Why Bitcoin Will Go The Distance

My last blog post here was 5 months ago, and there is plenty I should (and hopefully soon will make the time to) write and update. But in the meantime, here is something I was self-compelled to write a few days ago when bitcoin was getting a lot of naysaying in the press. This modified version was originally published on my facebook timeline here

With the price of bitcoin shooting up (1 BTC = $1,088 right now), there's been a lot of buzz about the world's leading cryptocurrency lately. And the pundits seem to think it's doomed. Let's look at their analysis.

Dan Crumb, Capital Markets Editor a the Financial Times, argues that while bitcoin is trading at over $1000/BTC, the market capitalization for the whole bitcoin ecosystem is still a rounding error on the scale of the global economy.

NOTE: You'll only be able to view this link once before hitting a paywall.

Is that really your argument, Crumb? You're criticizing bitcoin because it's... small? The level of hubris and shortsightedness here is hard to exaggerate. Where do I even start?

Let's look at this 1995 article from Newsweek titled "WHY THE WEB WON'T BE NIRVANA". Clifford Stoll, who I'm sure is a smart, capable man in his own area of expertise, enumerated the many reasons the Internet would never deliver on the apparent promises. One of Stoll's big objections was how small the Internet was. In Stoll's own words:

Then there’s cyberbusiness. We’re promised instant catalog shopping–just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obsolete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month?

The failure to think in exponential terms is one of the most persistent shortcomings of tech forecasters. Exponential systems move very slowly... and then very quickly. Human brains don't naturally grasp this. We evolved to understand the world linearly, as most of the natural world around us operates by those terms.

Mother Jones published a perfect visual example of this in 2013. Their subject was artificial intelligence, but the dynamic is exactly the same.

Back to Dan Crumb. His next objection is that bitcoin is a terrible currency because of the volatility.

Okay, sure. Bitcoin is historically volatile. But you know what thrives on volatility? Speculative investment. And that's a big part of how bitcoin is growing right now.

There's an interesting tradeoff between bitcoin's volatility or stability and its use as a currency or investment. In bitcoin's early years, it is (and will continue to be) volatile. That makes it an investment opportunity with potentially huge returns. As it matures, the investment opportunity will dimish, right in line with its use as a stable currency. As the investment opportunity decreases, the currency utility increases. The two are inversely proportional, and that dynamic will make it possible for bitcoin to climb the seemingly insurmountable mountain of becoming a globally used non-national currency. Volatility isn't bitcoin's weakness. It's the growth mechanism.

Crumb's final epithet against bitcoin is that it "has all the attributes of a pyramid scheme, requiring a constant influx of converts to push up the price, based on the promise of its use by future converts. So the ultimate value for bitcoin will be the same as all pyramid schemes: zero."

Crumb either doesn't understand pyramid schemes, or network systems, or both.

What good is a fax machine if you're the only one who has one? Who did the first person on facebook talk to? They needed more people to join the network. And the more people who joined, the greater the value of that network, and the greater the incentive for more people to join. This is called the Network Effect, and it's the functional dynamic of virtually every example of information technology.

This is the literal opposite of a Pyramid Scheme.
As pyramid schemes grow, their liability grows.
As networks grow, their value and utility grow.

Pyramid schemes have no inherent value. None. Zero. If they're selling a product, it's just a lure, a red herring, not the product. Bernie Madoff's investors were doomed from the start, because they weren't investing in anything with utility. It was a locked but empty safe, a house of cards, there was nothing behind the curtain.

That does not describe bitcoin at all.

Bitcoin accomplishes what experts previously thought was impossible. It transmits information and value without a trusted third party. Mathematicians literally thought this wasn't doable, as every prior system relied on trusted third parties. It's a well known computer science conundrum called the Byzantine Generals' Problem.

In practice, bitcoin overcomes this. With bitcoin, users are able to transmit virtually any amount of money to anyone, anywhere in the world, instantly, at virtually no cost, with no third party intervention. The value of that ability is hard to overstate.

Blockchain technology, and it's most prevalent implementation in bitcoin, are a Pandora's box that can't be closed again. It will need to grow, adapt, and change in order to serve a dramatically wider group. So did the Internet. So did the cellular grid. So does every system.

I know Crumb is probably an intelligent person. But intelligence doesn't matter if your model is wrong. Just as sophisticated hardware can't work without proper software, intelligence is useless (or worse, dangerous) without the proper mental models.

Remember Clifford Stoll? The guy who wrote the 1995 Newsweek piece about the doom of the Internet? He made an interesting observation.

Even if there were a trustworthy way to send money over the Internet–which there isn’t–the network is missing a most essential ingredient of capitalism: salespeople.

A lack of salespeople is just silly. Salespeople appear as soon as there are willing buyers. But what's not silly is a "trustworthy way to send money over the Internet". E-commerce first used PayPal and similar third-party transmitters. Now a better method is developing, one that I think even Stoll and Crumb will be using before too long.