Why Bitcoin’s Volatile Price Doesn’t Matter

Dish Network Corp. — Class A (MM) (NASDAQ:DISH)

Historical Stock Chart

3 Months. From Dec 2014 to Mar 2015

Bitcoin prices have dropped almost 60% since January, outpacing the Russian ruble. Critics say that’s proof digital currency has failed.

Ignore them. Bitcoin’s price is irrelevant to the key question of whether the underlying technology will disrupt finance. There are many signs it will.

Bitcoin is much more than just a currency. Investors from Silicon Valley to Wall Street are now pouring money and expertise into what they view as an adaptable technology platform. Software developers anywhere can use bitcoin’s open-source code to create specialized applications that let businesses undertake commercial exchanges without using middlemen. These applications threaten to make redundant many services provided by banks, foreign-exchange houses, escrow agents, clearing houses, notaries public and even lawyers.

Of course, none of that guarantees that bitcoin will succeed. Detractors will rightly argue that householders won’t save or transact in a unit of exchange whose value fluctuates wildly. Indeed, while bitcoin transactions continue to rise, and even though a growing list of merchants accepting bitcoin now includes Microsoft, Expedia and Dish Network, digital currency’s portion of global commerce remains minuscule.

But it doesn’t matter that mom and pop aren’t comfortable with bitcoin. What matters is whether the exploding software innovation around cryptocurrency leads to solutions that allow corporations and governments to derive benefits while protecting themselves from risks, including the volatility. The vision that many in Silicon Valley have is that bitcoin, or perhaps some clone of it, will work in the background of the global economy. Mom and pop won’t even know it’s there.

Balaji Srinivasan, a partner at venture-capital firm Andreessen Horowitz in Menlo Park, Calif. likens bitcoin’s current status to the early days of Linux, whose open-source operating system initially sought to compete with Microsoft’s Windows on personal computers but eventually became the leading operating system for enterprise servers. Much like some bitcoin evangelists’ views of fiat currencies, early Linux supporters were overconfidently saying, ‘We are going to kill Microsoft,’ and yet while it never got a much of a presence on desktops, it did gain a presence on the server side, Mr. Srinivasan said. Now, 15 years later, the Internet as we know it wouldn’t exist without Linux.

Mr. Srinivasan talks of how a dual boot of Linux and Windows became popular as techies simultaneously tapped the best functions of both. It’s analogous, he says, to how cryptocurrency developers are making their applications interoperable with traditional monetary systems. Bitcoin, with its more efficient, direct and cheaper system of exchange, would support payments and transfers over the Internet and then connect seamlessly with the offline economy, where the dollar and other traditional currencies continued to reign.

Mr. Srinivasan’s firm, which was co-founded by Netscape pioneer Marc Andreessen, is one of dozens that have invested a total $311 million in bitcoin startups this year, according to a tally by news site Coindesk. That’s up from $93 million in 2013. The names behind these deals read like a who’s who of Internet history: Tim Draper of the Valley’s legendary Draper family, Reid Hoffman of LinkedIn fame, Yahoo founder Jerry Yang and many others.

What gets these people excited is bitcoin’s decentralized infrastructure: the public, distributed ledger known as the blockchain, which is updated and maintained in real time by a network of independent computers to generate an ongoing consensus on the veracity of its data.

These computers are known as miners. While the new bitcoins they earn in return for maintaining the blockchain ledger can be metaphorically likened to freshly mined gold, the miners’ real work is to authenticate information. This vital role allows people and businesses that have no other way to trust each other to engage in commerce without the expensive intermediation of a third-party institution. It’s the first case of decentralized trust to challenge the hub-and-spokes centralized structure of international finance that was forged during the Renaissance by Florence’s Medici family.

Bitcoin’s fast, low-cost system for authenticating information not only makes it possible to make payments without fees going to credit card companies, banks, payment processors or exchange houses, but also to decentralize many other economic functions. Since any information can be embedded into the blockchain ledger and because the core software is an open platform, startups are building myriad Bitcoin 2.0 applications based on the same principle: blockchain-based ride-sharing services, personal ID systems, database management and asset registries, even the wild idea of companies run not by human managers but by software programs.

Wall Street is in on the act, too. Senior investment bank managers are joining bitcoin startups. Hedge funds are trading digital currencies. Ex-traders are building high-tech platforms and derivatives to better manage digital currency’s volatility. Bitcoin’s price is now quoted on Bloomberg terminals. Some banks are using Ripple Labs’ cryptocurrency network for international transfers. Some Federal Reserve district banks are looking at how the technology might streamline the Fed’s interbank payments system.

Meanwhile, the British, Mexican and other governments are studying blockchain solutions to enhance economic transparency.

Excessive government regulation could also strangle cryptocurrency, of course. But smart regulation could legitimize it. Last week, New York Superintendent of Financial Services Benjamin Lawsky unveiled details for a revised BitLicense that was welcomed by many in the bitcoin community for promoting innovation.

These are the developments that matter, not the roller coaster of bitcoin’s price.

Write to Michael J. Casey at michael.j.casey@wsj.com

Access Investor Kit for DISH Network Corp.

www.companyspotlight.com/partner?cp_code=P479&isin=US25470M1099

Access Investor Kit for Expedia, Inc.

www.companyspotlight.com/partner?cp_code=P479&isin=US30212P3038