How will the Coinbase Inc announcement impact the price of a Bitcoin

James Angel, Professor of Finance at Georgetown University, on Coinbase Inc. and Bitcoin

Coinbase Inc., a startup backed by $106 million from the New York Stock Exchange, banks and venture-capital firms, said its exchange will offer greater security for individuals and institutions to trade Bitcoin and monitor real-time pricing of the cryptocurrency. However, the collapse cases of Mt. Gox and Bitstamp are still fresh in memory. Given that Coinbase is the first licensed U.S. exchange, would it be fair to say that investors and traders are in a safer position than previously?

I believe I agree with the statement, since early Bitcoin exchanges were fly-by-night operations that were vulnerable to fraud and hacking. Moreover, they attempted to fly under the regulatory radar, which precluded acceptance by mainstream users and financial institutions. Hence, a regulated company backed by mainstream institutions provides an additional level of assurances to users of Coinbase Inc.

Analysts mention there is not much reason for the average American to use Bitcoins now. However, the currency could make it much easier to do business internationally, since Bitcoin transactions do not carry the steep transfer fees charged by banks. Do you believe this might be competitive with the traditional bank transactions in the future?

Lowering remittance costs and payment transaction fees is the only value-proposition for Bitcoin that makes sense. However, Bitcoin is one of many innovations in the payment space going on at the current moment, and it faces stiff competition from other innovations. At this time, it remains to be seen which of these innovations will prosper in the long run. If nothing else, however, the competition will help push the price of international money transfers down to the price of domestic ones.

Bitcoin supporters mention that paying attention to volatility ignores the importance of Bitcoin’s underlying technology, which is agnostic to its market value. Some mining companies that invested heavily in resources when the price of a Bitcoin was rising are struggling to keep their operations open. Do you consider this a big thread to cryptocurrency’s existence in general?

The decision to enter the mining industry is based on pure economics: is the value of the Bitcoins mined worth the cost of mining Bitcoins, mostly electricity and hardware? Bitcoin 1.0 requires quite a bit of processing power and thus electricity. When the price of Bitcoin falls, marginal mining operations will shut down, just like marginal gold mines close when the price of gold falls.

Some of the other altcoins require far less electricity to mine due to the fact that they use different crypto algorithms. Therefore, I think that an efficient payment system in the long run needs to be more energy efficient than Bitcoin 1.0.

How will the Coinbase Inc announcement impact the price of a Bitcoin, and to your mind what is the real price for a Bitcoin currently?

Clearly we have seen a jump in the price of Bitcoins amid the Coinbaise Inc. announcement. Seeing legitimate establishment firms like the NYSE invest demonstrates that the technology has legitimate applications.

Even though I believe the technology is awesome, I am still a bit skeptic about the prospects for Bitcoin 1.0. To my mind, it will slowly fade into obscurity, as other technical innovations in payments surpass it, much as the early Bitnet system that linked computers lost out to the internet IP protocol.

However, I anticipate that the technology of the blockchain has enormous potential. One of the exciting things about Bitcoin is that it creates a competitive open-architecture payment network with no single point of failure (other than the protocol itself). Eventually competition will push the price of processing transactions down to the competitive level, whereas this technology is not limited to Bitcoin 1.0. Moreover, I believe that the Federal Reserve should issue US dollars in a blockchain form. This would allow users to have all of the benefits of lower processing costs, without the instability of Bitcoin 1.0 or the need to convert to local currency.