Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would try using bitcoin's globally distributed network for verifying virtual currency transactions as a logbook for tracking private company stock deals.
Nasdaq is best known for running the $9.5 trillion exchange listing public companies like Apple (AAPL) and Google (GOOGL). But two years ago it started a market for trading in shares and options of private companies, such as music app Shazam and messaging service Tango. Keeping records of private stock transactions has sometimes been a haphazard affair and Nasdaq wants to bring more certainty, security and speed to the trades using bitcoin's network.
Until now, bitcoin's popularity has been all too dependent on the currency's often-volatile price. It was all over the news when the price of a single bitcoin topped $1,000 back in November, 2013. And there was plenty of coverage of the subsequent crash, as the price dropped more than 75% last year. Currently, each bitcoin trades for about $245. The extreme ups and downs left many people puzzled about how bitcoin could ever be used as a reliable currency.
The Nasdaq's plan, however, has nothing to do with using bitcoin like money. Instead, it's the technology underlying bitcoin -- the network of computers around the world that make the system work -- that intrigues the Nasdaq and many others on Wall Street.
Every transaction sending a bitcoin, or a fraction of a bitcoin, from one person's digital wallet to another's entails running the trade through encryption equations which are, in turn, verified by the network, usually in 10 minutes or less. The results are published in a public digital ledger known as the blockchain.
The system includes a feature to add more information to each transaction in the blockchain as well, information which can't be altered or forged without being detected by the network.
Nasdaq will use this commenting feature for its new private stock transaction service. Each time private stock is issued or transferred, the information can be added as a comment in a bitcoin transaction. And then, within 10 minutes, the blockchain will be updated with the information. The actual amount of bitcoin traded can be tiny -- the system includes 8 decimal places, so deals can take place with just 1/100,000,000 of a bitcoin.
Wall Street has been slowly getting more involved in the bitcoin ecosystem. Last month, Goldman Sachs (GS) was the co-leader of a $50 million fundraising round for Circle Internet Financial, which runs a bitcoin wallet service. And in January, bitcoin exchange Coinbase got backing from several big financial firms, including the New York Stock Exchange.
But the Nasdaq initiative marks by far the most mainstream, large-scale use of the bitcoin network beyond the trading of bitcoin itself. It could uncover previously unnoticed problems or weaknesses in the system. It might also turn out to be more cumbersome or less speedy than expected.
Or, it might turn out to be the key to slashing the three-day settlement time that's standard for trading most securities in the United States down to less than 10 minutes.
Either way, we'll finally get a reality check for the super-hyped cryptocurrency.