Eight thoughts on Bitcoin

A few things I’ve learned from following Bitcoin:

  • The greatest uses for Bitcoin haven’t been developed yet. Value exchange is only the tip of the iceberg.
  • Passwords are important. Security is a lifestyle. Brainwallets are insecure.1
  • Wallets, services, and exchanges that elegantly hide (or offload responsibility of hiding) private keys last longer.2
  • As Bitcoin marches on, changes to the protocol become harder and harder. 3
  • At the end of the day, what’s important? It’s the usefulness, robustness, and flexibility of the protocol as a distributed ledger, not the exchange rate. The exchange rate is useful if you’re interested in the movement of fiat currency into and out of Bitcoin.
  • Money is a human term. Math exists in spite of us. Money is a medium through which humans can exchange value. Bitcoin is the convergence of math and the human idea of a ‘medium of exchange.’ No matter your idea of what money is, what it is not, and what you wish it was, the rules underlying Bitcoin don’t care.
  • The blockchain will continue as long as one miner keeps their computer on.
  • Bitcoin is not like anything that has ever come before, so it is risky to make one-to-one comparisons with old technologies or historical trends.

If you’re following Bitcoin, you might be interested in a news robot I made called Bitcoin Bolt or you can follow along on Twitter: @bitcoinbolt.

Below is a video of Bitcoin being created:


  1. There’s hundreds of stories of people losing their Bitcoin to Brainwallets. Here’s a particularly sad one?
  2. The reason why services like Blockchain.info and Coinbase have not been compromised lies in the fact that it is difficult (or impossible, in the case of Coinbase) to expose private keys to wallets without the user explicitly asking for them over an https connection. Wallet seeds, ‘fragmented backups’ and 2 of 3 wallets are some of the ways that private keys are abstracted into human friendly formats.?
  3. In a recent talk, Andreas Antonopoulos brought up the fact that current network infrastructure engineers have been as of yet unable to switch the Internet from IPV4 to IPV6 even though everyone knows it’s necessary. There are far too many routers, devices, and systems that simply make the switch impossible. Similarly, the wallets, exchanges, and systems that use the Bitcoin protocol are becoming increasingly difficult to patch and upgrade in a timely fashion, and engineers working on the core development face huge hurdles getting their patches approved. ?

What Bitcoin’s Rising Purchasing Power Means for Shops and Shoppers

As the monetary base of Bitcoin sharply rises past $1 billion, spending the coins on physical goods makes little sense.

People who think they are ‘late to the game’ are quick to call Bitcoins a pyramid scheme. The currency can seem ridiculous, like Farmville tokens. It becomes only more suspect as holders of Bitcoins preach their merits in the cacophonous chambers of the Internet. Those simultaneously holding and explaining Bitcoins sound nerdy at best, and unapologetically crazy at worst. “But it’s worth something because of the GPUs solving problems, really!”

On the other side of the coin, those flush with coins who invested early have their own problems, and these are more easily discussed in terms from behavioral economics. If you bought a pair of alpaca socks using Bitcoins two years ago, you spent what amounts to several hundred dollars in BTC today. In two years, could those coins buy the farm? From an outsider perspective, this rapid rise in the price is stunning. From a buyer’s perspective, this severely changes how you approach the act of spending even a tenth of a BTC in the future. Knowing with some surety that the value could increase dramatically in a matter of months causes our decision-making process to be dynamically inconsistent. This has implications for the liquidity of the currency. Let’s call this the alpaca problem.

Screen Shot 2013-03-31 at 12.59.29 PM
The Pizza Index tracks the rising price of the first real-world purchase made with 10,000 Bitcoins in exchange for $25 of pizza.

It’s not an easy thing to anticipate. How will our future selves react to value increases in money we hold? How does an economy function amidst reliably increasing purchasing power? Buyers, sellers, traders, miners, and hoarders alike must come to terms with the behaviors of their future selves and adapt to their own predictions. Everyone in the mix needs to somehow map out their disparate approaches to this unique currency for a healthy economy to form. While the future supply of Bitcoins is predictable based on the rules built into the protocol, the psychology of actors within a deflationary virtual currency is completely unknown territory.

The $1,000 Pint of Maple Syrup

Onto a concrete example. I’ve setup a site to sell maple syrup from my girlfriend’s family’s farm in Vermont for Bitcoins. At first, I thought it would be a popular item. Maple syrup doesn’t spoil, it’s something many people buy (especially in the U.S.), and I even discounted the price by 30%. It’s the cheapest place to buy organic Vermont maple syrup, which normally sells for much more than plain old maple. However, in the 6 months the site has been up and advertised, only four pints have been sold. FOUR. I think it’s worth mentioning that my order number on Bitmit.net, the ‘Ebay of Bitcoins’ for the most recent order was #8900. Bitmit came on the scene in September of 2011, so that gives us about 16 orders a day. If people can’t expect “Bitcoin Millionares” to purchase things, what’s next?

Pricing for Deflation

Here’s how deflation affects merchants: As a ‘merchant’ (if four pints a merchant makes) I know that I can heavily discount items sold for Bitcoins due to the current trajectory of the currency. I could even put up the syrup for 50% off and expect to break even within two weeks. As long as deflation feels predictable, the merchant can confidently undercut brick and mortar fiat merchants.

If buying additional Bitcoins to offset any expenditures is part of the buyer’s plan, this can work to everyone’s benefit. Sellers can expect to earn more money when their held Bitcoins increase in value, and spenders benefit from low prices and increasing purchasing power, especially if they replace spent Bitcoins. Of course, this assumes that the merchant’s costs are low and can hold onto a portion of sales, and that one can move money into exchanges easily (this is not always the case).

The smell of lost opportunity

Not all transfers in the Bitcoin economy cause the spender to dwell on increasing purchasing power. When the transactional benefits of Bitcoin become a more central part of ‘the spend’, Bitcoins flow more freely. Here are the core situations where the alpaca problem is less of a problem:

  • Sending money across borders. Expensify is smart to make this a part of their featureset.
  • Avoiding credit card fees and chargeback risks, or helping a merchant lower their costs
  • Sending money to a family member — the recipient benefits from any increase in purchasing power, and could convert quickly to another currency to avoid risk.

These uses will continue to drive the demand for Bitcoin, but I will continue to watch the relationship/activity among merchants and consumers. Spendes of Bitcoins (and consumers of syrupy pancakes), must confront a cloudy crystal ball. “What will these 78 mBTC become in a month when I’m done with this maple syrup?”

Spending on physical items for oneself, no matter how small or large the purchase is, sets the stage for an unique case of buyer’s remorse months later. The possibility of deflation doesn’t inherently give buyers pause. The buyer feels it, sometimes months later. Holding something in your hands that had the potential for so much more value leaves a bad taste in your mouth. This taste is unique in the history of money and it’s something everyone using Bitcoin needs to come to terms with. Until the rate of increase in purchasing power slows, it’s much more psychologically palatable to purchase durable goods with old fashioned money.

Legally accept Bitcoin donations for any political campaign in the U.S.

Bitcoin for political campaign donations is a no brainer, and Bitcoinbuilder seems to have made the go-to platform. So many small transactions are nearly zeroed out by the cost of credit card transaction fees.  Here’s hoping the Bitcoin donation system for Super PACs is just around the corner 😉

Here’s the minimum information required for a donation for Jeremy Hansen‘s campaign:

 

 

Bitcoin and Morality

Bitcoin — a currency by most measures — is consistently framed as ‘amoral.’ Let’s think about why currencies are not compatible with morality.

An unethical or amoral use for a unit of exchange says nothing about the unit, and everything about the user. Those who don’t understand Bitcoin seem to think its uses make it good or bad. Cash, silver, gold, diamonds & bitcoins: These are units of value that can be used to purchase things no matter how the larger society perceives them.

The fact that you can buy drugs, guns, and assasinations, with Bitcoins is indisputable. Bitcoin was not built for the narrow purpose to purchase ‘illicit’ things. Teddy bears, maple syrup and beef jerky are all for sale. It was built to be a secure network of exchange, secured by the computing power of its participants. Sure, Bitcoin’s creator endowed its very DNA with an offhanded critique of our current banking system, but Bitcoin is at its core lacking an ethical or moral position.

I can’t blame Gawker headlines for this persistent problem when it comes to the common man’s perception of Bitcoin. The currency is scary once you get know it. Let me introduce you to a world using Bitcoin:

Transactions can be anonymous (1). Sending money from neighbor to neighbor or Alaska to Istanbul is instantaneous and free (2). Money can be stored with a memorized passphrase, or stored on paper in a vault (3). Only complete disconnection from the Internet can stop a transaction from occurring or disrupt the network (4).

This seems pretty liberating to say the least. But of course, with all disruptive technologies, one can forsee problems.

Can you see why I want Bitcoin to be understood correctly, free of moral relativism? It is a unique unit of value built for the Internet age which has been derided since the beginning. Placing a moral judgement upon what is essentially an open source algorithm is like calling a tomato evil. Learn more about Bitcoin here.

“What is true for you is true for you, and what is true for me is true for me.” – Protagoras

Notes:

  1. There are numerous mixing services.
  2. The double spend problem is real, but difficult to perform (read more). After 6 confirmations (usually after a few minutes) a transaction of coins from point to point can be reasonably trusted. See the comments for more discussion on this. A technical explanation.
  3. See Brainwallet. Pick a long, memorable phrase, and use that to generate a private and public key (this is printable).
  4.  The nodes, miners, and clients spread across the world make Bitcoin the largest distributed computing project ever. Ever.

Donations appreciated. Find me @danielmorgan.