Bitcoin: The Currency of The Future?
By now, you’ve probably heard something about bitcoin – maybe that it’s used to buy drugs and other contraband. Or, you’ve read that bitcoins worth tens of millions of dollars were stolen from Mt. Gox. While both of these things are true, they shouldn’t color your perception of bitcoin. Indeed, recently more than a billion dollars of US and other government-issued currencies were stolen from banks by hackers. And, illegal drugs worth billions of dollars trade worldwide using greenbacks. That doesn’t give you a negative opinion of the US currency, does it?
To be sure, the success of bitcoin is not yet guaranteed. Like any currency, it will work only if we collectively have confidence in its liquidity and stability. Of course, this is true for any currency. Recall Confederate dollars or Weimar Republic marks?
Yet, bitcoin has the potential to be the currency of the future for a variety of reasons:
- It is not controlled by any government and therefore isn’t subject to “quantitative easing” and other forms of manipulation.
- Like Visa or Mastercard, it’s an electronic payment system but without the egregious (~3%) transaction fees. In fact, no intermediary (think Paypal) is required to transact using bitcoins so its transaction cost is essentially (or actually) zero.
- It’s almost infinitely divisible, down to one-hundred millionth bitcoin, the importance of which will be obvious in the examples below.
So what is bitcoin? In short, it’s the world’s largest decentralized digital currency. It’s also been described by the inventor, Satoshi Nakamoto, as a “peer-to-peer electronic cash system.” It’s based on perhaps the most sophisticated cryptography and computer science humans have ever conceived. Somewhat counterintuitively, every bitcoin transaction is anonymous even as it’s entirely public. This is part of why it should prove impossible to counterfeit.
It would take a few PhD dissertations to explain the full details of how bitcoin actually works. Instead, what you need to know is that every bitcoin holder has a unique private key. That key is verified against a public key in any transaction. Without the private key, the bitcoin is unusable. Just be sure to take care of your key.
Humorously for the rest of us, in 2013 some guy discovered this the hard way. He discarded an old computer (and specifically its hard drive) containing his private key for 7,500 bitcoins, worth almost $2 million today. Note to self …
Let’s talk about possible applications and benefits. To start with, many online merchants operate at a net profit of just a few percentage points. Given that credit card transactions also cost a few percentage points, with it’s zero (or near zero) transaction cost, bitcoin provides the potential to significantly increase these merchants’ profits (or to materially reduce prices, or some combination of both). New Hampshire, Utah, and even New York City are considering accepting bitcoin for payment of taxes for exactly this reason. Transaction fees are costing them (and us taxpayers) millions. Still, that’s rather mundane.
Here’s a more interesting example: Let’s eliminate all spam. I’m talking about email here, not the processed, meat-like food. All we must do is decide that people can send us email only if they pay us. While no one would likely accept such a system if we charge a dollar per message (or even a penny per message), most people wouldn’t think twice if we charged, say, 1/100 of a penny. At that price, they could send a month worth of email (10,000 messages) for a buck.
However, spammers who send out messages in batches of 100,000,000 won’t likely be willing to spend $10,000 to do so. See how a nearly infinitely divisible currency with a zero (or near zero) transaction cost changes everything?
Come to think of it, if I’m receiving as many emails as I’m sending, this whole scheme nets out to zero. So let’s charge 10X more per message. Boom; take that spammers!
Another benefit of bitcoin and its associated generation algorithm is that it eventually caps out. Unlike currencies where governments can print more money to fund their deficits, bitcoin can’t be so debased. Sometime in the next few years, the number of bitcoins on the planet will stop growing.
Some people favor a return to the gold standard for the same reason. However, a capped physical currency like gold is impractical because it can’t be issued in infinitely smaller weights as its value escalates. Imagine gold coins of 1/1,000,000th ounce – not so practical if your pockets are made of cotton.
In case I’ve not yet fully convinced you that bitcoin is worth paying attention too, perhaps Marc Andreessen can do it. You’ll recall that he was the force behind Netscape and today is a prominent venture capitalist in Silicon Valley. Marc cites three tectonic technology developments in his lifetime: personal computers starting around 1975, the World Wide Web beginning around 1990, and bitcoin after 2008.
So what to do about bitcoin if you run a business? Unless you love flat out gambling, I recommend that you not speculate in owning bitcoin as an investment (I own exactly zero). Instead, keep an eye on how its acceptance and adoption grows. You can already use it to but a Dell Computer, Dish Network service, Sacramento Kings tickets, and a Virgin Galactic space flight. When it starts showing up in your competitors’ apps or its use starts affecting how your customers buy, you’ll be prepared to jump in.
Category: Financials
Tags: Vistage International