This short post is not about Bitcoin. It’s about a new method of organizing and arbitrating communications that is at the heart of Bitcoin
We hear a lot about the blockchain. We also hear a lot of misconceptions about its purpose and benefits. Some have said that it represents a threat to banks or to governments. Nonsense! It is time to form a simple, non-political, and non-economic explanation…
What is a Blockchain?
The blockchain is a distributed approach to bookkeeping. It offers an empowering, efficient and trusted way for disparate parties to reach consensus. It is “empowering”, because conclusions built on a blockchain can be constructed in a way that is inherently fair, transparent, and resistant to manipulation.
This is why blockchain-backed systems are generating excitement. Implemented as distributed and permissionless, they take uncertainty out of accounting, voting, legislation or research, and replace it with trust and security. Benefits are bestowed without the need for central authority or arbitration. The blockchain not only solves a fundamental transaction challenge, it addresses communication and arbitration problems that have bedeviled thinkers since the ancient Egyptians.
When my daughter was just starting primary school, she would look inside a book for the pictures before reading the text. She was old enough to read without pictures, but she wanted to get a quick synopsis before diving in. “Look, Dad! a bunny is carrying a giant clock into a rabbit hole.”
This is my first article without pictures. At least none of Bitcoin, because the copper coin metaphors are tired and inaccurate. At the user level, owning bitcoin is simply your stake in a widely distributed ledger. Ownership exists only as strings of secret code and public code. There is no physical coin.
Since the only pictures in this post show a white rabbit with a big clock, let me give you the quick synopsis: The answer is “No”. Bitcoin will not end government, nor its ability to tax, spend—or even enforce compliance.
But there is an irony: Most lawmakers and regulators have not yet figured this out. They perceive a great threat to their national interests. That’s why Andreas M. Antonopoulos runs around the world. He briefs prime ministers, cabinets and legislators with the noble purpose of demystifying and de-boogieing Bitcoin.
Does Bitcoin Help Tax Cheats?
I accept the need for taxpayer reporting, measurement, and compliance initiatives. After all, it’s human nature to dislike paying taxes. Many individuals dodge taxes, if the perceived risk of being caught is low. Sociologists also point out that people are willing to cheat a system, if they perceive it to be sufficiently big or impersonal—i.e that their individual contribution is meaningless.
[ASIDE]: For this reason, Akamai Technologies ends their free-soda-&-snack policy whenever an office grows beyond 30 people (I learned this during a job interview a few years ago). People who would normally respect the policy begin pocketing free sodas for their home or friends, if (a) they no longer know everyone, or (b) they perceive the extra burden is just a drop in the corporate bucket, and not a burden on their office peers.
I suspect that most early proponents of Bitcoin are partially motivated by a desire for low taxes and privacy. While I don’t feel that these individuals are bad for the cause (after all, I am one), I feel that it is unfortunate that they appear to be the overwhelming majority of users & supporters. Let’s dismiss, for the moment, the fraction of voices that want to completely end government and taxation…If you believe in any taxes at all, then government needs compliancy mechanisms, including methods that measure, verify and ultimately arbitrate or prosecute offenders. (Don’t blame me…I’m not even the messenger here. Just an observer).
My point is that in their effort to control a country’s monetary supply (and the interbank loan rate, etc) and in their effort to ensure taxpayer compliance, a great many governments view Bitcoin as a threat. In the past, I felt that my job was to evangelize the public on the benefits of cryptocurrency, and to a great extent, that’s what CRYPSA is all about. But in recent months, I have become confident that Bitcoin will become ubiquitous. It doesn’t need me to be an evangelist. The freight train is now rolling downhill. But…
But as an engineer, author, speaker and occasional consultant, I have found a new calling. Like Andreas Antonopoulos (my idol), I have found a calling in de-boogieing Bitcoin to lawmakers and regulators. I demonstrate that (a) cryptocurrency represents far more of an opportunity than a threat to a national interests, and (b) the future is coming at ya’. So, either: Stand pat; Get out of the way; or Hop on!
I can give an audience filled with old-school conservatives compelling reasons to “hop on”. Ultimately, blockchain technology coupled with true, permissionless, p2p transactions will shake up established mechanisms and enforcement protocols. They will force new ways of thinking. But cryptocurrency will not end the reign of government—nor even end the ability to tax, enforce and spend. It will simply change the way they do these things. It will also change the way we conduct polls, vote, arbitrate disputes, perform scientific research and much more.
Bitcoin and the blockchain are not just technologies. They transform the way in which many tasks are performed. But it’s not just about efficiency. These technologies offer mechanisms to level the playing field. They bring fairness and representation to processes that were opaque and perhaps even relied on the excuse of opaqueness.
Ultimately, Bitcoin may render certain government departments redundant. Nations will begin to question their need to directly control monetary policy. The impact at the department level is no reason to fear Bitcoin. Overall, it represents great opportunity and not a threat. In my opinion, the changes will benefit everyone.
Bitcoin is not an us-against-them instrument. It is win-win. Of course, perception counts. Misunderstanding potential and confusing it for a threat is a fundamental problem. I share CRYPSA’s passion to help make it a very short-term problem.
Philip Raymond is CEO and Co-Chair of CRYPSA, The Cryptocurrency Standards Association.
For most of us, figuring out the value of something that we want, comes from research. If you want a new set of wine glasses, you check the price online. Perhaps you consult a catalog. If the set of 8 stemware goblets that you like are a current model from a major company, there are probably many places to buy them. If there are multiple Ebay sellers and many recently completed sales, then you can establish the value with precision.
I’ve written a lot of Bitcoin articles on this Lifeboat Blog and elsewhere, so, let’s dig a bit deeper this time. Let’s talk about from where value really comes.
Supply and Demand
In the end, an item’s value is a direct result of supply and demand. It’s no different with a currency. And let’s be clear: Despite a raging debate, Bitcoin is a currency and not just a payment instrument. How can I be certain? Try this mental exercise—
Western Union money orders and Amazon Gift cards are each trusted monetary instruments. They facilitate cash transactions. But are they currencies with inherent value? If so, there would be no need to denominate them in units of fiat currency.
A money order is only worth something before it is redeemed. The gift card is only worth $500 when it is purchased or received as a gift. As the $500 is depleted, it becomes worthless. Eventually, it is just a piece of plastic. But like a dollar bill, a bitcoin can be circulated over and over. You may believe that its value comes from the government, but more realistically, its value arises from brand recognition and from pure supply and demand—not from a trusted redemption authority.
Bitcoin isn’t the first ethereal stash of bits with value. But it is more durable than others. The latest Pixar film on DVD or On Demand from your cable service provider has value. But piracy reduces the value dramatically. The supply is no longer scarce (no matter the demand) because of the ease and willingness to replicate digital files in any quantity. A Picasso painting is very rare, but it is so scarce, that we cannot gather enough data points to establish a stable value. Even worse, it’s not portable, divisible or fungible and it is nearly impossible to validate in the hands of the average person.
But, commodities like iPhones, Doritos tortilla chips—or even non-branded things, like Idaho potatoes, have a large and fluid market. These things have very measurable value and we can track the change in value over time.
People like to think that money is different than other commodities. In practice, it differs only by its handling characteristics: Compared to a Picaso painting or a new iPhone 6, currency has these properties. It is:
portable
fungible
divisible
widely recognized
resistant to forgery
backed by something tangible
Bitcoin has all of these characteristics. In fact, it surpasses your national currency in every way. But many people are confused about that last niggling detail… Aristotle called it “intrinsic value”. They worry that there is no gold—or at least the promise of a stable government—to establish and stand behind the value of a bitcoin unit (BTC). The concern is understandable, but it is wrong.
Recall that value arises through supply and demand and not simply because of authority or promises. The real question is “Can we trust that the supply is limited and that the demand is durable?”. That is, will my coin be recognized, coveted and honored in the future?
The Case Against Bitcoin as a Currency
Here are some frightening facts (frightening for some cryptocurrency enthusiasts and early adopters): Bitcoin is manufactured out of thin air. It lacks the underpinnings of a traditional currency. Referring to that last item on Arisotle’s list above, Bitcoin seems to fail the test of intrinsic value, because it lacks at least one of these properties:
A fractional reserve requirement
An edict to remit taxes in Bitcoin
A promise of a trusted authority
Any claim of pegging it to the value to some essential commodity (intrinsic value)
Bitcoin doesn’t even offer a perception of uniqueness. The formula is open for anyone to copy. You could create a competing ‘Bob-coin’ tomorrow.
In the absence of at least one of these things, detractors claim that Bitcoin lacks a foundation—and so it is effectively worthless. But value does not come only from authority. It comes from trust and is goverend by supply and demand.
The dollar is backed by trust — Not gold, math, nor even history
In fact, math may be a more trusted ‘authority’ than the directors of your national treasury and reserve board. Supply and demand leads to more tangible value than bankers, especially if the math leads you to believe that the demand will continue to outpace the supply. In fact, this is the primary reason that you are comfortable with a $20 bill in your pocket. You have a pretty good idea, that next week, it will still buy 2 movie tickets or 2 pizzas.
Bitcoin has achieved a “two-sided network effect” (Google the term and the economist “Marshall Van Alstyne”). It has captured the public imagination more than Picasso. It cannot be manufactured. With a reasonable understanding of wallets, it cannot be seized, stolen or lost.
The ability to mine new bitcoins is capped with a total supply of 21 million units, and so there is no opportunity for governments to inflate it through mismanagement of taxation or spending. They cannot even inflate it with good intent (for example, when they need to repair a bridge or provide for the poor). Instead, the ability to pay for these services (and all other government functions) forces them to live within a balanced budget. Spending cannot outpace the revenue generated by taxes and bonds. In a Bitcoin economy, the bonds will more likely be paid back by user fees rather than the future debt of unborn generations.* You get the point: Because governments no longer control the printing press, they cannot make hollow promises and then kick the problem into the next administration. With a limited money supply that everyone recognizes as money, governments are forced to live within their means.
What About Uniqueness?
The last item in the list above decries Bitcoin’s lack of uniqueness. You cannot mint your own bitcoins of course—but you can create an equivalent bitcoin ecosystem yourself. If your name is Bob, you can call it Bobcoin. Many countries and organizations are already doing this.
This is really no different than the US Dollar or your own national currency. The government note is difficult to counterfeit, but so is your own signature when placed on a fancy printed currency (Let’s call it a Bob-Buck). The problem is that the dollar is widely recognized, trusted and accepted, but few people other than your kids are collecting Bob Bucks.
You would face the challenge of spurring adoption. Whether it’s Bob Bucks (paper) or Bobcoin (cryptocurrency), how will you get the world to covet, mine and trade your new currency? That’s the point of a two-sided network. It becomes increasingly more difficult after one method rises to the top—especially if that method is open, transparent and extensible. Bitcoin is open. It is subject to worldwide scrutiny. But this works both ways. Bitcoin can also add incremental improvements that are part of any pretender to the throne.
Bitcoin is not just a transient coin-du-jour. It evolves and so it will not die.
How Can the Value be Measured?
I get this question a lot, and so I am adding the answer here. There is no need to measure the value of Bitcoin or define debt. Its value floats with supply and demand like a true world currency. Because the supply growth is capped and well understood, it is resistant to manipulation. As time goes by, it becomes far less likely to exhibit wild swings in value.
A few years from now, if Bitcoin spikes or tanks by 10% in a short time, you will be more likely to wonder “What is affecting the dollar?” (or Euro), rather than “What is affecting Bitcoin”. Consumers will budget for the cost of a new car or refrigerator in BTC rather than dollars or Euros. You will even see catalogs that print prices in BTC and honor them for the life of the catalog or online sale. After all, in an international market, it makes sense to quote a price in units with no geopolitical boundaries, just as we quote time in UTC (formerly called GMT).
Are these predictions crazy? They are not even bold. For us, here at Lifeboat Foundation, they are rather obvious. If we can be accused of dreaming, it is because we are ahead of the game. Look ahead, yourself. The signs are clear…
If Bitcoin has Value, What is the Value?
As Bitcoin adoption moves past enthusiasts and early adopters, the capped supply of coins (21 million, max) will be spread thinner and thinner. This doesn’t play out like a classic shortage, because unlike a supply squeeze on food or medicine, you can work with a smaller piece of the pie each year. The piece needed to pay for a car or an iPhone simply gets smaller as the unit price floats higher and higher.
Last year, I set up an equation to predict how high Bitcoin will float in 5 or 10 years. It involved a lot of WAGs (wild *ss guesses). Although I am a pundit, I am not a mathematician, and so the attempt was incomplete. No need to rehash that exercise.
As Hysteria Withers, Bold Becomes Mundane
Eventually consumers, banks, brokers, and governments will recognize that Bitcoin is a far greater opportunity than it is a threat. It pulls the world together by decoupling currency controls from national agenda, inflation, manipulation and loss (You can back up your Bitcoin. Try doing that with your paper money or a defunct bank).
Philip Raymond is CEO and Co-Chair of CRYPSA, The Cryptocurrency Standards Association.
_____________ * This is just one reason why an eventual transition to Bitcoin (as currency, and not just as a payment instrument) is in the national interest. It demonstrates to citizens that monetary policy is backed by more than growing debt, inflation or the promises of transient officials. It returns any government or economic entity to a non-inflationary, limited-supply pie. The pieces of pie can grow in value, but the pie cannot be watered down by printing more ingredients, counterfeit or even by enemy action.
Tokyo’s district court has ruled that it’s not possible for people to own bitcoin, and therefore they cannot sue for compensation in the wake of Mt. Gox’s collapse.
The ruling comes days after the head of the world’s largest bitcoin exchange was arrested on charges of fraud. Judge Masumi Kurachi felt that bitcoins do not possess “tangible qualities” to constitute owned property. Mt. Gox held thousands of individual accounts, and so there’s plenty of angry customers looking for compensation.
Here at Lifeboat, we have a long term view of cryptocurrency, and we sense the underpinning of fundamentals that are often overlooked.
My response to the Tokyo court…
A personal stake in Bitcoin is every bit as real (and a bit more tangible) than a personal stake in Yen, Dollars or Euros. Fiat currency is backed by the knowledge that your national government will demand tax payments in kind. But is it tangible? Like any invention of humans, that’s a matter of perception.
a) Dollars / Yen / Euros
Over the long term, national currency is likely to be debased by debt, social welfare, war, political ambition, and a desire to redistribute fruits of labor, typically to assuage political ambitions. A built in mechanism of inflation forces a hidden tax and enables legislators to spend beyond the consent of their constituents.
b) Bitcoin
Bitcoin on the other hand is backed by math. It is an asset without the potential for inflation or manipulation. It is a pure supply-demand currency and a pure 2-sided network—completely unfettered by the chaff that comes with central banks and national treasuries.
A stake in Bitcoin rises over the long haul, because the total quantity of currency is capped. As it is adopted for payments and commerce, a fixed pie is sliced thinner and thinner. This results in increased value per unit. Result: A deflationary economy without the baggage of sluggish economics.
Japan has made a foolish pronouncement; one that will ultimately embarrass their courts. Declaring Bitcoin ethereal is laughable when you consider that paper money is no more tangible than an unfulfilled promise. Likewise, declaring the theft or mismanagement of Bitcoin unworthy of recovery or restitution is no different than declaring the theft of art unworthy of restitution. Consider that each Mt. Gox account holder has proof of a real dollar investment position and an appreciation that is reported and tracked by exchanges all over the world.
Wake up Japan. You have so much more to offer the world than a distorted interpretation of a new technology.
Philip Raymond is Co-Chair of CRYPSA, Cryptocurrency Standards Association
July 9 update: 3 days after posting, Visa acknowledged that Bitcoin has a future in payments. This is an understatement, of course. The bank described below goes a step further by acknowledging that the entire financial infrastructure may cave to cryptocurrencies.
French bank BNP Paribas warned customers and investors that the technology behind bitcoin might one day overtake conventional, account-based financial institutions, thus rendering existing companies redundant (that’s British for “obsolete”).* It’s a tectonic acknowledgement from one of the world’s biggest banks.
Analyst Johann Palychata writes in the company’s magazine Quintessence that Bitcoin’s blockchain, the underlying architecture that allows cryptocurrency to function, “should be considered as an invention like the steam or combustion engine,” that has the potential to transform the world of finance and beyond.
Check out the full story by Oscar Williams-Grut at Business Insider.
* Although Bitcoin will obsolete the current service mix of financial institutions, it is my opinion that for savvy governments and established businesses, it represents a long term opportunity rather than a threat. —PR
__________ Philip Raymond is Co-Chair of The Cryptocurrency Standards Association [crypsa.org] and chief editor at AWildDuck.com
Sure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched a ride on an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.
But what is Bitcoin, really? To what class of instruments does it belong?
• Ardent detractors see a sham: A pyramid scheme with no durable value; a house of cards waiting to tumble. This is the position of J.D, an IRS auditor who consults to The Cryptocurrency Standards Association. As devil’s advocate, he keeps us grounded.
• This week, MasterCard was only slightly less dour. They claim that the distributed nature of Bitcoin will ultimately cause it to unravel. They want us to believe in the necessity of a trusted authority as broker/guarantor/arbiter. I get it! After all, the block chain is a serious threat to the legacy model for moving money
• Many people recognize that it can be a useful transaction medium—similar to a prepaid gift card, but with a few added kicks: Decentralized, low cost and private.
• Or is it an equity asset, traded by a community of speculative investors, and subject to bubble psychology? If so, do the wild swings in its exchange rate diminish its potential to be used as a payment mechanism?
• Full-fledged ehthusiasts say that Bitcoin has the potential to be a full-fledged currency with a “real value” that floats based on supply and demand. Can something that lacks intrinsic value or the backing of a bank or government replace national currency?
Regardless of your opinion about Bitcoin, it does one thing that few pundits dispute: Sure, the exchange value fluctuates—but for those who don’t plan to retain holdings as an asset, it reduces transaction costs to —nearly zero. This characteristic, alone, is a dramatic breakthrough.
Peering Into the Future?
Removing friction is certainly what it is all about. As a transaction medium, Bitcoin achieves this, but so does any debit instrument, or any account in which a buyer has retained house “credit”.
Currently, there is a high bar to get money exchanged into and out of Bitcoin. It’s a mess: costly, time consuming and a big hassle. Seriously! Have you tried using an exchange? Even the most trusted one (Coinbase of San Francisco) makes it incredibly difficult to get money in and out of BTC, prior to establishing your account, identity and banking history. Fortunately, this situation is gradually improving.
Where Bitcoin really shines (or more accurately, when it will shine), occurs at the time when more vendors choose to leave revenues in BTC, pending their own purchases from suppliers, shareholder payouts, or simply as retained savings.
When this happens, all sorts of good things will follow…
• A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.
• Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.
• Sellers begin pricing merchandise in Bitcoin rather than national currencies—because they are less anxious to exchange out of BTC immediately after each sale.
When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenon will follow. I call it the tipping point…
• If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.
• If goods and services are priced in BTC, then the public will begin to perceive exchange rate volatility as a changing dollar rather than a changing bitcoin.*
• If buyers also begin to save their BTC (i.e. they do not worry about immediately moving it back to national currency), it means that Bitcoin is being perceived as a stored value—not just an exchange chit. That may seem to be a subtle footnote, but the ramifications are earth shaking. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified and currency that we can all trust.
People, everywhere, will one day place their trust in a far more robust and trustworthy mechanism than paper promissory notes printed by regional governments. A brilliantly crafted mechanism that is fully distributed, p2p, transaction verified (yet private), has a capped supply and is secure.
What Then?
O.K. So we believe that Bitcoin is the future of money and not just a replacement for credit cards. But what does this really mean? Can the series of cause-and-effect be extrapolated beyond widespread user adoption? Absolutely! …
Adoption of Bitcoin as a stored value (that means as a currency) leads to the gradual realization among governments that Bitcoin is not a threat to sovereignty nor even to tax policy. Instead it presents unbounded opportunity: The opportunity to stabilize markets, eliminate inflation, reduce costs and restore public trust. In short, Bitcoin will ultimately level the playing field, revive entire economies, transform the role of government, and save consumers and businesses billions of dollars each year.
Did I mention that Bitcoin is the future of commerce and a very possible successor to legacy currencies? Aristotle must be smiling.
* We tend to think of the dollar as more ‘real’ than Bitcoin. It is not! It has only one advantage. At the end of the day, taxpayers must settle their debts in the currency demanded of their nation. But as Bitcoin adoption gains traction—even if only as a transmitting medium—fiat currencies will gradually become marginalized as play money. That’s because they are susceptible to inflation, politics and manipulation. Bitcoin is held to a higher standard. It is governed by pure math. Despite high-profile news of the day, Bitcoin will even become more resistant to loss and theft than dollars, once tools and practices become well established.
Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation
Armstrong and the Winklevoss twins have promising visions in securing Bitcoin exchange.
Bitcoin exchange Coinbase has brought innovation to the next level by opening the first ever licensed US Bitcoin exchange. Backed by $106 million from the New York Stock Exchange, banks, and venture-capital firms, Coinbase’s newly launched US exchange, said to be named Lunar, will provide greater security features; so as not to repeat the mistakes of Mt. Gox and Bitstamp, the former of which declared bankruptcy last year while the latter has sustained hacking attacks and is now back in the game.
Coinbase has already acquired licenses from 50% of the states in the country, which includes New York. The remaining 50% is still in the works and is necessary to complete to be able to provide full nationwide services. Also, Coinbase does not only look at expanding nationwide, it also looks at expanding worldwide in offering their Bitcoin-related services.
Of this plan, Coinbase CEO Brian Armstrong said: “Our goal is to become the world’s largest exchange”.
For this vision to be realized, Coinbase must make sure that no security attacks will ever threaten the safety of every user’s bitcoins, which is something that the company seeks and proves to show.
On the other hand, Coinbase is not the only one that has the same vision. Entrepreneurs Tyler and Cameron Winklevoss, widely known for their work on Facebook, are also eyeing on the same project.
The twins have already taken the necessary steps such as hiring engineers, enlisting a bank, and engaging with regulators to begin the process of opening their own Bitcoin exchange in the next months to come. The exchange will be named Gemini, Latin for twins.
Despite the volatile prices and security attacks on other exchanges, the Winklevoss twins haven’t lost their confidence in bitcoins and the technology that powers it, which is why they consider a reliable and regulated exchange extremely necessary to bring bitcoins up on its feet again.
I recently announced a new protocol layer being built on top of bitcoin. You can read the details here: https://bitcointalk.org/index.php?topic=265488.0
I’m pleased that I have already raised over $200k worth of bitcoins from investors, including myself. Investments will continue to be accepted through the end of this month (August 2013).
This is my first article without pictures. At least none of Bitcoin, because the copper coin metaphors are tired and inaccurate. At the user level, owning bitcoin is simply your stake in a widely distributed ledger. Ownership exists only as strings of secret code and public code. There is no physical coin.
hey bring fairness and representation to processes that were opaque and perhaps even relied on the excuse of opaqueness.
Western Union money orders and Amazon Gift cards are each trusted monetary instruments. They facilitate cash transactions. But are they currencies with inherent value? If so, there would be no need to denominate them in units of fiat currency.
Picaso painting or a new iPhone 6, currency has these properties. It is:
Over the long term, national currency is likely to be debased by debt, social welfare, war, political ambition, and a desire to redistribute fruits of labor, typically to assuage political ambitions. A built in mechanism of inflation forces a hidden tax and enables legislators to spend beyond the consent of their constituents.
French bank BNP Paribas warned customers and investors that the technology behind bitcoin might one day overtake conventional, account-based financial institutions, thus rendering existing companies redundant (that’s British for “obsolete”).* It’s a tectonic acknowledgement from one of the world’s biggest banks.
Sure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched a ride on an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.
