PayPal's founders and Bitcoin's 'ridiculous' status

Max Levchin, one of the founders of PayPal, says that as an asset class bitcoin is “ridiculous” but believes the current decline is a good thing because it is “zeroing on fair value, whatever that is”.

Levchin was speaking on a panel at the Dreamforce conference in San Francisco with fellow PayPal alumni Reid Hoffman, now of LinkedIn, and Jeremy Stoppelman, CEO of Yelp.com during a volatile month where the value of a bitcoin had risen by nearly $US100 dollars, or 133 per cent.

At the start of October, bitcoin had hit just above $US300 -- its lowest point since its late-November high of $US1147.

All three alum agreed, however, that cryptocurrencies like bitcoin were ‘here to stay’ but disagreed on whether bitcoin would survive as a currency. Hoffman is an investor in the space via Xapo, while Stoppelman owns units of the currency.

Hoffman said that bitcoin was probably most likely to become the dominant cryptocurrency because it was attracting the scale and network effect to make it sustainable. “Bitcoin is adding more wallets every day or every week than every other wallet (from rival currency platforms) in total,” he told the audience.

Levchin, who currently runs a peer-to-peer lending platform called Affirm, said that cryptocurrencies like bitcoin had enormous potential to improve a finance system he feels is fundamentally broken.

The biggest challenge facing cryptocurrencies at the moment, according to Levchin, is the legal enforcement of contracts. “Until a Supreme Court judge thinks about ‘here’s how we enforce contracts with this currency’, it doesn’t exist for the purposes of everyday life,” he said.

What he was seeing was the much more rapid takeup of bitcoin in international markets where fiat currencies were much more volatile.

“In a country like Venezuela, where contracts are enforced by whoever has the largest shotgun,it [bitcoin] is already relevant,” he said. “That’s why we have a lot of entrepreneurs who use it in Latin America.”

Hoffman said that cryptocurrencies were an excellent way to solve the trust issue that is still resonant after the collapse of the banking system during the financial crisis. Because a bitcoin transaction is conducted across a distributed system of nodes, it won’t suffer from the sclerosis that froze banks during the GFC when banks refused to act as counterparties during transactions. “One node can’t corrupt the center,” he said. “51 per cent of nodes would have to fail.”

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Despite the volatility recently seen in bitcoin, there is still plenty of VC money going into bitcoin or other cryptocurrency providers because investors see the opportunity to provide financial services to the huge number of unbanked citizens in the developed world, a number the World Bank puts at 2.5 billion.

Ryan Bloomer, who runs a mobile technology incubator in Silicon Valley, said that the rapid takeup of smartphones in the developed world meant that many people who were previously unbanked would move directly into conducting transactions on their mobile phones.

That’s certainly been the case in Kenya, where the innovative mobile payments service m-Pesa has seen 68 per cent of financial transactions in that country conducted via mobile.

Given the lack of access to credit, except from friends and families, a currency platform that can work instantly across not only a country but also the world, would also offer the opportunities to offer finance to entrepreneurs in developing countries. That would appeal to the many companies in San Francisco, like Levkin's Affirm, which are using data analytics to rapidly approve loans at a far faster and more efficient rate than major banks.

It also would help give entrepreneurs in developing countries an alternative to their own volatile currencies.

“In places where currency can run amok, having some store of value outside the country is valuable,” said Stoppelman. “In places like that, how important will it be an alternative.”

For Hoffman, it was a case of when, not if. “Is bitcoin the first or last cryptocurrency?” he asked.

“Either way. It’s obvious there will be a cryptocurrency.”