Bitcoin – My Two Satoshi

It’s the hype, admit it. Everyone and their mothers are talking about bitcoin. The price of the crypto-currency quadrupled in just 6 months, and even now, after a serious security issue affecting one of the largest exchanges in the market, it still trades at double the value it had last year in April. That’s a 100% grow in less than one year. Very few, if any, other investment vehicles can offer this return.

Recently I started to look into it too. During the last few weeks I’ve read a lot about the protocol, the implementation and how the market reacts to this phenomenon. The reason for this interest (which may seem sudden for people used to read about other stuff on my blog) is made of two parts. The first part is tied to a project I started 6 years ago, before selling my online publishing company, called XCent. It was an internal currency with which we rewarded content creation on the network by it users. So to speak, the bitcoin hype rang my “xcent bell”. The second part is because I intend to start a project involving a virtual currency in the near future. But it’s too soon to talk about it.

Given these circumstances, and the fact that all this Bitcoin (please note the capital “B”), stuff is gaining momentum, I thought to chip in my two satoshis (a “satoshi” is the smallest denomination part of a bitcoin, something like a cent) about it.

1. Bitcoin Will Win, bitcoin Will Fail

For those of you unaware, there are two ways to read the term “bitcoin”. If you’ll read it with a capital “B”, like in “Bitcoin”, you will refer to the protocol, or the collection of rules which are controlling the creation and trading of the currency. If you read it with a lower case “b”, you will refer to the actual currency that is traded and mined in various exchanges over the internet.

So, I think Bitcoin, the protocol, will survive. Even more, it will thrive. But the bitcoin, the currency, will eventually fail. First of all, there’s already too much air into the balloon. The hype pressure on the bitcoin phenomenon is already at a very high level. Sooner or later this will make the crypto-currency implode, and, in my opinion, it will happen rather sooner than later. So, the value of the bitcoin currency will eventually fade out. That’s the bad news.

But the good news is that will happen in a transparent and predictable way. I actually think that many bitcoin owners will have enough time to exchange their bitcoins into new currencies, created on top of the same protocol. Because Bitcoin, the protocol, will survive. Here are at least three reasons for that:

1.a It’s Transparent

Everyone can check the block chain at any time. It’s not a super easy task, especially for a technically challenged person, but it’s way easier than to check a ledger of a private bank. In a way, it’s like democratisation of money. Everyone can check on everyone. Not all will want to do it, but at least you will be able to do it, if you fancy it.

1.b It’s Distributed

The Internet as we know it is working for more than 2 decades now. Some will say even 3 decades. Anyway, this is mature technology. The underlying protocols were polished over the years and now they are working (pretty much) flawlessly. For example, the reason you can read this on your device right now is a little protocol called TCP/IP. On top of TCP/IP an entire technological empire was built.That’s exactly how Bitcoin will be referred as in the next decade.

1.c It’s Programmable

The Bitcoin protocol doesn’t only describe transactions and safely distributes the associated value among the members of the network. It can also create contracts. In other words, it’s scriptable. There aren’t many implementation yet (or at least I’m not aware of many) but the potential is there. And it’s huge. It’s very convenient to pack an entire economical process in just one automated transaction.

2. A Currency For What?

A currency should follow an economical landscape. It should be the consequence of the transactions in a given context. Like providing a service to someone or selling goods. That’s the main reason for a currency: to “mirror” the value of transactions.

At the moment, bitcoins aren’t that. They’re just a speculative financial bubble (which will make some people rich, not doubt about it). There’s no “economy” behind it. Some real life processes are starting to use bitcoins, but there isn’t a structured approach to it. At this moment, bitcoins are just an alternative, presumably safer, currency to be paid in.

But the most disruptive effect of the Bitcoin protocol may be in the area of micro-economies, where it can act as an internal currency. I’m talking about the protocol here, not about the currency. Imagine that you have a community of, let’s say, tango dancers. These tango dancers are exchanging some value in various processes: they attend to milongas, they may participate in private classes and so on. Many of these processes are now mapped to traditional currencies, you have to pay real money to cover them.

But with the use of an internal currency, one that can be instantly accessed via your smartphone, this micro-economy can grow into something extremely flexible. This value – which, at times, may be hard to record or evaluate in traditional, centralised currencies – will stay inside the community and may generate exchange processes with other communities. A milonga in this community may be traded for another milonga in another community. Soon, the tango dancers around the world may have their own, internal currency, based on their internal processes.

It’s already happening in communities like reddit, where you can send bitcoins to other users. In this case, the process is a donation.

You may think that these different currencies will generate a lot of pressure and confusion. I don’t think so. Intrinsically, a value of a transaction is tied to its context. And if the protocol can describe the context to all its participants (like I said, Bitcoin is distributed and transparent) then that’s what really counts. The name of the currency will stop matter. The transaction itself will be the carrier of the value.

So, What’s In It For Me?

A while ago I wrote about money as being the ultimate form of agreement. Money doesn’t have any intrinsic value. It’s what we all agree upon it. This new technology will make it even more obvious, by avoiding the centralised structures (governments, banks) that are now tampering with it. Money will be deregulated. And, with that, all our thoughts and expectations about what it means to be rich.

Maybe the most important effect of this new technology will be that distribution and access to value will be faster, more transparent and useful. Rethinking money on top of a decentralised, distributed and transparent currency will dramatically change the world we live in. Allegedly, for the good. Because if you will do something good for somebody else, it will be instantly and ubiquitously recognised and rewarded.

That’s kinda huge, if you ask me.

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