Cheap Thoughts

There seems to be a little less excitement surrounding bitcoin over the past few months.  The price has been steadily declining since it hit it's peak in November 2013 of $1,145 and transaction volume, which I believe is an incredibly important metric, has been relatively flat over the past few months.  Furthermore there seems to be a lot less discussion in the general press about bitcoin.  Although I can't quantify that metric the marked drop in bitcoin press and open debate is a little troubling.  

I believe that bitcoin is missing the major use case that drives it to the mainstream.  Paypal was able revolutionize online payments, but only after they found a very specific use case.  It was not until they began to focus specifically on eBay that they were able to recognize the growth they were looking for.  Bitcoin faces a similar problem in that it is so unfamiliar to most people that in order to drive mass adoption they need to address a specific problem.  The most logical place to me is international remittances.  In 2012 there was over $123 billion in remittances sent form the United states to other countries alone.  The global market for these types of money transfers is absolutely massive and also suffers from a couple major problems, which bitcoin is uniquely positioned to address.  

First is that fact that most citizens in Third World countries do not have access to modern banking, making international money transfers difficult.  With the number of smartphones expected to be close to 6 billion by 2020, transferring bitcoin would be much easier than than hard currency. 

Second is that fact that the average fee imposed on international remittances is roughly 8.5% but can often be as high as 25%.  Even on the low end that is a huge chunk of money that is taken away from some of the poorest people in the world.  Again bitcoin is a perfect solution to this problem because the cost to transfer it is close to 0%.  While this problem may not touch close to home in the lives of most bitcoin enthusiasts it is certainly a big problem globally.  The 8-25% could be the difference between a family in the slums of Mumbai eating for a week or not.  

International remittances represents a way for technology to truly change the lives of billions of the poorest people on earth.  And although its faces a tough uphill battle I wold love to see more people get behind this specific cause.  

I was talking with one of my younger brothers last night and told him I decided to buy some bitcoin.  We had a brief conversation about what bitcoin is and how it works and we got to the subject of mining.  He asked what that meant and I was stumped to come up with a concise answer.  One of my favorite parts about blogging is that is it a perfect place to start to hone your ideas about certain subjects and work on explaining them concisely, so here is my first attempt at describing mining to a layperson. 

1. Most of the currencies we're familiar with (the US dollar) are created by a central government who decides when to print more money.  That's not the case with bitcoin because it operates as a peer to peer network with no one central authority. 
2. The easiest way to describe mining is that any individual "miner" can use special software to solve complex math problems and are issued a certain number of bitcoins in exchange for their work, a reward of sorts.
3. This becomes a smart way to issue the currency and also creates incentive for people to mine.
4. What miners are doings is essentially approving bitcoin transaction, so more miners also means a more secure network.
5. The miners are approving a set of multiple bitcoin transactions occurring on the network and write them into a general ledger. This also ensures that the general ledger can never be tampered with.
6. The mining process is designed to become naturally more complex and resource intensive over time to limit the number of bitcoins that can be created.  Furthermore, as more people start mining it becomes much more difficult to solve the math problems because you're competing against more computers to solve the same problem.  
7. The process of mining is what keeps the bitcoin network stable, safe and secure.

I have spent a considerable amount of time reading about Bitcoin recently and have finally decided to buy some for myself.  There is nothing as frustrating to me as reading about a great new technology and not actually using it myself.  fortunately the cost has come down considerably in the past few days, presenting a perfect opportunity to get in the game.  

The two uses for the digital currency I have come across the most are speculating and transacting.  I will hold on to a small amount of Bitcoin for speculation purposes but what really excites me is the idea of Bitcoin as a medium of exchange.  As the number of online retailers that accepts Bitcoin continues to increase I'm anxious to understand how the technology works in practice.     

I’m still spending a fair amount of time trying to dig into Bitcoin and understand both the technology and it’s consequences.  An interesting question I came across is, what is Bitcoin’s impact on interest rates and tax policy if it were to become a truly global currency?  It is the first currency without and interest rate, which is unheard of until now.  How do monetary and fiscal policy evolve in developed countries like the US, China or the EU?  Will the power of the fed diminish? What about fiscal policy?  How does the US or any other government collect taxes on a currency that is not backed by their or anyone else’s government? As soon as you start to talking about governments losing their power to tax citizens and set interest rates things get VERY interesting.

While this scenario seems far fetched in the developed world that is not the case in developing countries like Kenya, which already has a one of the most mature mobile payments network in the world.  There are also a number of small countries who are not capable of managing their own currency like Cyprus, Panama, the Bahamas (to name a few) that would also make great candidates. Another interesting possibility is Iceland.  The Krona has a rocky history at best and badly needs a new stable currency following its collapse during the financial crisis of 2008.   There are clearly a number of major hurdles that Bitcoin has to cross before sovereign nations would even consider adopting it, but I believe they are on the right track.  Accordingly, I expect to see it evolve into a major player on a macro level in the next 5-10 years.   

I should add that at Bitcoin’s total current valuation it is nothing more than a blip on the radar when compared the the value of the US dollar, (the total value is currently just over $7.5bn in US dollars) but isn’t that how all disruptive technologies started?  I think it’s important we at least begin trying to understand Bitcoin's impact on a macro level, otherwise we'll risk playing catchup.  

I have spent a fair amount of time over the past few months reading about Bitcoin.  Living in San Francisco has definitely opened my eyes up to this new technology, especially because it is a city where everyone has an opinion on Bitcoin .  More importantly is the fact that most of those opinions are informed, as opposed to the constant barrage of speculation and fear mongering that seems to consume the media's attention.  Like so many subjects today the people who are making the most dire predictions about Bitcoin and while it will fail are often in no position to make those judgements at all.

It has also been comforting to know that even some of Bitcoin's most ardent supporters have not fully grasped the technology, and are not shy about admitting as much.  Below is a quick summary of some of the benefits of the technology from Stripe's blog followed by a few of the most worthwhile articles I have found on the subject. 

Less than 12 months ago it would be fair to say that I did not have an opinion on Bitcoin, and even if I did it would have been a slightly negative one.  Over the course of the past year however, I have become much more bullish on the technology and am beginning to see why it has some of the smartest people in  the world excited and some of the wealthiest people in the world putting their money where the mouth is, investing hundreds of millions of dollars into Bitcoin related companies.

"There would be three major improvements to the existing financial system.

First, the resulting ecosystem is technologically open. Open ecosystems have a way of getting better much faster than their closed counterpart. Anyone can enter, connect to the network, and start building good tools and applications on top of it. The emerging  regulatory landscape may change some of the constants, but this fundamental advantage will remain.

Second, this model unbundles the existing financial system into layers run by independent companies. To see the value of this, contrast with the US mobile carriers, who used to own the entire stack. They owned the handsets, the operating systems, the applications running on the phone, and the service. This meant that most of the stack never had anything pushing it to get very good, and there were even incentives to hold it back in order to preserve legacy revenue-generating facilities like SMS. By enabling competition at individual layers of the financial system, each one should improve.

And third, this would be the first truly global payments network: anyone would be empowered to start a gateway in their country, rather than relying on it eventually making sense for some centralized actor. This is especially powerful for people in countries with underdeveloped banking systems, which many traditional payment systems never reach."

• Stripe 
• Marc Andreessen
• USV
• Coindesk
• Chris Dixon