Bitcoin is the largest in a new wave of approaches to currency. I would go into the technical details, but that actually makes understanding it much more confusing! If I explained how the Internet worked, for example, most people would go cross-eyed and wouldn’t want to use it! Trust me, Bitcoin works. It’s very, very clever and set to revolutionise our lives in the future. (If you want to learn more about it, take a look at Coindesk.com)
The interesting thing about Bitcoin is that it isn’t just a decentralised currency beyond central bank control. It is a financial communication network, too. Not only is it designed to store value (provided people believe in it), it is also designed to be a new communication system for money, as well. It radically reduces the friction associated with financial systems – because essentially, all financial transactions have the potential to become fast and free.
Whether you are transferring $1 or $1 million, the cost and time of that transaction is the same: zero cost, instantaneously. If you think about how far email has transformed communication, think of Bitcoin in the same way, for commerce. When you take the friction of interaction down to zero, you will get an an explosion of usage. Communication exploded as a result of snail mail moving to email. It is fair to expect that commerce will explode as a result of the mainstream arrival of Bitcoin. This benefits us all.
In the main, people are unaware of the really fertile ground for its future development. Much of the world’s population lives on very small amounts of money. These people are rapidly coming online through the widespread use of smartphones, and they will want access to new types of banking that can’t currently be implemented in developing countries. The ability of someone living on $1 per day to transact electronically is hugely diminished by the current system. Where I live, a debit card transaction alone costs the retailer around 30 cents. A same day bank transfer can cost $30! So, a huge amount of micro-ecommerce in vast swathes of the world just cannot occur until something changes. This change is already starting to happen – and fast. Just look at the scale and speed with which the virtual money system M-Pesa took off in Kenya, for example – even before smartphones and 4G mobile networks had taken off in the developing world.
We are on the cusp of an irresistible financial revolution, because of the availability of virtual currency to those who have never been part of the financial system to date.
Ever since I read The Black Swan by economist Nicholas Taleb, I have looked at systemic risk in a completely different way. The existing currency system that we take for granted has a huge systemic risk issue associated with it, anyway, when one considers the amount of debt that Western countries are in, and that interest rates and money printing (sorry – ‘quantitative easing’) are the main financial tools being implemented to regulate economic growth.
Taleb describes ‘Black Swan events’ as occurrences which seem surprising and impossible, but which have great impact and are later rationalised as ‘only to be expected’. Banks are particularly susceptible to Black Swan events, and in Bitcoin, I see a potential Black Swan event for financial systems everywhere. Even if there was only a very slim chance of it happening, it is worth insuring against it in some way. You actually only need to buy a small amount (i.e. say 1% of your assets) to cover yourself against such an occurrence.
Present currencies are largely built on the confidence that governments have the financial strength to back them up. In reality, many are not as financially strong as they seem. Just look at the US total debt and the fact that just a handful of right wing politicians can take the US Government to the brink of defaulting. In 2008, the dollar was the currency of last resort and it held its position during that time. Does it have the strength to do so next time, or will it finally snap under the weight of its every increasing debt burden? In the end, it will be fascinating to see what happens next time there is a major financial crash (and yes, there will be another one!).
We just take it for granted that the dollar, euro and sterling will always exist. The truth is – they won’t. Nothing lasts forever, and it is safe to assume that something will disrupt their use at some point. And when that happens, confidence can disappear extremely fast.
Most of us know that the financial system is broken, yet we don’t fully understand how to change it. The financial system could technically change in a revolutionary way with what we know today. Yet, the turkeys (banks and governments) will never vote for Christmas. We just have to accept that they will fight tooth and nail to preserve the status quo.
Hierarchical systems do not change in revolutionary ways without extreme events such as war or financial collapse. Revolutionary change generally comes from the outside, and in unexpected ways. And this is what is really clever about Bitcoin.
Bitcoin is also clandestine system, and in a way, it is the insurance policy for the financial revolution. It thrives during chaos, because no one controls it. It is like a secret virus, already out there, which comes back stronger every time it is attacked or whenever there is turmoil. There is no permanent way of killing it. Whilst criminals and the like will be early adopters, as they were of the internet in the early days, it only really takes one major nation to adopt it, either by going bust or through wanting to turn the tables of global wealth towards them, for it to hit the big time. There is a great first adopter advantage for a large country moving to the currency, because they would get a much bigger slice of the financial pie.
In my mind, the only way to permanently get rid of Bitcoin in the future and stop people using it is to produce a better currency. But let me be clear – when I talk about ‘Bitcoin,’ I actually mean the phenomenon of virtual currency in general, and not necessarily Bitcoin itself. And that is why buying bitcoin itself is still a risky investment. ‘Bitcoin or Better’ – it is hard to say which virtual currency ‘horse’ will win the race, but you can predict with some degree of accuracy where that race is heading overall.
Bitcoin will probably only succeed as the winning horse in the long run if governments start to crack down or play with their own currencies and banking systems (think of Cyprus and Argentina). The greater the financial turmoil, the more people will flock to virtual currency. That fact alone should have every central banker, bank owner and government quaking in their boots. People just cannot be controlled in the same way any more, so the loss of faith in the old system is much more likely to precipitate change. Thanks to the internet, the truth is always out there. The bankers’ chickens will eventually come home to roost. It is just a matter of when.
A shared, smooth global effort to create a new monetary system outside the influence of bankers and politics would be the ideal way to proceed, but that is unlikely, given the various factions and self-interest at play. Some form of chaos seems the likely way for revolutionary change to occur, given human nature.
The price of Bitcoin at the moment does, however, invite parallels with the dot com bubble at the beginning of the century. Bitcoin could still end up being worthless tomorrow. But as happened with the first dot com bubble, the initial investments to kickstart this new financial ecosystem have already been made. The internet was the wild west in the early days: fortunes were won and lost. But roll onwards, a little over a decade later, and it has penetrated most of the things we do, one way or another.
The survivors of this new system’s initial investment will form the basis of the new financial world of tomorrow. And the world will be a very different place in the next 10 years, thanks to all that investment. The financial system will rapidly privatise, democratise,digitise and move beyond government and politics.
Some of the the more visionary corporate players have already seen this. There are rumours of companies such as Google reigniting their plans to launch a currency. They shelved their original plans because they thought they would come under too much political pressure. From a lobbying point of view, they are a much stronger company now! Facebook already has their Credits system, which they are no doubt developing into a currency. Amazon and Apple, no doubt, have big plans, too. Great change is coming, and it is coming fast.
And although there may be a lot of upheaval and turmoil as we move to a different economic system, it will potentially allow the world to become a much fairer place. It will form a platform for a complete explosion in global wealth and higher living standards. And whilst there are many risks during the collapse of the old system, there are also many opportunities.
Whether or not Bitcoin ends up at zero or ends in lots of zeros remains to be seen. One thing that is for sure – the current financial system is broken and will be surpassed in the not too distant future, as a result of Bitcoin’s existence. Personally, I am excited about that future. It means that a lot of change waiting to happen can actually happen, and that, in essence, is why I believe in it so much.
The debate on virtual currencies is still in its infancy; much more thinking and discussion are needed. As a result, I would love to know your thoughts on this post in the comments system below.
Marc
(Disclosure: I own Bitcoin)
Buy Me a Coffee
Did you love this article? If so please consider buying me a coffee.
Take The 50 Coffee Adventure
A Fun, Light and Easy Way to Build Connections
Or search your local Amazon store for "The 50 Coffee Adventure".
Hi Marc, the best intro to the virtual currency scene, thank you. How about the 6-8 other, but lesser known new digital currencies out there? Same prospects, with more risk but higher ROI potentials? Leslie
Hi Leslie, You are articulating one of the problems with the sector. There can be an infinite number of currencies. The cost of setting a new one up is set to drop to around $100k. In that way there is a big danger to the whole ecosystem. So from that point of view the currency that becomes the default financial communication protocol stands to have by far and away the majority of the value as that will be the financial standard that the world adopts. Bitcoin may not be the best technical currency at the moment but it is the one that is getting the majority of the investment. In that way it has the potential to become the best through standardisation. It is still quite unclear though at this point which will win the race. Certainly the smarter investment money is going into the ecosystem rather than the currency itself.
Before I come to the interesting social impact part, I want to give some technical corrections.
These apply to the current bitcoin system and can be solved by other currencies.
A) The transfer is not instantaneous, the verification takes up to about 30min atm.
–You almost instantly see that someone is trying to sent you money, but the laborious security check that enables the trust in the systems takes some time. So during these 30min you don’t know if the sender of the payment might trick you.
B) The transfer is not free
-the verification process is designed to be a lot of work for computers. To motivate other people to verify the payment, they get new bitcoins (aka mining). When all bitcoins are mined, the plan is to setup a transfer fee, which goes to the people verifying the payment.
-unfortunately, the amount of work necessary to verify a payment is almost independent of the amount of money transferred. So micro-payments might not be effective.
Source (and a good long read):
http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/
When transferring Bitcoins from a system like blockchain.org, you have the option to send the payment without a fee. It takes longer, because it does not give the incentive to miners to verify the transaction, but payments (and micropayments) can be sent free of charge.
I was generalising the trend line rather than being absolute. I perhaps should have said trending to instantaneous and free. By the time the coins run out I am sure it will be. The world will be a phenomenally different place by then!
I really like that you are showing the big picture! Bitcoin might crash and be replaced, but virtual currencies will influence the world.
Two aspects I want to add.
1. Bitcoin (not necessary all currencies) is inherently definitional. The more people want to use it, the higher the value, the higher the incentives to keep the bitcoins and not spend it. One can argue that the current way of inflation due to money printing keeps the unhealthy growth orientation in the economy going, but too much deflation would slow down any investment, if beneficial or not.
If a virtual currency will be widely implemented, this factor shall be intentionally designed to benefit us all by considering the impact on economy. Bitcoin surely did not do it, but I it will be easily possible to design a system (should it seem better), that will have a less deflationary impact.
2. One aspect you did not mention is, that the big players (governments and banks) might take harsh steps to control or ban virtual currencies. They still have a lot of leverage, since they can control right now any flow of traditional money into the virtual currencies. And thank to the NSA and the traceability of bitcoins, they could find and punish any individual ignoring the possible ban.
But these suppressive measures might just increase the pressure to start a revolution from the outside, so it might even accelerated a fundamental change.
I agree: exciting times. 🙂
One would argue that it is the deflationary impact that will drive the speed of adoption above what other systems would not. ‘Can’t miss out’ can create something of a frenzy. That is why people are saying that it is Gold 2.0 and why that fear has driven the massive investment and speed of adoption this year. It just would not have happened this fast without deflation. Again something so smart about that. There will probably be an ecosystem of currencies each providing different purposes. Bitcoin is the viral insurance policy that forces the world to move on at a much faster speed that if it didn’t exist.
What you have with people that hold Bitcoin is the system starting to pick a fight with people with a lot of money and who are very connected and aware. They also can move and adapt at a speed that is way faster than government. That is a totally different type of challenge to what the financial system has faced before. David is actually more likely to win than Goliath. Goliath is too big and too slow.
You really make it seem really easy together with your presentation
but I to find this topic to be really one thing which
I believe I might never understand. It seems too complicated and very
large for me. I am having a look forward for your subsequent put up,
I will attempt to get the hold of it!
Hello, just wanted to tell you, I enjoyed this post. It was inspiring.
Keep on posting!
My family members all the time say that I am wasting my time here at net, but I know I am getting know-how daily by reading thes
fastidious content.
Sսperbе post, comme d’habitude
Its like you learn my thoughts! You seem to grasp so
much approximately this, like you wrote the guide inn it or something.
I believe that you just could ddo with a few
p.c. to pressure tthe message house a little bit, but instead of that, this is fantastic blog.
A fantastic read. I’ll definitely be back.
Enjoyed studying this, very good stuff, thanks.
What i do not understood is actually how you are now not really much more smartly-appreciated than you might be right now.
You are very intelligent. You realize therefore considerably in terms of this matter,
produced me for my part consider it from so
many various angles. Its like men and women are not interested except it is one thing to do with Girl gaga!
Your own stuffs excellent. At all times maintain it up!