Wall Street momentum adds to year of bitcoin legitimacy

A top secret bitcoin startup called 21 Inc. finally disclosed its business plan this week and the strategy points to the many uses of the virtual digital currency beyond the obvious.

With $116 million of backing from top tier venture capital firms and former Treasury Secretary Lawrence Summers signed on as a strategic advisor, 21's emergence is also further proof that bitcoin has rapidly moved from fodder for weirdo science fiction to the realm of real business tools. The New York Stock Exchange's announcement on Tuesday of its own bitcoin price index, one that could be used as the basis for all manner of derivative contracts, is yet another signal of bitcoin's usefulness to mainstream businesses.

The well-funded startup says it has created a dedicated computer chip that can be added to smartphones, tablets or almost any other type of computing device to allow for the processing of bitcoin transactions and the creation of new bitcoins. The feature could also be incorporated into chips made by other companies to add the same functionality. Currently, that's the realm of high-powered (and high-priced) computer rigs known as bitcoin miners.

Every time a bitcoin is traded from one person to another, the transaction is recorded in a digital logbook known as the blockchain. Mining computers crunch the encryption equations needed to verify each transaction and verify the listings in the blockchain. New bitcoins, each really just a unique string of digits, are generated via the same process, providing an economic incentive for the miners to verify all of the transactions.

Adding the bitcoin mining capability to any consumer's portable computing device opens an intriguing array of new functionality. Because bitcoin mining generates new bitcoins, 21's chips create a small, new revenue stream for any device. That revenue could go toward subsidizing Internet access or paying for online services. It could also go to a phone manufacturer or mobile carrier.

And if the idea catches on, more than a billion smartphone owners could be crunching bitcoin transaction data on the phones in their pockets as they go about their day.

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But connecting each device to bitcoin's digital logbook of all transactions adds another set of interesting capabilities. Transactions added to the blockchain can include extra information which can't be altered or removed. That can provide a layer of security and verification that's hard to find on the Internet. It could also allow devices to authenticate themselves without resorting to the kinds of more expensive security networks used by corporations today.  

Many of these type of features can work no matter how much the price of a bitcoin rises or falls. The often-volatile price climbed over $1,000 in November 2013, only to plummet more than 75% over the next year. Bitcoins traded for about $234 each on Tuesday.

21 CEO Balaji Srinivasan emphasized that separation of price and function in a blog post on Monday. "At 21 we are less concerned with bitcoin as a financial instrument and more interested in bitcoin as a protocol — and particularly in the industrial uses of bitcoin enabled by embedded mining," he wrote.

Of course, there's no guarantee that 21 will succeed. Its chips may turn out to be too expensive, too slow or otherwise flawed. And the revenue generated by the chips may turn out to be too meager to support any interesting initiatives.  

Still, the  news of Summers and the New York Stock Exchange's involvement adds to the list of serious Wall Street players already backing bitcoin, including Goldman Sachs (GS) and the Nasdaq (NDAQ). The NYSE was already one of the backers of bitcoin exchange Coinbase. Goldman is backing digital wallet provider Circle while the Nasdaq recently announced plans to use the blockchain as a secure listing for private stock transactions.

Again, all of these ventures could certainly fail or fall short. But it seems more likely that 2015 will be remembered as the year bitcoin got serious.