out of the job market, and created jobs for those who can handle IT, Ethereum threatens jobs—including mid-tier management positions—that rely on consumers needing third parties to conduct transactions.

“Instead of just replacing factory jobs, this technology happens to also replace management to a substantial degree,” Buterin says.

Buterin, however, has reservations about the future of cryptocurrencies. Among his concerns are the costs that using bitcoin could generate if it goes mainstream.

“Transactions in bitcoins cost three cents right now,” he says. “People in the US venture capital industry are in a bit of a dreamland right now, because they think bitcoin is better because [PayPal Inc.] charges 30 cents.

“Well, guess what? In China, you have [] that charges zero cents. The fact is, each payment transaction costs zero cents to process. At some point, if bitcoin gets anywhere, MasterCard Worldwide and Visa Inc. are just going to drop their fees by 80–90 percent and they are going to squash it.

Fundamentally, every node processing every transaction is just not the sort of paradigm that can go up to tens of millions of people.”

Security, which is subsidized, presents another worry.

“At some point, that subsidy is going to run out,” Buterin says. “So either transactions are going to go very high or network security is going to drop off.”

Regardless of how these issues play out, Buterin, for his part, is working with developers across the world to realize a cryptocurrency economy by solving such concerns before they create problems.

If he can do so, it will be up to others to bring in the killer apps that can get anyone involved in this complex industry, Buterin explains. That includes the average grandma and grandpa.

“The point is that grandma isn’t [necessarily using] Ethereum; she is using some wallet or chat application or whatever else. And [it’s the responsibility of] each of those applications to make themselves user-friendly.”

For those without ideological reasons for wanting bitcoin to succeed, there is little to do other than wait and see if the cryptocurrency movement can deliver on its potentially revolutionary promises.


Richard Smart is a copy editor at the Nikkei who has been living and writing in Japan since 2002.