Oct 122013

Future Bitcoin

In 5 years, Bitcoin has gone from proof of concept to over $1 billion in market cap, providing about 25 million transactions to date and proving, once and for all, that a decentralized peer to peer crypto-currency is possible and maybe, just maybe, we are ready for it. That being said, Bitcoin does have a long way to go to become the de-facto currency. It is not just the hashing power that has been seeing an exponential growth – the interest among the common folk is growing every day. Bitcoin is reaching the people all over the world and it is sometimes good to remind ourselves that this is a technological revolution above all and will take time to reach everyone and be widely adopted (not unlike the Internet).

But what are some of the stages that Bitcoin needs to go through to achieve this? I believe there will be several milestones that this nascent currency of the people will hit before reaching mainstream adoption. Here are some of them, in no particular order.

  • A big company/corporation with real paying customers decides to deal exclusively in Bitcoin, removing fiat from the picture and ‘closing the loop’ on Bitcoin, so you can earn and spend in Bitcoin without an intermediate fiat conversion. There are smaller initiatives, e.g. Tealet that are moving towards exclusive Bitcoin trades. However, there are no big serious companies today that deal exclusively in Bitcoin. When this happens, people will be forced to do the opposite – get their fiat and convert that to Bitcoin so they can buy things that they need. This should be a huge step and big boost to Bitcoin and crypto-currencies.
  • A Bitcoin stock exchange gets implemented and a known company goes public, selling shares on this exchange. This isn’t as far-fetched as it might seem. The idea of a stock and bond market in the Bitcoin world is already documented. If I have to make a prediction, I would say within the next 5 years we’ll see a working model of a Bitcoin based stock exchange. The only way common public will have access to equity in these companies is by using Bitcoin.
  • Wall Street gets seriously interested. As much as you might hate the financial sector right now, they do have the means to help with the adoption of Bitcoin, not just through funds like SecondMarket but through real trading, by making the markets for Bitcoin to fiat conversion and providing the necessary price stability and liquidity. Of course we have already seen some interest, e.g. from Bloomberg, but when real traders with real money on the line for their clients start trading Bitcoin, that’s when the financial services industry would have truly adopted the idea.
  • Within a country, the number of Bitcoin transactions exceed fiat. This might take some time, but shouldn’t be too far-fetched depending on the geo-political situation across the globe. If people lose faith in their government’s money, they are bound to adopt something with tangible benefits over fiat currency like Bitcoin. Once trading in Bitcoin overtakes government issued fiat, it would have reached that tipping point where the better currency would survive (pop quiz: Gresham’s Law wouldn’t apply here. Why?) That opens up the Bitcoin market to a huge extent – everyone from ordinary citizens to tourists to officials would need to get on the new, better currency system.
  • Smart property gets implemented by a major hardware vendor. This would be a game changer when it comes to technology because smart property is one of those areas that are not too hard to implement from the software side for Bitcoin developers but is a challenge building hardware designed for it. This is also an area where ordinary fiat money doesn’t even come close to challenging what Bitcoin can do. The marketplace for this can be phenomenal.

Note that nowhere am I looking at the ‘price’ of Bitcoin or the exchange rate BTC/USD because it is immaterial.

What are some major events I am missing?

Photo Credit: Alberto

Sep 182013

Bitcoin National Currency

Will Bitcoin ever become a nation’s currency? It’s an interesting thought that has probably occurred to many Bitcoin enthusiasts as the think about the future of money and the role of Bitcoin. The idea is very appealing. If Bitcoin is ever the national currency of a real country as recognized by the UN and the rest of the world, that will give Bitcoin a legitimacy like nothing else. Countries cannot try to ban Bitcoin, for example, because that would be like trying to ban the Euro in the US. This was apparently also echoed by Tyler Winklevoss.

It is tempting to think that countries with a weak currency would be well served to adopt Bitcoin as their national currency to provide a level of stability. Currency weakening in countries like Argentina and India are well documented in the financial world today. Indeed Bitcoin has a lot of potential in these countries. But thinking Bitcoin can just slip into the role of a national currency would be a fallacy.

Governments work through a system of power and control. A decentralized currency that is held and controlled not by the government and people inside the borders but by the entire world means ceding power like nothing else. Governments would always like to be able to control the financial aspect of things because that’s a huge source of it’s power. Besides, a decentralized currency makes it very complicated to tax and implement the tax policies (at least for now) but the real reason would be the inability of a government to control this money.

That being said, there are other ways in which Bitcoin can start on the path towards something resembling a national currency. For instance, an anarchy would be a great state to experiment with Bitcoin. Unfortunately, there are no stable anarchies in the world today. For some of the poorer parts of Africa that come close to an anarchy, internet and technology penetration is very low.

If Peter Thiel is building his libertarian islands, Bitcoin should definitely be the adopted currency. I am not sure such an initiative will be recognized as a legitimate nation though. And it isn’t going to happen in the next few years either. A smaller group of people can always come together and form a ‘mock society’ and experiment with Bitcoin as their ‘national currency’ but those usually aren’t very sustainable by nature. Larger systems need a central power that derives a lot of that power from monetary policies.

The other idea that has been floated is to create a national crypto-currency that mimics Bitcoin. This has always been a utopian idea but again, something that can be implemented with a smaller group of people. If such a society is being created from scratch, it can start off as the most egalitarian society – for example, all the coins can be mined and distributed equally to all the citizens. The free market takes it from there.

Unfortunately, I don’t see a practical way in which Bitcoin will realistically be a national currency even within the next decade. I won’t buy the argument of ‘technology can change so fast’ which I completely get. However, it isn’t the technology but the people who will need to be at the center of this, and people aren’t easy to change (because, as Beckett would say, “People are bloody ignorant apes”).

Your thoughts?

Photo Credit: Phil Dokas

Sep 082013

Bitcoin Retirement Portfolio

Considering Bitcoin in your retirement portfolio? Good for you. And bad for Bitcoin. Let me explain. Market Watch recently ran an article by Jack Tatar about why it might be a good idea to have Bitcoin in your retirement portfolio. I’ll leave it to the author to explain, but the premise is that it isn’t terrible to have some (5%-10%) diversification in your portfolio through a highly speculative “investment” in Bitcoin that has a very high potential return. Indeed, the value of Bitcoin can potentially rise exponentially depending on its mainstream adoption.

There is a fundamental disparity between Bitcoin as a payment system and Bitcoin as an investment. Bitcoin as a payment system is what will ensure mainstream adoption of Bitcoin. Bitcoin as an investment will only lead to hoarding and it will never reach mass adoption. Bitcoin is simultaneously “PayPal” and “gold”. The “PayPal” part of Bitcoin ensures a lot of transactions and movement of Bitcoin from one person to another whereas the “gold” part of the Bitcoin is a long-term hold and watch strategy that most gold-bugs are aware of which does nothing to make Bitcoin more popular.

Here’s the thing – the hackers and entrepreneurs are busy using Bitcoin as a payment system, building new services and products that utilize all the good features of the crypto-currency. On the other hand, the hoarders simply have a cold storage wallet with Bitcoin in it and waiting for the price to shoot up (Winklevoss twins anyone?) and do nothing for the Bitcoin economy really.

The entrepreneurs will get their way. Bitcoin is certainly on road to becoming more mainstream every day. That means its value will invariably increase, thus benefiting the people who simply hold on to Bitcoin waiting for it to go up. Ironically, it probably would be good for these people as the entrepreneurs succeed but if everyone began hoarding Bitcoin, it will have no value.

So indeed, Bitcoin in your retirement portfolio is probably good for you as the others are busy making Bitcoin more mainstream which indirectly will increase the value of Bitcoin you hold, but that is certainly bad for Bitcoin because it chokes off the circulation of these Bitcoins that are hoarded. I don’t know a way around this dilemma. Perhaps you do?

Photo Credit: 401(k) 2012

Aug 202013


This is a classic example of a completely free market with asymmetrical information – lots of people in China are investing their Bitcoins in ‘virtual IPOs’, buying stock in ‘companies’ that deal with Bitcoin. Of course, it shouldn’t come as any surprise that this would be popular with Bitcoin as the currency of choice.

Bloomberg wrote a nice piece about the rise of these ‘Bitcoin investments’. People need to understand the risk they are taking. Bitcoin is not a get rich quick scheme and it shouldn’t be your retirement plan, even if “…796 Xchange has returned 46 percent since the stock’s Aug. 1 debut on the company’s own website. The benchmark Shanghai Composite Index has only gained about 2 percent during the same period.” That’s the danger of these short-term goals. And it is impossible to know when the bubble is bigger than the utility, even for something as promising and revolutionary as Bitcoin.

We all knew that there was a steady rise in Bitcoin wallet downloads from China, second only to the US. This is, in general, great news for Bitcoin because China is a huge market with a huge population and Bitcoin provides a way to get around government regulations in an otherwise tightly controlled economy. However, it is also important for the reputation of Bitcoin in this nascent market that it not be associated with scams but instead as an excellent alternate form of currency and payment system bundled into one.

Bitcoin can be a game changer in China. It shouldn’t be associated with get-rich-quick schemes though. I hope ordinary Chinese realize this soon enough.

The game is rigged. The people who operate shady operations know about a ponzi scheme, for example, while the “investors” don’t. That’s the whole reason we have regulations in the stock market where companies need to disclose information to the investors. These ‘virtual stock markets’ need to be played with extreme precaution and in more than 99% of the cases, should be avoided completely.

People do stupid things all the time. If you can’t find the sucker, then it’s probably you.

Photo Credit: Roger

Aug 182013
Falling Indian Rupee

Falling Indian Rupee

Bitcoin has a huge potential in India. Here are some of the reasons I think Bitcoin can really take off in India –

  • Positive Bitcoin wallet downloads in July compared to June, about a 10% rise. This is compared to almost -40% in the United States. This shows that Bitcoin is really picking up in India of late.
  • The Rupee is on the fall. The currency, the Rupee, has been on a steady decline, falling by 28% in the last two years. Bitcoin can act as a store of value instead of the Rupee for the savers.
  • The central bank announced that it will not regulate Bitcoin as of now. This makes it hugely profitable for the local businesses and entrepreneurs to get on board with Bitcoin before the central bank or government change their minds. Innovation can shift from the US to India, owing to current regulatory hurdles in the US.
  • Lack of faith in government and poor implementation of laws can easily force the people towards a free-market based solution to economics. Less than 3% of Indians pay income tax and the government cannot realistically do anything about it.

What do you think will be the major forces that will push India towards a Bitcoin based future?

Aug 052013

Bitcoins ArgentinaWhat’s the status of Bitcoin in Argentina? Argentina is one of the most popular destinations for Bitcoin today, going by the per-capita Bitcoin usage. There have been several newsworthy stories about Bitcoin in Argentina and it is growing in popularity every day. In fact, even now, in July, which has been a quiet month for Bitcoin throughout the world, with Bitcoin wallet downloads going down in almost every other country, Argentina has been the one lone country where Bitcoin wallet downloads is still growing month to month.

Of course the use of Bitcoin in Argentina isn’t new. It has been covered in mainstream news media outlets about how Bitcoin is acting as a reprieve from high inflation and flawed policy to keep up the peso.

CoinDesk today noted that the price of Bitcoin in Argentina is about 60% premium to the price in the US when bought in Peso. That already tells you there is something terribly wrong with the economic situation because of the obvious arbitrage opportunity that exists (which means it isn’t a free market, in a nutshell). Argentinians are using localbitcoins and meetups to arrange for this trading in Bitcoin.

The question now is, will Argentina be the first country that goes for mainstream adoption of Bitcoin? It is a long way away and even though the Bitcoin community in Argentina is growing and vibrant, it is still only a tiny fraction of the total population. However, as the economy deteriorates further, could it be that ordinary folks will begin to embrace Bitcoin, and place their trust in the internet and the peer-to-peer network rather than their own currency? It isn’t likely to happen in the near future but isn’t outside the realm of possibility either.

The way Bitcoin might be adopted in Argentina might be a primer for the future of Bitcoin in other countries. Several economies are still struggling after the financial crisis of 2008, and that has led to short-term policy fixes that don’t bode well for the overall economic health of the world financial system. Bitcoin might be a way out for the people who feel cheated by the system, e.g. savers in Argentina who see the high inflation wiping away the purchasing power of their money.

Do you think Bitcoin in Argentina will forebear Bitcoin adoption elsewhere?

Photo Credit: cbc.ca