Tag Archives: Bitcoin

If a state becomes Bitcoin-friendly, it will see a huge increase in companies

Interesting Bloomberg story: State-level regulations are coming for Bitcoin and “the devil take the hindmost”.

California and New York, home to Silicon Valley and Wall Street, are preparing to write rules of the road for entrepreneurs driving a surge of interest in Bitcoin and other virtual currencies.The outcome could determine how big a threat Bitcoin poses to established payment companies including JPMorgan Chase & Co. and Visa Inc. as well as where venture capital and talent converge to form a geographic hub for U.S. startups.“If a state becomes Bitcoin-friendly, it will see a huge increase in companies,” said Adam Ettinger, an attorney with San Francisco-based Strategic Counsel Corp., which advises technology investors. “That will mean the brightest minds working on some of the most innovative payment technology we’ve seen in awhile.”Bitcoin, a five-year-old protocol for issuing and moving money across the Internet, has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com. Venture capitalists see promise in it as an alternative to the global payment system currently dominated by companies including Visa, Western Union Co. (WU) and large banks.

 

Marc Andreessen: why Bitcoin matters

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What technology am I talking about? Personal computers in 1975, the Internet in 1993, and — I believe — Bitcoin in 2014.

This may not be the best essay on Bitcoin, but it is definitely the best essay that I have read. Because I respect Marc Andreessen I pay attention when he decides to write publicly. And when I see that Andreessen Horowitz has invested nearly $50 million in Bitcoin-related startups, that gets my completely focused attention.

Media coverage typically talks about much the value of a Bitcoin has risen (or fallen). Or how Bitcoin is a vehicle for buying drugs and guns. I think you will better understand the significance of Bitcoin by thinking of a fraud-free VISA payments system with nearly zero fees and no minimum transaction. That creates possibilities. Once the infrastructure is in place Bitcoin will enable many possibilities that are way beyond a no-fee VISA. Here’s just one of Marc’s many cases: Remittances. The hard-working people who picked your strawberries are sending cross-border remittances to their family. A big chunk of the funds sent (order of magnitude 10%) is lost to bank-fees and funds-transfer agents. A Bitcoin-based payment system will drop that 10% fee to nearly nothing. That will have a huge impact on the workers’ welfare.

Andreessen summarizes why Silicon Valley is “all lathered up”:

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.

All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.
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Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can buy into or sell out of the ledger any time they want — with no approval needed, and with no or very low fees. The Bitcoin “coins” themselves are simply slots in the ledger — analogous in some ways to seats on a stock exchange, except much more broadly applicable to real world transactions.

The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees.

That last part is enormously important. Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of around 2 percent to three percent — and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher. We’ll come back to that.

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no preexisting trust: a string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks — this is the part that is literally like cash — if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today — volume and velocity of payments running through the ledger — and speculation on future use of the payment system. This is one part that is confusing people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value.

If you give your attention to Marc’s essay for 30 minutes I think you will understand why his firm is actively seeking Bitcoin-related opportunities. Oh, I hear that Amazon will launch a Bitcoin payment window soon. Just kidding, but think about how skinny Amazon’s margins are – and the impact on profits when the 2 to 3% credit card fee goes to 0.01% for purchases by Bitcoin customers. Think about the network effects when Amazon starts accepting Bitcoin.

 

Matt Yglesias: Bitcoin Will Spiral Up and Down Forever

Matt Yglesias explains why the scheme will prove useless:

Tim Lee makes what is I think the strongest case for Bitcoin, arguing that it’s not just a fad, it’s a disruptive technology that can serve as a platform

(…) 

But where I think the analogy breaks down is with deflation. As computers started looking more and more useful and demand for computers grew, the world started building more computers. Bitcoins are deliberately designed to represent a finite supply. So if over time more and more people want to use Bitcoins to conduct transactions of various kinds, then the price of bitcoins is going to have to rise and rise. The problem is that if the price of a bitcoin is on a steady upward trajectory, then nobody’s actually going to want to spend a Bitcoin on anything. And if everyone’s hoarding their Bitcoins, then the network is actually useless. Then, since it turns out to be useless, you get a crash. The funny thing is that once the upward spiral comes to an end, then the technological virtues of the Bitcoin platform come to the fore again. If nobody wants to hoard Bitcoins, then Bitcoin-as-platform looks like an attractive alternative to elements of the payment system. But when Bitcoin starts looking attractive again, you should get a renewed hoarding cycle.

To put it in more jargony terms, expectations about the price level will be ‘unanchored’ instead of rapidly mean-reverting, so its going to be very difficult to ever have a platform that attracts a steady user base rather than a boom-and-bust cycle.

Tim Lee: Why bitcoin is a bubble

 As I just posted, Felix Salmon says “bitcoin is a bubble…”. Tim Lee writes “Why bitcoin is a bubble“, guest-posted at Megan McArdle:

My friend Tim Lee says that critics of Bitcoin need to do a better job of explaining why bitcoins–the virtual currency that has been soaring to impressive heights–are in a bubble.  Tim writes:

When people dismiss Bitcoins because they can’t think of how they’d use it, they’re missing the fact that Bitcoin is a platform, not a product in its own right. When ordinary users started buying computers, it wasn’t because they thought it would be cool to own a computer. They did it because they wanted to do spreadsheets or word processing or email. Similarly, ordinary users aren’t going to start using Bitcoins just because it’s a cool technology. If normal users start using Bitcoin, it will be because they’re interested in gambling, or cheap international money transfers, or some other applications that hasn’t been invented yet. And Bitcoin’s intermediary-free architecture means that many more people can try their hand at building the platform’s killer app.

I haven’t written about bitcoin before, but here’s my stab at why it’s fair to say that bitcoins are frothy: eventually, the novelty will wear off, the state will get involved, and the costs will be found to outweigh the advantages.

The problem isn’t that I can’t imagine how I’d used bitcoins.  I can imagine exactly how I’d use them: to evade government surveillance of my financial transactions.  This potential use seems to have tickled the imaginations of many, many bitcoin fanciers. The problem is, the government also has an imagination. 

The reason I think that bitcoins will ultimately go away is that I think they will, like other virtual currencies before them, ultimately prove to be too illiquid.  A dollar is one of the world’s most liquid assets: it can be turned into virtually anything I want, at least if I put enough of them together.  

But bitcoins are not so liquid.  Mostly, to buy things, I need to trade them for dollars or another currency.  And that is the fatal weakness of bitcoins: at some point, to compete with dollars, it needs to enter the real economy.  And if bitcoins become a good way to avoid government surveillance of your financial transactions, then governments will find a way to choke off those entry points so that bitcoins become very illiquid indeed.  (…) 

Some of those ‘technologies’ are pretty low tech. Bitcoins are essentially electronic bearer bonds.  Readers of 1930s-era thrillers will remember that these often figured heavily in the plot: bonds which paid out to whoever happened to be physically holding the bond.  These were very useful for refugees, tax dodgers, and criminals, and anyone else who wanted to keep the government’s eyes off their finances.

But the usefulness of bearer bonds became a problem.  If your bearer bond was destroyed, you had no recourse. They also turned out to be very useful to steal, since the original owner had no way to prove their property rights.  And indeed, one source alleges that about 10% of bitcoins have been stolen at some point.

Even worse, governments found a way to shut down the issuance.  In fact, this proved surprisingly easy: the US government simply announced that interest payments on bearer bonds would no longer be tax deductible.  And voila, no one wanted to issue bearer bonds any more.

 (…) In other words, I think that governments can make it so difficult to translate your bitcoins into the real economy that most people simply won’t bother.  And the more successful that bitcoins are–the better they become established as an alternate currency–the more likely it is that rich-world governments will swoop in and make it prohibitively difficult to use bitcoins to procure real-world goods in developed countries.  At that point you’ve essentially got a novelty currency like greenstamps, which can be exchanged for only a limited supply of goods, and maybe some developing-world travel.

Given that, bitcoins seem overvalued to me.  People are betting on bitcoins as an actual substitute for money, not a novelty currency.  And while I wish the bettors luck, I think they’re facing some pretty long odds.

More Tim Lee at Megan McArdle.

On the bitcoin-as-platform concept, my friend Charles writes “Bitcoin is really a template for a whole family of shared distributed ledger systems that can potentially solve all kinds of problems without any central authority being involved.” Personally I think Charles has the best perspective on the future utility of this machinery. The “Killer App” of bitcoin may not involve bitcoin as medium of exchange.

Scott Sumner: When bitcoin crashes . . .

Scott Sumner captioned his somewhat technical “no bubble” argument “When bitcoin crashes . . .”

. . . .I predict people will say it was a bubble, even though it wasn’t. The term ‘bubble’ can mean many things, but the sine qua non of definitions includes “rejection of the EMH.” But the EMH says that bitcoin is very likely to crash. Why is this so, and why don’t people know this?

1. We know that market volatility is serially correlated. Markets that have been highly volatile are likely to remain highly volatile.

2. Bitcoin prices are super volatile.

3. The EMH predicts that expected returns are near zero. Combined with high volatility, this mean the EMH predicts that bitcoin will exhibit large price increases and large price decreases at various times in the future.

More…

Felix Salmon on “The Bitcoin Bubble and the Future of Currency” a primer on the crypto-currency

Each time the value of a bitcoin hits a new high or a new milestone, there’s more press coverage of the phenomenon, drawing new people in, and sending the value of bitcoins even higher. Indeed, if you chart the value of bitcoins against the number of times that they’re being talked about on Twitter, you’ll see a very strong correlation. And because of the Cyprus connection, mainstream publications have a handy real-world news hook, now, with which to explain the bitcoin phenomenon.

This is actually a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next? Currencies need a modicum of stability; indeed, one of the main selling points of bitcoin was that it couldn’t be destabilized by government institutions. But that comes as scant comfort to people watching the value of a bitcoin behave like some kind of demented internet stock during the dot-com bubble.

And just like demented internet stocks, bitcoins have seen busts as well as bubbles: in the second half of 2011, for instance, the value of bitcoins retreated from their peak around $30 each to a low point closer to $3. (Today, they’re trading above $140.)

In reality, then, bitcoin doesn’t really behave like a currency at all. In terms of its market value, it looks much more like a highly-volatile commodity. That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen – to the point at which they would effectively erase the distinction between a commodity and a currency.

But is that a good idea?

(…) 

 Good question. More in the longish essay by Felix Salmon at The Medium. 


The bitcoin demand crisis?

 

As I write there are about 11 million bitcoins minted. There will be about 21 million bit coins when the increasingly power-hungry crypto algorithm stops minting fresh coins. Is it money? What is driving the enormous surge in trading prices? At the moment the total market cap is less than Facebook paid for Instagram (which was a company of nine people at the time?)

For some bitcoin perspective, read Zachary M. Seward’s  Quartz series – where Zachary attempts to unravel the future of bitcoin. This is a good place to get some perspective on the crypto-currency: Example: 

(…) Last time I wrote about bitcoin’s surge, I cast doubt on the popular theory that it’s due to the crisis in Cyprus and asked for better ideas. (Here’s my email address.) The best explanations I received were the simplest: bitcoin is going through a “demand crisis,” as Quartz reader Rees Sloan put it. That’s as obvious as it sounds—increasing demand for the currency is pushing its value higher—but framing it as a crisis emphasizes some other truths: As bitcoin’s value rises, so does interest in it, which drives the price up even further, leading people who own bitcoins to expect even more gain, making them reluctant to sell, reducing the available supply of bitcoins, driving the price still higher, leading to more interest, which…

(…)

That’s great publicity if you’re a bitcoin speculator, riding this surge to $100 before dumping the currency on a very eager market. It’s less encouraging if you believe in the idea of bitcoin as a truly alternative currency, unencumbered by sovereign governments, a refuge from the turbulence of monetary unions and fiat money. If that’s the bet you’re making on bitcoin, brace yourself: Just today, the value of a single bitcoin swung between $75.00 and $95.70.

Market forces tend to ruin good ideas.

 Full disclosure – we have no position in bitcoin And AFAIK there is no way to short bitcoin. If there was…