3 reasons why Bitcoin is getting its groove back

Bitcoin screenshot

Bitcoin is in a slump. In recent months, the crypto-currency has been in the news for all the wrong reasons: the Department of Homeland Security shut down its primary exchange, the State of California is gunning for the Bitcoin Foundation and, meanwhile, the mainstream press still regards it as an exotic financial hobby rather than a serious currency.

Bitcoin, however, has weathered similar dark periods and still has the potential to shake up the world’s financial architecture. And, in the last week, three news stories brought hope for Bitcoin believers that the currency can overcome its twin weaknesses: illiquidity and lack of legitimacy. Here’s a summary of the news and a quick comment on what it means:

The return of a major Bitcoin broker? Mt. Gox says it will play by the rules

Recall that it’s easy to swap Bitcoins with other users — but that it’s hard to trade them for conventional currencies like dollars and euros. Until May, the main way around this bottleneck was Mt. Gox, a Japan-based currency exchange that allowed speculators to use Dwolla (a Pay-Pal like network) to change Bitcoins into dollars.

Homeland Security, however, put the beat down on Mt. Gox for operating as an unlicensed money transmitter, and Dwolla suspended the exchange’s account in May.

Now, though, Mt. Gox wants to come in from the regulatory cold. The company quietly filed for permission last week to be a licensed entity with FinCen, a division of the Treasury Department that deals with financial crimes; if FinCen gives the green light, a major source of liquidity will return to the Bitcoin market.

A chance to trade Bitcoin on the stock market

The Winklevoss twins this week filed to go public with a trust whose shares will track the value of Bitcoin. Similar financial products exist for investors who want to bet on the overall performance of the stock market or a real estate portfolio — in this case, investors will be able to bet on Bitcoin without having to directly buy the stuff.

The Winklevii, best known as wannabe Facebook owners turned pistachio pitchmen, control 1 percent of the world’s Bitcoin supply, and project a mainstream business presence that many other Bitcoin investors do not. If their IPO succeeds, the value of the currency could shoot up on interest from the general market — and enjoy a degree of legitimacy that Bitcoin has never had before. (For the flip side, see one Bloomberg’s writer’s view that investors will still need a strong stomach).

A new decentralized bridge for Bitcoin

My colleague, David Meyer reported from London this morning that Ripple — a platform that offers peer-to-peer banking and credit — is introducing Bitcoin Bridge, which will result in “money going in as traditional currency and coming out as Bitcoin.” If the new Ripple service catches on, it will create a network of decentralized nodes that will make Bitcoin less reliant on exchanges like Mt. Gox, which are exposed to hackers or regulatory seizure — and which threaten the entire Bitcoin eco-system when they fail.

The Ripple-based payments are significant not just because it promises more liquidity, but also because it reinforces Bitcoin’s place in an emerging new era of money transfers.

The bottom line

It’s been a rough few months for Bitcoin but the emergence (and re-emergence) of other platforms and services to support it bodes well for the future of the crypto-currency. Widespread adoption, however, will require more members of the Bitcoin community to emerge from the shadows and engage with a regulatory system that many distrust.

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