Bitcoin Series 3: Bitcoin would be a terrible national currency (and why that doesn’t matter).

One common debate between bitcoin evangelists and economists is the question about how well bitcoin could serve the role of a national currency and a unit of account for a country as a whole.  

The two main points that economists make are:

(a)    Bitcoin is too volatile at this point to be a day-to-day currency.    This is true right now (though this will mitigate over time).

(b)   Bitcoin as a national currency would be deflationary, take away monetary policy as a tool for economic management and herald the return of the gold standard 2.0.     Or, to take a more modern example, is the situation that the southern European countries have placed themselves in by tying themselves to the euro, a currency that they don’t have effective control over.

On this topic, the economists are right and the bitcoin enthusiasts are wasting their time arguing the point.    They should just concede that bitcoin would not be a good national currency and move on to any one of 20 other areas where bitcoin is unambiguously useful.

Besides the fact that the economists are correct, there is no chance that any serious national government will replace their central banking powers with bitcoin any time soon.    At best, this could be an option a few years from now for a country in complete distress (aka Zimbabwe during its recent hyperinflation phase) that needs to latch themselves to an outside metric (like Zimbabwe did with the dollar), but it is not relevant for any credible central bank (US, Europe, etc).

So, team bitcoin, in my humble opinion, needs to stop having this battle and practice saying:

“You are right, bitcoin would be deflationary if it were a national currency or the main unit of account for any particular country.   Fortunately it is not a national currency in any country today so none of these issues apply now or in the foreseeable future.   Now, can you please explain to me why in the current financial system in the year 2013 an international wire transfer (a few thousand bytes of data) takes 3 days to clear when I can transfer a video (hundreds of megabytes of data) in a few minutes?”

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
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Posted on December 28, 2013 and filed under Bitcoin.

Bitcoin Series 2. Decentralization is the key characteristic of bitcoin

Decentralization is not an important characteristic of bitcoin; it is the be-all and end-all important characteristic.   Without decentralization, bitcoin would not survive.

Decentralization provides two critical benefits to bitcoin that no digital or private currencies have previously had.

(a)    Bitcoin can make credible promises about money supply because there is no central party that can renege on its promises to keep money supply stable. Any centralized issuer of a digital currency poses the risk that the rules of the road regarding money supply will change later on.   Even the central banks of traditional currencies present this risk.

It is impossible to overestimate how important this is in building confidence in bitcoin.

(b)   Bitcoin is more or less invulnerable to regulatory shutdown.   Any particular bitcoin business in any particular jurisdiction can be shut down and certainly a more negative regulatory environment would slow down bitcoin adoption.   No regulator, however, can make bitcoin itself go away.    Like a new solution to a mathematical problem or email or P2P file sharing, bitcoin is here to stay.   You would have to shut down ‘the internet’ to really put a dent in it and that still will just put it into hibernation until you have to turn the internet back on.

So, decentralization should be the key characteristic by which proposals regarding digital currencies should be measured.   If someone says “I can solve this problem in bitcoin by making bitcoin v2 that has [centralized party] doing [x]”, it is almost certainly a bad idea.

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
Ledra Bitcoin Digest email newsletter: ledracapital.com/subscribe

Posted on December 28, 2013 and filed under Bitcoin.

Bitcoin Series 1: Bitcoin is a major technical achievement

We have discussed this before but it bears repeating that bitcoin is a major technical achievement.   It is the first practical success at creating a decentralized trusted asset ledger.   This will have implications far beyond ‘currency’.    If you are new to this, start with the following:

General Context 1 [updated Jan 22, 2014]

Marc Andreessen's op-ed in the New York Times of why bitcoin matters.   Best single intro article to bitcoin I think
http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/?_php=true&_type=blogs&_r=0

General Context 2
Good context setting if you read the quick 4 part blog series.
http://www.circle.com/2013/10/30/circle-bitcoin-global-digital-currency/
By Jeremy Allaire (formerly CEO Brightcove, Macromedia)

Bitcoin as a Platform/Protocol
http://www.usv.com/posts/bitcoin-as-protocol
By Albert Wenger (partner, Union Square Ventures)

http://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/
By Naval Ravikant (Founder, Angellist)

Excellent Description of "Mining"
http://qz.com/154877/by-reading-this-page-you-are-mining-bitcoins/Applications of Bitcoin
About as clear and non-technical as it can be made.  I love the characterization of mining as competitive bookkeeping.

Broader Applications of BTC
http://www.finextra.com/video/video.aspx?videoid=513
Interview with Richard Brown (executive architect, IBM) 
12:29 minutes

Once you have done that and are ready to understand more, watch this Khan Academy series.  You will need to watch some episodes more than once but once you do you will have a grasp of the technical basics.

https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
Ledra Bitcoin Digest email newsletter: ledracapital.com/subscribe

Posted on December 28, 2013 and filed under Bitcoin.

Intro to Bitcoin in 30 Minutes

I am often asked for information about what the decentralized asset ledger at the heart of bitcoin actually means.  

For a non-technical person trying to get a general sense of the broader opportunity that the tech world sees in bitcoin, reading the following would be a good start.   You would get the general gist in about 30 minutes.

General Context
Good context setting if you read the quick 4 part blog series. http://www.circle.com/2013/10/30/circle-bitcoin-global-digital-currency/
By Jeremy Allaire (formerly CEO Brightcove, Macromedia)

Bitcoin as a Platform/Protocol
http://www.usv.com/posts/bitcoin-as-protocol
By Albert Wenger (partner, Union Square Ventures)

http://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/
By Naval Ravikant (Founder, Angellist)

Excellent Description of "Mining"
http://qz.com/154877/by-reading-this-page-you-are-mining-bitcoins/Applications of Bitcoin
About as clear and non-technical as it can be made.  I love the characterization of mining as competitive bookkeeping.

Broader Applications of BTC
http://www.finextra.com/video/video.aspx?videoid=513
Interview with Richard Brown (executive architect, IBM) 
12:29 minutes

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
Ledra Bitcoin Digest email newsletter: ledracapital.com/subscribe

Posted on December 19, 2013 and filed under Global Economy.