Bitreserve and the bitcoin volatility problem

Luis Buenaventura is head of product at Satoshi Citadel Industries, a Philippines-based Bitcoin startup.

Ask anyone what the obstacles rallied up against mainstream Bitcoin adoption are, and you’ll get a similar response: regulatory uncertainty and technical complexity. Those are two of the most common complaints that I hear from industry folks. But from an average consumer standpoint, I don’t think anything blocks Bitcoin adoption more than the constantly fluctuating exchange rate.

Bitcoin’s price – currently at US$340 – is fascinatingly volatile. Because it is based purely on the buying and selling of the cryptocurrency on various open exchange markets, its price rises and falls like an erratic heart rate (that is, if a heart rate were worth $50 in either direction). There’s no direct cure either. Bitcoin’s US$5 billion market cap just isn’t large enough to stabilize its exchange rate yet, and will probably remain so for the next three to five years.

In the meantime, convincing shoppers to use Bitcoin over regular paper money is a task somewhere between Herculean and Sisyphean. Holding on to Bitcoin for more than a few days exposes the bearer to a volatility that is untenable for the average person, let alone the low-income “underbanked” that the cryptocurrency supposedly levels the playing field for.

But hard problems are business opportunities waiting to be unlocked.

Goodbye, volatility?

Over the past six months a couple of different startups have launched that use various financial instruments to stabilize the value of Bitcoin. Hedgy and TeraExchange are two new trading platforms for Bitcoin derivatives, both of which can effectively preserve your Bitcoin’s value over time. If you have no idea what a derivative is, don’t worry. Neither solution is targeted towards the average consumer, instead focusing on professional and institutional users.

A more consumer-centric approach is to simply peg the value of your Bitcoin (BTC) holdings to a regular fiat currency, which in my mind is a more straightforward workaround. This model, piloted earlier this year by Coinapult with their “locks” feature, and then more recently by Bitreserve, is probably the first time I have genuinely felt comfortable about storing BTC as a portion of my savings instead of as a speculative investment.

Bitreserve – started this summer by Halsey Minor, former CNET founder turned investor – works by emphasizing the use of Bitcoin as a mode of transmission as opposed to a currency, or more to the point, a store of value. This is arguably the same thought process behind Bitcoin payment processors that offer to hand merchants their earnings in fiat, or Bitcoin remittance services that pay out only in local currency.

Upon receiving my beta invite to Bitreserve, I was presented with six different currency “cards,” which are essentially just empty wallet addresses (pictured above). I deposited 1 BTC into the “Bitcoin” card, and it became available for spending within the hour (a similar confirmation time as either Coinbase or Circle).

Now that I had 1 BTC available in my account, I decided to diversify my personal holdings and moved 33 percent to the USD card, and another 33 percent to the EUR card. The process was near instantaneous; I now had 0.3398BTC, US$115, and EUR 90, respectively. And while the relative value of the BTC wallet would continue to rise and fall with the changing market rates, the USD and EUR wallets would remain pegged exactly where they are.

What’s actually going on behind the curtain? Bitreserve’s explainer video does give some details: they actually sell your Bitcoins in exchange for dollars or euros as you make the deposit into a given currency card.

Lofty goals