Investor Fred Wilson: Security and Hoarding Are Holding Back Bitcoin

Venture Capitalist Fred Wilson is a self-proclaimed bitcoin believer, but when speaking at New York University recently he highlighted some of the negative aspects of the digital currency, which he said, are holding it back from widespread adoption.

Currently, security, practicality and problems related to speculation and hoarding are the biggest issues facing bitcoin, he said at an event sponsored by the NYC Foundation for Computer Science Education.

Wilson

is the co-founder of venture capital firm Union Square Ventures, which has made investments in a number of successful tech start-ups, including Twitter, Tumblr, Kickstarter and Zynga. The company also has a focus on bitcoin, investing in digital currency startups rather than the currency itself.

As a proponent of digital currencies, Wilson attended the New York State bitcoin hearings in January, and has previously said the block chain could be an even bigger opportunity than bitcoin.

In his NYU speech, Wilson said:

"What bitcoin does is remove the need for that central entity, that central computer and central company. The way I like to think about bitcoin is like PayPal, but open source, peer-to-peer and not controlled by a company."

The problem with hoarding

Wilson said that rampant speculation, bitcoin hoarding and price volatility go hand in hand, arguing that most people still decide to sit on bitcoin, effectively hoarding it and waiting for the price to go up. Such behaviour causes supply problems, affecting volume and price in the process.

Wilson explained:

"I also think we need to see real transaction volume happen. Right now, most people who get bitcoin hold it, they don't transact with it. That’s part of what causes all of the volatility — if there was a very vibrant system where bitcoin was just getting swapped around like crazy, the velocity of the money would cause bitcoin's price to stabilize and there would be a much more liquid market. I think those are the kinds of things an economist would want to see."

Another problem that keeps volumes low, he said, is the fact that buying bitcoin is not as straightforward as it seems. Wilson indicated that it can take days for bitcoin to show up in his account once he buys some. This simply is not practical if you want to use the cryptocurrency on a day-to-day basis.

Improved security essential

Wilson further identified a lack of security as a major challenge facing bitcoin, and one that is hampering mainstream adoption.

He argued that it is still relatively easy to hack into people's computers, and thus into bitcoin wallets hosted there, while bad actors running bitcoin businesses pose a threat to public confidence in the digital currency:

"Bitcoin theft is a big issue. Bitcoin fraud is a big issue. And what will have to happen is we will need to see companies like Coinbase and others merge that can invest heavily in security. And that's both technological security, and also process security, to make you comfortable to keep your bitcoin there. And I think that that's probably going to be first big commercial opportunity in bitcoin, [...] to create secure systems. Because without that, I don't think we'll ever get enough confidence and trust in the system for people to really start using it."

More potential than teething problems

Wilson did not simply address concerns and challenges, he also talked about bitcoin's unique properties that make it an attractive payment option for merchants, charities and other organisations.

"The thing that's cool about bitcoin is that it like cash on a wire, or cash over the air. It's like I'm giving you a five dollar bill, but it comes into your account over the Internet and there is nobody to pay for the transaction. That is a big deal," he said.

Wilson pointed out that crowdfunding platforms, charities and many businesses rely on relatively small individual transactions. The fees pile up quickly and allowing a charity or a crowdfunded project to keep 2-5% of the cash they raise in their pocket makes a big difference.

"All of that money is going to go to the cause we care about. None of that is going to go to a third party that is making money off of the charity," he added.

Some of Wilson's assertions have been met with vocal criticism from the bitcoin community on reddit and other online forums. In response he took to reddit on Sunday to clarify his position on these and other concerns.