Wednesday, 26 February 2020

Berlin, the cryptocurrency capital

Berlin’s alternative neighborhoods are no strangers to calls for revolution. While the calls previously came from anarchists and squatters in abandoned buildings, they’re now coming from cryptocurrency entrepreneurs digging the city’s funky past and anti-establishment vibe. In Germany’s capital, a handful of stores have accepted leading cryptocurrency Bitcoin for much of this decade — most of its existence — and now a growing community of crypto-related startups and investors are looking for ways to make virtual currencies more accessible to everyday consumers.

“Berlin is the crypto capital of Europe if not the world,” says Fabian Vogelsteller, a lead developer of Ethereum, the world’s second-largest cryptocurrency. He is working on the currency’s future in Berlin, and his partner, Gavin Wood, told the Wall Street Journal much of it was developed here.

The city emerged as a Bitcoin hub quickly because of a handful of early adopters living in the once-alternative Kreuzberg neighborhood. The district’s history of squats with revolution-seeking anarchists mixed with a German distrust of government-backed currencies — a throwback to the hyperinflation of the Weimar Republic — ignited a local cryptocurrency scene.

Mr. Vogelsteller was surprised by the rocketing prices of Bitcoin and other cryptocurrencies this year but is more interested in the development of the technology they run on, blockchain. It is a digital ledger that records transactions, called blocks. Each new transaction is proofed, checked and added to a connected list of all past transactions, called a chain, maintained by many independent computers. Any time a new transaction is recorded, a majority of the computers must confirm the transaction. This requires significant computer power, so the computers working to confirm the chain are rewarded for their “mining” efforts with digital coins, such as Bitcoin or Ether.

The computing power needed to run Bitcoin is becoming an issue — the Guardian newspaper claimed in November that the currency consumes as much electricity annually as Ireland — but one Berlin company thinks it has found a more efficient blockchain solution. Iota was founded by 21-year-old Dominick Schiener, an Austrian, and his Norwegian partner, David Sønstebø. The duo designed Iota to become the currency machines use among themselves as automation expands. “If the full potential of the Internet of Things is to be realized, you have to make it possible for machines to pay each other,” Mr. Schiener says.

Iota is based on the idea of blockchain’s distributed ledger but without the mining. It has already found supporters in Germany’s biggest moneymaker, the automotive industry. “If cars are supposed to pay for charging or parking on their own, then you need a secure method,” says Johann Jungwirth, Volkswagen’s chief digital officer, who thinks Iota is “very interesting.”

And it’s not just VW. Deutsche Telekom, Microsoft and German utility Innogy have also taken a look at the digital currency, which ranks among the top 10. Automotive supplier Bosch has even bought an undefined number of the coins, which have risen in value from $0.15 in July to more than $4 earlier this month.

The digital currency boom is also bringing venture capital to Berlin. Miriam Neubauer is managing director of Catena Capital, a fund focused on cryptocurrencies. Her first two investments recently moved into a new joint office and co-working space, the Cryptotank. Digital wallet Cryptonator “is a network of traders,” Ms. Neubauer explains. The startup charges members a fee to access research on the now more than 1,300 cryptocurrencies, just like a traditional investment bank. The other firm she has backed, Herdius, is working on a cross-chain virtual currency exchange.

Despite the current hype about cryptocurrencies, actually buying the currencies or utilizing blockchain technology is difficult, especially for novices. “All of the software and the wallets for cryptocurrencies are not very user-friendly,” says Max Kordek, whose startup Lisk aims to make blockchain more accessible for other potential uses. He of course funded the venture by selling his own currency, the Lisk. Mr. Kordek raised 14,000 bitcoins in his initial coin offering (ICO) two years ago. At the time, they were worth nearly €6 million ($7.2 million). They’re now valued at €200 million. Although his startup is still in its infancy, Mr. Kordek hopes to double his staff to 60 this year.

Yet another Berlin startup, Bitwala, is working to make Bitcoin more accessible to consumers by providing basic banking services that convert the digital currency into euros and dollars for a fee. But Bitwala is also a cautionary tale — as cryptocurrencies have become household names, they’ve also caught the attention of regulators and risk-averse companies. For example, payment company Visa told Bitwala’s card provider to effectively cancel its customers debit cards last week. In a statement, Bitwala said it was working on finding a new provider.

Although Germany’s BaFin financial regulator has largely left digital currencies untouched, late last year it warned people against participating in digital-currency-backed fundraising, and experts have said it may yet get more involved. It’s a sign the industry, with Berlin’s help, is growing up.

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