When $27 of Bitcoins Equals $980,000, The FBI On Seizing VS Owning Bitcoins And Coinbase Aims To Become The Gmail of Bitcoin, Etc.
A Norwegian man who bought $27 worth of bitcoins in 2009 and forgot about them discovered their value had since shot up – to $980,000 at today’s price.
Kristoffer Koch decided to buy 5,000 bitcoins for only 150 Norwegian kroner ($26.60) in 2009, after discovering bitcoin as part of an encryption thesis he was working on.
Koch probably didn’t think he would become wealthy as a result, but his 5,000 BTC has turned into a goldmine. It was a wise investment by someone who stumbled across bitcoin before many others did.
Koch found that his bitcoins were worth 5 million Norwegian kroner ($886,000) when he checked back in on them. At the current Bitcoin Price Index of $196, those coins are now worth about $980,000.
After purchasing the 5,000 bitcoins, Koch pretty much forgot about them altogether. That is, until the price shot up to over $200 back in April and he started seeing press coverage about bitcoin’s rise.
“I thought to myself, didn’t I have something like that?” Koch told NRK, a Norwegian news outlet.
He did, and after figuring out the password to his wallet and seeing how valuable those bitcoins had become, he sold off a portion of them. Now he has an apartment that he purchased in an expensive part of Oslo, Norway. All thanks to the huge price gain that bitcoin has experienced, mostly in the past year.
It turns out that Koch’s frivolous technology spending, against his girlfriend’s wishes, actually turned out to be a great investment.
“I buy a lot of technical little things that I never have time to use, and this was the worst of all, the fact that I was buying fake money,” Koch told NRK.
It’s not fake anymore, at least not to Kristoffer Koch.
Many people have become wealthy as a result of bitcoin’s rise, although stories like this are rarely in the public eye. There’s the story on the Bitcointalk forums about Kevin, who purchased 259,684 BTC for under $3,000 in 2011.
Then there is Erik Voorhees, who founded the bitcoin gambling site Satoshi Dice and sold it for 126,315 BTC, worth about $24.7 million at the current bitcoin price.
And The Verge reported earlier this year that Satoshi Nakamoto, the Bitcoin network’s mysterious founder, has an address with over one million bitcoins.
Of course, we shouldn’t forget about the person who bought two pizzas for 10,000 bitcoins back in 2009. Now, if only that person had kept them, or perhaps forgot about them and rediscovered them years later like Kristoffer Koch did.
FBI Proves Seizing Bitcoins Isn’t The Same As Owning Them
While the FBI may have its hands on the founder of Silk Road’s bitcoin wallet, that doesn’t mean it has access to what’s inside. Ross Ulbricht, despite his own self-incriminations as the mastermind behind the online black marketplace, was able to do one thing right: secure his bitcoins.
A reported 600,000 BTC belonging to Ulbricht is in the FBI’s hands. But they can’t access the bitcoin wallet because it is encrypted. This supposedly is separate from the 26,000 BTC that was left in an escrow account, which was being used to exchange money between the marketplace’s users and dealers.
For law enforcement, taking on new technologies isn’t always a smooth operation. As criminals adopt new concepts, cops have to figure out new crime-solving methods.
With bitcoin that’s no exception. But what most people in the bitcoin community can pretty much agree upon is the fact that killing off Silk Road was a good thing for the future of bitcoin.
“Taking down Silk Road was an important step in helping legitimize and bring bitcoin into the mainstream. Liquidity is a big problem right now that impedes bitcoin’s growth, hopefully this 5% stash can be recovered and reinserted into circulation to get more people and businesses using BTC,” said Travis Skweres, CEO of bitcoin exchange CoinMKT.
The Feds Owning Bitcoin
It may make some BTC investors wary that a government entity is in possession of so many bitcoins. After all, it is fear of the Feds trying to shut down decentralized virtual currencies that may be the biggest risk of all right now for considering bitcoin as an asset class.
“I’ll be glad to see these bitcoins transitioned to the wider community,” says Jaron Lukasiewicz, the founder of Coinsetter, a high-performance bitcoin exchange designed for traders.
Not only will investors delight on seeing these bitcoins back on the market, such a huge amount being back in circulation will help volume, and thus liquidity overall.
“Without the private key, it would be impossible for the government to access the bitcoins,” says Ankur Nandwani, who runs bitcoin micropayments service BitMonet.
Conceivably, the government could make some sort of deal with Ulbricht to provide the key to the bitcoin wallet holding the approximate 489,000 bitcoins it cannot currently access.
It will be interesting to see if the government will try. It has made various statements in the past that it believes bitcoin is real money, but they can literally put money where their mouth is by making a deal to release those coins.
After all, 489,000 bitcoins is no small sum, amounting to over $92m in BTC using the latest CoinDesk Bitcoin Price Index valuation.
Not Talking
The feds certainly aren’t talking about what access they have to Ulbricht’s stash of bitcoins, but the block chain can prove to us a few things, says Dan Held of Zeroblock.
“We know the FBI has access to 144,000 bitcoins since they moved them on 10/25. Whether or not they have access to the remaining 489,000 bitcoins is debatable,” says Held.
Indeed, on 25th October, approximately 144,000 bitcoins were moved to this address. They were moved in segments of 324 BTC, which has been presumed to stand for “FBI” on a dial pad. Also, the phrase “DPR Seized Coins” was added as a note to each transaction on the block chain.
What might be the most intriguing aspect of these bitcoin seizures is just how the Feds will eventually get fiat for them. As it stands right now, dumping the amount of bitcoins that it has in its possession could take a long time, since exchanges are not used to handling that sort of volume.
“Mt.Gox, BitStamp, and BTC-e combined don’t have the volume necessary to facilitate a sale of that size,” said Zeroblock’s Held.
He’s probably right – daily volume for the top five exchanges is currently around 58,000 BTC, using the most recent 24-hour data from Bitcoin Charts.
The feds may have to ultimately auction off the coins, which might be of interest to any bitcoin investor out there.
“If they auction off the coins, it will most likely be at a discount to current prices, as there is not enough demand to execute at the current market price,” says Held.
Coinbase Aims To Become The Gmail of Bitcoin
Brian Armstrong, CEO of Coinbase, is a hard man to track down. It took CoinDesk months to get him on the phone. “Things have been busy!” he said.
No wonder. Armstrong is leading the charge to make bitcoin a mainstream currency. His firm specializes in services that make it easy to use.
Customers in the US can buy bitcoins from Coinbase using credit cards. They can keep them easily in a web-based wallet, an iPhone app, and they can send them to each other via email addresses, without having to worry about QR codes or random alphanumeric gibberish. They can even use SMS if they want. How is it able to do this?
Core developer Jeff Garzik once said that although the underlying protocol for the bitcoin currency had been developed, a second layer of services designed to exploit the coin was still needed.
These services, such as more intuitive payment systems, credit services, stock exchanges, and smart property, are what will give bitcoin more traction among mainstream users who would run a mile from a public bitcoin key.
Coinbase isn’t building most of them – but it is focusing on making a superset of services as simple as possible.
“We want to make bitcoin easier, and if we can do it with underlying bitcoin technology we will always do it that way first,” he says.
“But if customers ask for something like recurring billing, or subscription payments, or free micro-transactions and we can’t think of a way to do it with the underlying protocol, then we are going to provide it on top of the protocol.”
This creates something of a bubble for Coinbase and its customers. When Coinbase users send each other bitcoins between Coinbase wallets, they send money to email addresses, rather than bitcoin addresses. This is one of the ease-of-use features offered by the company.
What Exactly Does Coinbase Do?
Armstrong breaks its services down into three main categories: user wallets, bitcoin buying and selling, and merchant tools.
It has competitors in all three areas (BitPay in the merchant space, for example), but capitalizes on being one of the only companies – if not the only one – to offer an end-to-end ecosystem.
Armstrong describes the company’s advances in each of these areas. The off-chain transactions in its user wallet offering nestled alongside paper wallet, and bitcoin rewards for referring other customers.
On the merchant side, it enabled merchants to collect shipping addresses and emails through its merchant tools earlier this month, and has been offering recurring payments since May. Merchants can also accept microtransactions with zero fees.
Isn’t it dangerous to take large amounts of bitcoin trades off-chain and offer them non-standard services such as the ability to send to email addresses? By creating a bubble of customers who can transact in a non-standard way, doesn’t Coinbase risk Balkanising the bitcoin community?
The “Gmail” of The Bitcoin World
Gmail screenshot 2013-10-28Armstrong likens his service to Gmail, and bitcoin to SMTP.
SMTP is an open email standard that provides basic functionality, but people using Gmail can do extra, non-standard things, such as having calendar invites automatically dropping to Google calendar, or taking advantage of automatic message prioritization or conversational threading directly in the client.
“We love open protocols,” he says. “And in the same vein we never want to have anyone locked into anything on Coinbase, so if you were to lose faith in us, you didn’t like our services, or we did something evil in the future, you will always be able to send bitcoins outside Coinbase.”
Between 75-80% of transactions that Coinbase conducts are handled internally, says Armstrong, but if it needs overflow capacity, it has partners.
Where it needs to reach out to our exchanges, he has agreements with Tradehill, Bitstamp, and Mt. Gox.
But with Tradehill benched because of regulatory issues, and with Mt. Gox taking a long time to process US withdrawals, Armstrong admits that Bitstamp is his ‘go-to’ exchange at present.
However, the company also conducts over-the-counter trades with two or three institutional players, at least one of which is a miner, he says.
Regulatory Uncertainty
The company still faces challenges, however. There is still some regulatory uncertainty, he suggests. The company is exchanging bitcoins for fiat currency on US territory, and it has indeed taken the step of securing an MSB license at the federal level.
However, the individual US states are a different story. Each state has its own regulatory approach (and some appear to have none at all). Some states are considerably more aggressive than others. “We’re in uncharted territory, so hard to say if this stuff falls under a particular state’s MTL [money transmitting license] statutes,” says co-founder Fred Ehrsam. “We’re still talking to states to figure out how each responds, but Coinbase is prepared to get licensed where a regulator deems it’s necessary.”
In the meantime, he is continuing to do business, relying on the fact that Coinbase has its AML and KYC processes established.
In short, it seems to be a process of acting first and asking forgiveness later, while doing the utmost to ensure that, should regulators come calling, it will be in a position to show them some documented processes.
“Our approach so far has been that we assume the industry is going to get there eventually, where it will be pretty clear that you need to do it. That said, there is nothing clear yet today saying that that is the case.”
This approach stands in stark contract to partners like Tradehill, for example, which focuses more on the high-net worth market. It refuses to do business without all of its US state licenses intact, and has backed out of the market while it resolves the issue.
“In a market with everything to play for, owning your own ecosystem in a decentralized world like bitcoin is a valuable asset.”
It is a bold move on Coinbase’s part. Grabbing a market first brings the benefit of time; an early adopter can get a solid grip on a market and establish a healthy cashflow before regulators weigh in.
Square, for example, was fined $507,000 by state regulators in Florida and Illinois for failing to obtain a license before opening up for operations.
However, by that time the firm had raised $341m, and the Florida fine (which enabled it to then obtain its license) was presumably at that point just a cost of doing business.
Coinbase has a long way to go down that road. It successfully completed its A-round last May with a $5m investment led by Union Square Ventures.
It was the largest investment in a bitcoin-related company at the time, and it sets the scene for bigger funding deals in the future. It is constantly growing, having just signed a deal with Cashie Commerce, enabling the latter to use its merchant API for BitDazzle, an online Etsy-style marketplace for bitcoin-friendly merchants.
Deals like this will propel the company forward – and bitcoin with it.
If the regulatory challenges do come, the firm must be secretly hoping that it will have raised enough funds to handle them.
In the meantime, it will be concentrating on volume growth, by gaining mindshare in a still-nascent market.
This must be one reason why it waived merchant processing fees for its first $1m in sales. It will also strive to stay focused on what users want, which is likely to keep it one step ahead of the core development team on merchant and wallet features.
Bitcoin startups today must make a landgrab for users. In a market with everything to play for, owning your own ecosystem in a decentralized world like bitcoin is a valuable asset.
Monty Henry, Owner
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