Broncos and Bitcoin
Santa Clara University Finance Professor Atulya Sarin discusses the promise and perils of Bitcoin.
It’s not possible to pay tuition or buy lunch at Benson with bitcoin yet. But across campus, interest is heating up in the Bitcoin system and other “digital currencies” that have captured the imagination—and investment dollars—of millions of people worldwide.
Perhaps no one on campus is more tuned in to the promise and perils of Bitcoin and cryptocurrency than finance professor Atulya Sarin. He’s written six op-eds on the topic, and will be giving a series of widely anticipated lectures to campus starting Feb. 22. from noon to 1 p.m. in Lucas Hall Room 125. He's also adding the topic to his graduate-level classes, and will be helping meet ravenous demand among Valley businesses for information on cryptoassets, by joining colleagues Sanjiv Das and Seoyoung Kim to teach a planned Executive Development Center course.
For the uninitiated, Bitcoin is two things: 1. an encrypted, digital currency that can be used relatively anonymously and independent of government finance systems; and 2. a decentralized system for tracking and validating transactions in that currency. Once two users conduct a transaction in bitcoin, the universe of Bitcoin “miners” validates the transaction, by uploading it in a block of recent transactions, into a blockchain.
We sat down with Sarin to discuss how cryptocurrency is the new dotcom mania; his dream of sending bitcoins to his mom in India; and why he once almost changed his name to e-Tulya.
How did you get interested in Bitcoin?
Atulya Sarin: About three years ago, I went to a meetup in San Francisco, where the host company wanted to make micropayments using bitcoin. The idea was hard to implement, but I could tell there was a lot of excitement about bitcoin, so I started going in-depth into it.
What do you see as the future for either cryptocurrency like bitcoin, or the blockchain technology that underpins it?
AS: It needs a “killer app,” the way that e-mail was the killer app that got us all on the web and launched today’s internet giants. The killer app in terms of the blockchain is money—banking activities, financial activities—probably starting with money transfers. Money is incredibly expensive to send. If I want to send money to a guy I work with in Canada, I have to pay $40 and he has to pay $40, and it takes three days and multiple layers to transact and verify that this is a legitimate transfer. It is very tedious. I think banks could well be the first adopters, with money transfer as the killer app.
One cryptocurency company that got press recently was Ripple, because they have this collaboration with some Japanese banks, and they announced they’re going to team up with MoneyGram to transfer money essentially. So all of a sudden it’s becoming clearer what the “use case” is for Ripple.
However, for widespread adoption of money transfers on the blockchain, people will have to be comfortable with the entire financial record system essentially living on my laptop—or rather the laptops of all participants. There will need to be a company that will ensure that those transactions are being carried out in a secure fashion. One company that was created to do that— Ethereum—the founder is like 19 years old. I think so far we feel more comfortable with this government structure, whereby there are adults in the room who will make sure things happen the way they are supposed to.
You also can’t walk away from the fact that if indeed all the activities were to go on Bitcoin, and linked on the blockchain, how are you going to keep track of who’s paid taxes and who has not? With the current systems—banks, credit cards, registered storefronts, etc.—businesses collect taxes and there’s a way to check at multiple points. With digital currency and blockchain, government has no access to that information.
Where are we in cryptocurrency life cycle?
AS: I think we are now in this crypto world, this blockchain world, where we were in the internet and dot coms, around ’92, ’93. Recently, Kodak announced that they’re going to do a Kodak Coin; the stock doubled in two days. One of our colleagues, Kirthi Kalyanam, is on the board of a company called Overstock, an online retailer. Overstock announced that they’re going to do an ICO (initial coin offering). The stock used to trade around $15 to $20, now it’s at $80. And what’s more extreme is a company called Long Island Iced Tea Corp., which announced that they’re going to change the name to Long Blockchain Corp.
We saw exactly the same thing in the early ’90s, when companies’ stocks went up 70 percent to 80 percent when they appended “.com” to their name or added “e-” in front. I used to joke around that I considered changing my name to e-Tulya.
So we are at least several layers away from realizing a dream of a truly safe, portable, global currency that will bring unbanked people into the digital economy. The big question is how do we get my mother bitcoins in India? The people who are using bitcoin right now are millennials in San Francisco. That’s not the dream.
What else might we see in the future with cryptocurrency and blockchain?
AS: Blockchain technology is very well suited for recordkeeping. So I think eventually, public records of who owns what, which now are kept in offices with multiple backups—such as who owns this house; medical records; car registrations; energy trading contracts—could wind up recorded on blockchain.
Can people get rich investing in cryptocurrency right now?
AS: At best, you can think of it as a speculative asset. I’d be very, very careful before recommending that people start investing in bitcoin, because it’s highly speculative and it really worries me. I see students of mine, and my children’s friends, millennials, buying these cryptocurrencies. You have to be able to afford to lose it all.
And if you’re an investor in cryptoassets, it would make sense to be diversified in all of them, partly because there are a lot of reasons why many of them will not work. For instance, I can easily see this becoming a system where you convert your U.S. currency into bitcoin or some other digital currency only for purposes of a transaction, then convert back into your primary currency right away. So these currencies will be more like pass-throughs, with very little value themselves.