Since the first great jump in Bitcoin’s exchange rate in early April 2013, speculative trade has stolen the limelight as the main Bitcoin story. Tweets of “To the moon!” echo like a rallying cry, selling what amounts to a collective vision statement. But what’s the vision? A respected VC assures us it’s “still headed to 10k” as if Bitcoin was a prize thoroughbred being written down by the Bookies, but still had a few Derbies left in her... Is that all this is about?
Whatever one feels about the ‘profiteer mentality’ so evident across the Bitcoin movement, it is clear that without this driver, this long overdue financial systems innovation may not have taken hold. So we may as well accept that the ‘greed factor’ is serving a greater purpose. However, whenever the Bitcoin price slides, editorials claiming the demise of Bitcoin demonstrate that both the detractors and the devotees are focusing on an artifact of the system rather than the system’s innate value.
It's about all of us...
Bitcoin’s real value is closely related to the manner in which its transactions are validated across a highly distributed network in what amounts to a collaborative process. This inclusive decentralized validation process is, after all, one of the key differences between Bitcoin and centralized financial systems. It must be understood that decentralization is inherently attractive to people because it's about all of us.. and the promise of guaranteeing impartiality and fairness. It is Bitcoin’s greatest achievement to date that its version of decentralization, being achieved in an area as tricky as financial transactions, actually works at all.
However, the real value of Bitcoin is not reaped at an individual level. If a few thousand of us get rich, is that what Bitcoin is about? Are we heading towards replicating the wealth disparity evident in western capitalism in the digital currency space too? If we are, perhaps we should pause and take a few breaths.
We are all the blockchain, metaphorically
The real value of Bitcoin resides and is apparent at a group level. We are all the blockchain, metaphorically. Technically, miners may process the transactions by computing and embedding blocks into the blockchain, but it's the people who make the transactions that drive the system. But what kind of transactions? This question hints at a conflict issue within the way the existing system is working, i.e. if Bitcoin continues to be hoarded and transaction volumes are mainly associated with cashing in and out of Bitcoin on exchanges, we are indeed mainly treating it as a commodity, rather than leveraging from its utility, like hoarding a limited supply of gasoline instead of using it to fuel a car to go from A to B.
Alternatively, we could be asking: ‘What can Bitcoin do that traditional currency systems cannot?’ Simply buying things with Bitcoin instead of normal money is still a very basic use of the technology, as it doesn’t really begin to exploit the full potential of the medium. But like most innovations, when they first arrive they tend to be associated with legacy systems: the ‘Horseless Carriage'; the ‘Electric Candle’; the ‘Digital Super Highway.’ In other words, we inevitably tend to match them with existing concepts that we are familiar with. This is where most of us still are with Bitcoin... even the devotees. One just has to look at the plethora of startups and VC backed businesses in the alt-currency space (with a few notable exceptions) that are only focused on the handling or holding of Bitcoin rather than leveraging from its innate characteristics to drive innovation in other sectors, to know that we are still very much in a Bitcoin 1.0 world. To grow Bitcoin adoption, we don’t really need endless ‘money handling’ applications competing with each other, we need mass market applications that offer new forms of value facilitated by Bitcoin transactions, millions and millions of them. But what has been the reality so far?
Like the great Railway boom and land grab in the USA in the 1850s and 60s
Since early 2013 the Bitcoin/cryptocurrency space has resembled a kind of land grab by those who quickly saw the Bitcoin revolution as an unpopulated parallel monetary universe with vacant land as far as the eye could see. Yes it has indeed been like the early days of the web, but perhaps more like the great Railway boom and land grab in the USA in the 1850s and 60s. Back then, just like in this current cryptocurrency frenzy there was technology innovation, dramatic new efficiencies, opportunism, greed and yes... those legendary ‘snake oil’ salesmen.
The explosion of interest in Bitcoin has been like a large room full of empty chairs: someone opens the doors, a crowd floods in and everyone tries to grab a seat. In this group there is the wider community of bitcoin users, the Crypto-Developer Community, the anti-government Libertarians, Crypto-Anarchists, Bitcoin and Alt-Coin Entrepreneurs, Bitcoin friendly VCs and of course the ‘Investopreneurs’ at the BitAngels. It's a diverse bunch, and they are not all driven by a common philosophy.
The inevitable search for a multiplier, in a realm where copies cost nothing...
Most successful business people learn to look for a ‘multiplier’ when evaluating business opportunities. A multiplier is a way to achieve economies of scale, to pump out widgets that are in demand, and to fill that demand. Think: rolls of Kodak film, tubes of toothpaste, CD blanks that cost less than a dollar but sold for $20.So it has been inevitable with the sudden advent of a new technology like Bitcoin, that was in effect a ‘money protocol’ and an idea that could be fairly easily duplicated, that a bunch of enterprising folks would want a piece of that for themselves. But herein lies the problem... There is a growing but relatively limited demand for cryptocurrencies, yet we already have (at time of writing) apparently 985 tradeable crypto coins and an indeterminable number of vaporware ‘crap coins’ being pumped out, before most people have properly understood, or in some cases, even heard of Bitcoin.
It's almost reminiscent of that scene in Aliens when Sigourney Weaver’s character ‘Ripley’ stumbles on the Alien hatchery.
We now have what amounts to parent alt-coins that enable enumerable child alt-coins, and parent 'crypto-crowd-funding marketplaces' that can be used to give birth to enumerable child 'crypto-crowd-funding marketplaces’... It's almost reminiscent of that scene in Aliens when Sigourney Weaver’s character ‘Ripley’ stumbles on the Alien hatchery. Its the pandemic (coindemic) idea of something that is rapidly duplicating and escalating out of control.
In contrast to just over 12 months ago, the teams working on alternate cryptocurrencies, app-coins and coin generating marketplaces, now massively outnumber those working on pure bitcoin projects and the core bitcoin protocol. In many ways, what we are seeing is an endemic cookie-cutter approach to the Bitcoin phenomenon by teams trying to duplicate and (sometimes) improve on Bitcoin, but sewing the seeds of massive fragmentation in the process.
When something can be copied at near zero marginal cost, it will inevitably become valueless
As Kevin Kelly pointed out in 2007 on his influential blog The Technium, the Internet has made the cost of making copies near zero, and so everything from web pages to books to music to movies are copied and distributed at near zero marginal cost.
“Copies are worthless; sell what can’t be copied”
Kelly’s observations relate to what economists call ‘zero marginal cost economics’. With traditional physical goods, marginal costs tend to rise over time due to constraints; with digital goods the marginal cost of goods tends to drop toward zero. The music industry is a classic example. From CD sales to Napster to iTunes to Spotify we have seen the price of music to the consumer effectively fall close to nothing at all, because the cost of that reproduction has become negligible. However, in contrast to tech savvy musicians working in today’s music industry who are still economically constrained by legacy industry structures imposed by record companies and the RIAA, it's the class of people who are adept at working with computers and software in new areas like the alt currency movement that are prevailing in digital markets.
Tyler Cowen in his book Average is Over argues that: “As computer based digital goods start to dominate the economy, their odd zero marginal cost economics will loom larger and larger. Computers will accelerate our existing trend toward a more stratified society. People adept at teaming up with computers will get richer, while those who aren’t will get left behind.” 1As everyone in the field knows, there will be a finite maximum of 21m Bitcoins mined. It's a big world, so as an illustration, if for instance everyone in Australia would end up only owning one bitcoin each, there goes your 21 million. Too bad for the other 7+ billion people in the world right?
So, to maintain Bitcoin’s pre-eminent status there will be an inevitable division of Bitcoin into smaller and smaller but increasingly valuable fractions, and the utility of Bitcoin will be extended, but its integrity maintained by systems that are benign to Bitcoin rather than competitive with it. The Sidechain project by Adam Back and Austin Hill of Blockstream to create pockets of crypto-innovation, double pegged to the main Bitcoin blockchain, is an obvious example of a project that strengthens the core of Bitcoin. The 900+ tradeable crypto coins are, regrettably, pulling in the opposite direction.
We have already seen a number of instances of crowd sales of alt-coins with many orders of magnitude higher eventual numbers of coins than Bitcoin, i.e. MaidSafe’s crowd sale of 400m Safecoins being “only 10 of all Safecoins that can ever be produced!” 2 purchased at the ratio of 23,800 to 1 BTC. The inducement being the prospect of massive capital gains, like the gains we all witnessed with Bitcoin, which of course would be less and less likely with each successive competitive alt coin.
However, it is the practice of using Bitcoin as the preferred medium of exchange for these alt currencies that is particularly revealing. Not only as evidence of Tyler Cowen’s prophesy (above) that “People adept at teaming up with computers will get richer, while those who aren’t will get left behind,” but also as testament to which crypto-currency is clearly being perceived as having the most innate value and the least ‘value-risk.'
The promise of a perpetually exploding crypto universe...
As crypto-entrepreneurs hoover up thousands of Bitcoin from enthusiastic early adopters in exchange for the promise of a perpetually exploding crypto universe (who more than likely purchased their small holdings of Bitcoin with hard earned fiat currency), are we seeing the beginning of an era where it is the tech elite that will own the vast majority of Bitcoin, while the devout legions of early adopters will be left with crypto wallets full of tokens with values unlikely to be sustained by the scarcity that will continue to underpin Bitcoin?
This is a problem worth considering. Because if Bitcoin is indeed ‘about all of us’ because we are all metaphorically its blockchain, do we risk a collapse of confidence in the ‘idea’ of cryptocurrencies due to this fragmentation and dilution, or will the alt-coin leaves fall off the tree, to leave the Bitcoin trunk intact and strong?
Clearly market forces of demand and supply will always have the effect of injecting liquidity back into the Bitcoin economy from the ‘have lots’ to the ‘have nots,' but that precious goal of the ever increasing exchange rate of Bitcoin to the US dollar will be much more likely to occur if it is built on real participation by a growing global constituency of users experiencing genuine value, unique to using Bitcoin, rather than speculation in it as a new kind of commodity.
1. Nathan Taylor, praxtime.com2. Hill, Kashmir (8 April 2014). "Beyond Bitcoin: Crypto-Ownership Companies Hope You'reReady To Decentralize Everything On The Internet". Forbes. Retrieved 30 July 2014.