Bitcoin is messy. Let’s fix it.
“This is not just money for the Internet. This is a new Internet of money.”
— Andreas Antonopoulos, Bitcoin expert
Bitcoin is the first large-scale, peer-to-peer, crypto-currency platform experiment that has a real chance to making a significant impact on how we use money around the world. To begin to understand it, you need to think of it as an open “money platform”, and not just a new type of currency. Once you detach its currency-related speculative and volatile characteristics; within its own ecosystem, Bitcoin attacks the traditional money supply chains and breaks down traditional barriers and conventional practices. That is why it is feared by some, misunderstood by many, and embraced by the early few. But its long-term success is not assured. It must be guided, and it must be focused.
I’ve recently become a huge proponent of Bitcoin, as a result of my own analysis, not of anyone else’s. Earlier, I wasn’t against it. I was neutral, because I couldn’t understand it at a level where I could form a defensible opinion without pandering to other viewpoints. I kept asking questions, and kept receiving fewer answers than I was hoping for, even from those who had invested in it. But that didn’t deter my optimism for Bitcoin’s future.
Then I reached the conclusion that one of the issues that is currently hurting Bitcoin’s prospects was a lack of clarity around its future, in the eyes of users. Furthermore, the challenges and barriers surrounding Bitcoin’s evolution were not being addressed systematically. We can’t just say: “let the market develop”. A mess, with the passage of time and some experimentation doesn’t always result in a less messy situation. Sometimes, things get worse if a path isn’t given some guidance.
I’m suggesting that it’s time to put some order and simplicity in the mind of people about what Bitcoin is, what it’s not, what it could be, and what needs to happen around it. That order needs to be simple, and without obfuscations of jargon that is incomprehensible to the average person. Let’s not forget that the future of Bitcoin will depend on the average person’s understanding of it, which will precede their usage of it. No one will use something they don’t comprehend, at least up to a minimum level of understanding.
Bitcoin’s Early Days
Bitcoin today is a little like the Internet in its early days, around 1994. It’s equally full of excitement and skepticism. But the Internet turned out to be a wonderful thing, as the excited group won over the skeptics. But that didn’t occur by happenstance, or by sheer enthusiasm or market forces. It happened because, early on, we were able to identify the challenges to the Internet’s commercialization, and one by one, they were tackled, such that the barriers of entry kept getting smaller and lower, and the opportunities became larger and more reachable.
I saw this up close with the Internet, circa 1994, having participated in the advocacy of its early commercialization, via my affiliation with CommerceNet whose sole purpose was to help remove the barriers to adoption, evangelize its vision, and expose its benefits, by working on technological, educational, legal and regulatory initiatives that lubricated the Internet’s early development days.
Today, Bitcoin’s challenges are larger than its known opportunities, at least to the extent that they could be easily understood by the average person. We need to fix that gap, if we want Bitcoin to flourish.
Attacking it via a Framework Approach
We need to look at Bitcoin holistically using a Catalyst-Barrier-Solution framework perspective. This framework consists of accurately depicting the Catalysts: Business Drivers and Technology Enablers. Second, we need to table the Barriers that include Market, Legal/Regulatory, and Behavioral/Educational Challenges. Finally, we need to tackle the Solutions to each one of these barriers, one by one.
There should not be any illusion about the reality needed here. If we ignore the issues behind these barriers, many of them will not get solved on their own, nor will they go away.
The message behind this framework is to help us focus on what’s important. Magical things start to happen when business drivers are strong, when technology enablers are ready, and when solutions to challenges are found.
So, I’ve made this attempt to list them below, according to this framework. Btw, I have used a very similar framework in 1996 to depict the Internet’s characteristics in my book Opening Digital Markets, but have adopted it for Bitcoin.
Business Drivers
- Money transfer fees are too high
- Internet missing a native software protocol for payments
- Money transfers cannot be accomplished without an intermediary
- Money transfer process is too complicated
- Money settlement timeframes are too long
- Too many players involved in the process of money transfers
- Peer to peer transfers are not easy to accomplish
- Micro-transactions are still a challenge, and not widespread
Technology Enablers
- Strong underlying cryptography
- Reliable mining process that is part of its resiliency
- Decentralized transactions, no choking point
- Globally decentralized ledger of assets
- Digital signatures (can’t be forged, but can be securely verified)
- Transparent transactions
- Intrinsic payment protocol, native to the Internet
- Distributed blockchain process is very reliable
- Multiple APIs exist
- Natively peer-to-peer
- Antifragile system: any weaknesses are fixed by a change in behavior
- Doesn’t need a third party to authenticate (block chain does it via proof of work)
Technical Challenges
- Under-developed infrastructure
- Lack of applications
- Scarcity of experienced developers
- Immature middleware and tools
- Not well integrated yet into the fabric of the Internet
Market Challenges
- Competition from other digital wallets
- Integration with existing POS not widespread
- History of failed prior attempt at digital currencies
- Perception that it enables fraud and criminal activities
- Mining Bitcoins consumes a lot of energy
- Few retail locations where you can buy with Bitcoin
- Volatility of currency value
- Large number of currency speculators
Legal/Regulatory Barriers
- Unclear regulation
- No protection or guarantees on transactions
- Irreversible transactions, even on incorrect ones
- Risks of government blockage
- First currency that doesn’t have a sovereign entity behind it
- Several governments issuing Bitcoin warnings
Behavioral/Educational Challenges
- Difficulty in understanding it
- Bitcoin’s usability is not great
- Perception that it’s led by anti-banking motives
- Buying or spending Bitcoins is still not easy
- Unclear safety and security of using it
The above lists may not be complete, but the bullets give you an idea about what we need to focus on, in order to continue to assure the success of Bitcoin. It is surprising to note that the list of consumer behavioral challenges is not that long, because users want simplicity: they want to be able to understand it, believe that it is safe and secure, that it’s available, and that they can use it as easily as they can operate their smartphone.
The Bitcoin Landscape
Another way to understand Bitcoin is by portraying its evolution around 3 successive layers of architecture. I’ve again borrowed from a popular segmentation method I used in the late 90’s to explain the Internet. First, you basically need a strong set of Infrastructure capabilities as foundational elements. For the Internet, it was TCP/IP, HTTP, SMTP, etc. Then, you need to see a number of Middleware services that are built on top of the Infrastructure. Finally, thousands of Applications will flourish by relying on the Infrastructure and Middleware services, as they get built on top of them. There is a certain required sequence of iterative evolution to this landscape depiction, but it can serve as a clear visual representation of reality.
Understanding the User Vision
The groundswell activity around Bitcoin technologies is mind-boggling. Thousands of software engineers in hundreds of companies are developing innovative services and applications around Bitcoin because they have seen its future, and it has captured their imagination. But the Bitcoin vision that matters is the one that users see, because they are the ultimate proof point of Bitcoin’s success.
There is enlightenment in noting that from a user adoption angle, Bitcoin’s skepticism is way lower in less developed countries where the monetary systems are frail and corruption is rampant. There, people are seeing Bitcoin as an efficient and liberating system, away from the grips of central governments mediocrity. We must follow their lead, because they are seeing the effects of decentralized money when it empowers them.
After all, Bitcoin’s vision in the eyes of its founder, Satoshi Nakamoto was very simple: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
In layman’s terms, Bitcoin is:
- An incredibly easy and cheap way to transfer money between people
- An alternative currency to pay for retail products and services
- An easy way to add a payment option to products and services without a central gatekeeper
That is the essence of Bitcoin, at the consumer level. Of course, there are derivative business related products that will exist (ref. the Applications segment in the above slide), but if we don’t get past the critical mass of adoption at the consumer level, none of the other services will matter.
Getting Educated on Bitcoin
Moving forward, we all need to get better educated on Bitcoin. We need to understand it, and help others that don’t understand it yet. If you have one hour to invest, I strongly recommend this seminal video by Andreas Antonopoulos. I have not heard anyone more articulate about Bitcoin than Andreas.
We need to address Bitcoin’s challenges, collectively, and systematically. Perhaps, what is lacking is some authoritative consortium organism that sets and re-enforces the required agenda, and lubricates the work that is required to remove the barriers, whether perceived or real. Few of the challenges will disappear if we ignore them. Most will need to be tackled head-on.
Therefore, we may need to fund a new organization, or strengthen an existing one, as a non-profit organization that will be recognized as a global authority on Bitcoin, and whose sole mission will be to educate, remove barriers, advocate, and combat legal and regulatory barriers that are being erected to block Bitcoin’s success. This type of organization could take a page from what CommerceNet did, circa 1994-2001. [you’ll need to review web pages prior to 2001, because CommerceNet’s direction changed after]
Bitcoin cannot be above the law, around it, nor under it. It needs to deal with the existing perceptions about its safety and security, and it needs to turn many of its detractors into supporters. Ignoring all of them will not help.
We need less negative punditry around Bitcoin. There has been a recent flurry of opinions written by known authors who have attacked Bitcoin, but in that process they have shown their ignorance or lack of education about it.
A Bitcoin-supported money system is going to happen. There is no question about it. It is unstoppable.
So, let us work on putting a little more order and guidance into its evolution, removing or lowering barriers, tackling challenges, accurately describing its vision, and focusing on innovation around its application.
Now is the time to elevate Bitcoin’s evolution and put it on the right path of global support.
Bitcoin’s success is urgently needed.
Great post William. I think many of the things you suggest are in fact happening but we need to get the word put better.
There is a hacker news like community that is focused entirely on bitcoin but I can’t recall its name
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To keep the New Year interesting, I will take the “under” to your “over” and suggest that Bitcoin is a solution wandering around looking for a problem. A problem which simply does not exist.
It is not even remotely difficult to move money in the world today. Money can be moved through the wire system and interbank system with ease. Just get your account numbers right.
Government regulation — given that Bitcoin was designed initially to fund anonymous transactions in such industries as illegal drugs — is going to be enormous.
Bitcoin is both a system of payment processes and a store of speculative value. It is taking on more than one competitive opposition group and must win two fights to win a single war. This two front war will be impossible to win.
Having said all of the above, your blog post is EXCELLENT as it lays out the arguments for Bitcoin in a comprehensive and rational basis.
Well played.
JLM
http://www.themusingsofthebigredcar.com
bingo!
I wonder about education as key here Fred.
People don’t understand money. Not do they understand the Internet. Or maybe they understand each a little bit.
As long as there is stability or even as much, the ability to transfer to cash at the agreed upon price, and there are no transaction fees (or fewer) I think this can change the world is a positive way–without it truly being understood.
Trust and acceptance for bitcoin more than understanding and education is I think the way of big change here.
I hope so but with all the bashing we may need some advocacy and education
All the understanding in the world won’t create consumer trust.
Someone building something on top of it for usage that mitigates the wacky ups and downs, and bingo.
My take at least.
Yup. That was the main point of my post. Bitcoin is peer-to-peer decentralized to the T, and cannot be attacked from a technical perspective, but it’s being attacked from an adoption perspective. Some real world advocacy and lobbying will help. The analogy is striking with the early Internet days.
The bashers don’t understand it. And they are showing their ignorance by zeroing in on singular aspects.
Thanks JLM. I’ve done a lot of research in the past 2 weeks educating myself on Bitcoin.
The first thing one needs to do is to dissociate Bitcoin-the currency from Bitcoin-the platform, and that helps in understanding what an “open platform for money” can do.
“It is not even remotely difficult to move money in the world today.” That may be the case for some, but not for billions living in less developed countries. The banking systems aren’t serving everybody equally well.
Regarding the illegal activities, the reality is that Bitcoin is not that efficient for drug trade or illegal activity. It is just getting a bad rap on that because of its novelty.
If you have an hour to invest, I would really suggest you try to listen to Andreas’ video. It is an eye opener and pleasant to listen to. http://www.youtube.com/watch?v=JP9-lAYngi4
It falls to vendors of goods and services adopting it as an accepted means of payment, for awareness and trust to spread. If a person sees that it’s an option, they will ask about it. If merchants offer a small discount for using it over credit, that would speed adoption.
We do need education for the public, but the public doesn’t need to understand how it works, necessarily…just THAT it works – and companies like Coinbase and BitPay need to make it VERY easy and user friendly.
Difficult? No. Costly? Absolutely. Go look up how much Western Union will charge for a funds transfer. Or how about the gigantic loss of value that has taken place in the dollar over the last 60 years. Bitcoin solves the central banking annihilation of value, too. So I definitely dispute the notion that Bitcoin solves problems that don’t exist.
Bitcoin the platform doesn’t exist without the currency. The miners that provide the backbone are only incentivized to run their hardware because of the reward of Bitcoin. If there is no value to the currency, there will be no miners and no Bitcoin network. So the thinking that it’s “all about the platform” is erroneous, because the two cannot be separated.
Agreed. The users don’t need to understand the details of how it works. They care that it works, that it’s available, and that it’s secure.
Yes, users don’t care to understand the details. They just want something that works and is trusted (and available).
But there’s also value in educating and outreaching to a segment of stakeholders/influencers/gatekeepers that need to rally behind Bitcoin. What made me a believer was pure education about it.
Yes and No. Currently, the currency and the platform are tied, but gradually the platform will get unbundled and its services will be useful with or without the currency (worst case scenario). The platform features are arguably more important than the currency itself. Even Andreas thinks so, according to the videos I watched of him.
Of course.
How about this:
-I’ll give you $20K, and you create an outreach to the influencers. Info portals and the standard stuff.
-I’ll take the same $$, get Shopify to stop with their bullshit ‘we support it’ campaign, really make it useful and understandable (not that difficult), teach 100K shops how to market around it, and make a hero of one of the articulate enthusiasts with some true consumer outreach.
I’ll take this bet!
Who will operate the backbone of the network in the absence of a reward for doing so? The miners that give the network it’s strength are not dedicating massive amounts of technology and power consumption out of altruism. If you try to decouple the currency from the platform, it’ll collapse…because there is no incentive to run the hardware. Even once all the coin is mined, miners will earn income from transaction fees (which will be a volume business). I think anyone who believes that the currency can be discarded and the platform still remain don’t understand crypto currency, nor really appreciate it’s purpose (decoupling currency from centralized government control). That is the true separation that Bitcoin/Litecoin advocates want to see.
Great article William. Grass root call to arms. I believe initially the trust and understanding comes from education of the proper spheres of influence as you also suggest. Acceptance follows. I am adjuncting a class this semester. I would like to put together a presentation for an undergraduate audience, run it by you first, launch it as the lecture topic and see how it takes hold.
I don’t think I was implying there would be a separation of currency vs. platform. I’m not sure how I got cornered into that 🙂
I think what I was saying is the platform itself is a significant contribution, in addition to the currency. But you do raise an interesting question about what happens when all 21M Bitcoins have been mined. I’m assuming that the service providers/exchanges/etc. will then run the network, no?
Sounds good. Thanks!
There is lots that we are still learning about Bitcoin. I’m a bit worried about the gatekeepers and nay-sayers. They need to be addressed head-on via lobbying, advocacy, and education.
No, the miners continue to provide the infrastructure in exchange for fee payments. Presumably, by the time there are no more coins to be mined, it will be in such widespread use that transaction fees will be a volume business and fairly lucrative.
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Just being courteous in replying to your comment.
The Western Union customer base is not the bitcoin customer base no differently than the payday loan industry is not serving folks who are otherwise keeping their money at Goldman, no?
It costs literally $0 to wire funds from a Schwab account to any bank in the world. It similarly costs $0 to transfer funds to any bank account in the system which has a routing number and a bank account number. eBill payment services are a common ingredient of any digital banking relationship.
Bitcoin values go both up and down at levels of volatility which compromise the utility of using it as a payment system.
While exchange rates have changed over time, they have not fluctuated with the volatility that bitcoin has undergone in very short periods of time.
It is fair to ask — is bitcoin a security or a modicum of exchange?
I cannot think of one thing that can be uniquely done with bitcoin that cannot currently be done within the current bank system of payments. The system of payments — not the store of value — is being improved and streamlined by apps like Dwolla.
Again, bitcoin is a solution in search of a non-existent problem.
JLM
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The problem with the third world and the absence of banking services is not going to be solved by introducing a new currency. It is going to be solved by expanding the existing bank services footprint.
JLM
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What, at the end of the day, is the basic utility of bitcoin?
Does it facilitate transactions that would otherwise go undone?
Does it increase sales?
Does it widen margins?
Does it broaden the customer base?
Why would a merchant want to conduct business in bitcoin?
What is the marginal economic benefit of bitcoin in the real world?
JLM
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More fundamentally, users need to be able to articulate what benefit is conferred upon them by using bitcoin and tying up liquidity in a security which has a volatile value.
There has to be a reason why one would be drawn to using bitcoin.
JLM
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Both you and Fred are proselytizing rather than discussing, informing or educating. You are immediately knee jerking to assume that anyone who is not drinking the kool aid is an opponent and basher.
Skeptics of bitcoin are not by necessity opponents, bashers or ignorant.
They are simply genuinely skeptical as to the utility of bitcoin. Put me in that camp and seat me next to the fire. I am prepared to be convinced.
I have not heard a single convincing argument as to the unique utility of bitcoin. In many ways it strikes me as the comparison between the tape cassette and 8 track tape players.
Both produced music. In this manner, neither originally really had a utility that was unique and superior to the other. This comparison is much like the banking system (wires, transfers, eBill payments) v bitcoin.
In the end, perhaps the smaller footprint of the cassette player overcame the larger size of the 8 track. It was not because of the quality of the music, it was because of the utility of the size of the tapes?
I continue to struggle with what problem bitcoin is really solving for the mass market.
JLM
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I hear you JLM. Your position is probably representative of many others in the “skeptics” camp, and that’s reality.
I was a skeptic too, even a month ago. I had to invest a lot of my time reading and getting educated on Bitcoin in order to be convinced, and made my own conclusions. Bitcoin isn’t totally out of the woods in terms of its success assurance, but it does have a good chance of making an impact. It is not going to replace everything, let’s be clear about that. But it has a chance to become an interesting “alternative”. You’ll be surprised at how many people are not satisfied with the current financial ecosystem, or at least parts of it.
It is unfortunate that the currency volatility is clouding the increased support Bitcoin could be getting. If you have a chance to listen to Andreas Antonopoulos and let me know what you think, I would greatly appreciate your feedback and whether your needle is moving.
I can’t remember the name of the HN-like community either. I saw it mentioned perhaps on USV.com. But here’s where I’m getting my Bitcoin news:
Let’s Talk Bitcoin – this is the real experts outlet. Andreas is one of the animators. It’s podcast style. They mention you in their last episode here: http://letstalkbitcoin.com/e72-powerful-perspectives/#.UsgU7fZQ3l0
Bitcoin Magazine – http://bitcoinmagazine.com/
CoinDesk – http://www.coindesk.com/
And I love what Nathan has done with Venture Scanner, compiling an organized list of all the Bitcoin players http://www.venturescanner.com/scans/bitcoin
You have the advantage of comparing Bitcoin to the US dollar which is a strong currency, with a pretty good system underlying it. But that’s not the case for other currencies out there.
According to Andreas, Bitcoin is better today than about 40-50 currencies in the world, out of the roughly 190 currencies worldwide. He thinks (and I agree) that Bitcoin doesn’t need to be better than the dollar (because it’s not, today). It just needs to be better than other currencies (as a starting point).
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I will definitely listen to the tape. I am headed to CO for some skiing so I will have the time to do so.
There is no doubt that the financial sector can use some grease on its processes but it is pretty damn digital and amongst Schwab, Wells Fargo, USAA there is nothing that I personally want to do that is undone.
I continue to hear silence as to what problem Bitcoin is solving.
JLM
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Let me point out 2 problems:
1. In the US/developed world, there is no native payment system that can be easily bolted on the Internet. And the transaction fees can easily eat up into your profit margins, if you’re a retailer. Chris Dixon gave the example that if your net margins are 5%, and you’re paying 2.5% for credit card clearing, that’s eating 50% of your profits.
2. In many less developed countries, their financial systems are not good, and inflation is rampant. Bitcoin is a hedge against that, and a more “stable” currency scheme, relatively speaking.
These are strong drivers and motivators for change, no?
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Perhaps I am missing something but aren’t credit cards and PayPal examples of a “bolt on payment system” which works just fine in the US and other developed countries?
Transaction fees, like every element of COGS, are simply passed along to the ultimate consumer.
Less developed countries have less spending power and less financial ability to hedge against anything. The subsistence farmer in India is not buying goods from Amazon in a meaningful way.
Even if they are, they are spending money at an instant in time. Inflation is a scourge over time not at an instant in time. If I get paid today and buy my goods tom’w, inflation doesn’t have a long enough window in time to impact me.
I may have a blind spot but I continue to see Bitcoin as a solution in search of a problem.
JLM
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Really nice post, William. I’ve marked it on my “for detailed reading” list. thanks a lot!
William nice post on the challenges of the bitcoin @ its present moment.
Mainly i believe that the moment that bitcoins will support a real trade able value it will rise on the solutions. Thus far the better ventures are simple marketing ventures (taking away those pharmacy and MLM scams; which may have the irreversible bad reputation)
This is a huge point. I remember attending a talk by Kenneth Bromberg from Bloomberg LP where he talked about why Bitcoin is not a currency. Two key points were the lack of ability to demand taxes payable in that currency and the lack of a deposit-bearing instrument of last resort. If certain economies become heavily Bitcoined (as El Salvador or Zimbabwe became Dollarized) it will do quite a bit to accelerate Bitcoin’s acceptance, regardless of its status (currency or not).
If you pass the transactions fees to the client, it makes your product less competitive, when the margins are thin. I don’t know anyone that “loves” PayPal. We put up with them.
Take the farmer in Zimbabwe. With a Bitcoin wallet, he could finance his next crop and sell it by clicking away. It empowers him. There are 3.5+ Billion people whose lives could change if they had access to money that has no borders.
I think the Bitcoin revolution will happen outside the US this time, before it totally propagates here.
Exactly. Andreas predicts it will get accepted worldwide in less developed countries much faster than in developed ones. I agree.
Yes, that’s how users see it. They want applications that mirror their real life needs, but done much more efficiently. A Bitcoin infrastructure will empower people in many ways.
Thanks Rohan. Watch Andreas video if you have time 🙂
Interesting William.
I have found myself wondering how this will get to the Zimbabwean farmer (disclosure my Wife is Zim.).
However, I realise that this is a playing field leveller. Just as rural africans first used SMS allowances on a sim card as a means for small payments – those that are desperate will find a way, because theirs is a situation where there is a de facto will – hunger!
With respect to the naysayers ( @JLM:disqus on this occasion 🙂 – It is their relative economic comfort that blinds them seeing and grasping the dire need for efficient economic exchange.
If that as a side effect brings about a major perhaps somewhat chaotic redistribution of wealth towards the (prepared to venture because nothing to lose) on this planet, It is probably a good thing.
From an entrepreneurial perspective, I would love to accept payment via bitcoin – it makes sense from a banking perspective (ours is primarily an export service), but will require B2B legitimisation before it becomes realistic.
I have heard that Bitcoin transactions via SMS are around the corner. The reality is tilting towards wider/quicker adoption in less developed countries, because the need is more prevalent.
You could accept payment via Bitcoin now. What prevents you from it? Just install a merchant software and proclaim it. It might earn you some additional marketing juice while it is still a novelty 🙂 Actually, that’s a good strategy if you are entrepreneur selling something. Instead of “buying” Bitcoins, you accept to get paid in Bitcoins, and you’re automatically part of that new economy.
http://www.noidapackersandmovers.in
cool helping resource
based on questions and replies you seem perfectly capable of answering these questions yourself. in fact reading whats been said these questions have been answered. if you really arnt convinced and are willing to be then maybe you should research these questions you have yet to ask that are really getting to you.
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The last Bitcoin is going to be mined in 2140. By then, with transactions in the millions per block because of widespread adoption, transaction fees will be considerably more profitable for miners to continue verifying the new blocks.
Bitcoin exchanges will make a lot of money.
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Found it. It’s http://coinspotting.com/, but it doesn’t seem to be getting lots of links, although it has potential.
yup, that’s it
This is a worthwhile reading article.
I’m largely interested by :
Market Challenges
Few retail locations where you can buy with Bitcoin
I hope to participate in lowering this issue in the next months / years in Europe
Thanks Clement. Vous etes en France?
Tout à fait, je suis à Paris et Lille.
Well, it does exist : Namecoin is using Bitcoin (the protocol and almost all the hashing power with merged mining) and the unit of account (Namecoin) is not really a currency. The value is less because the purpose is not directly about money. I believe that color coins (other services that are using transactions but are not about money transactions) provide more value to the whole infrastructure but the actual big trigger for all of that infrastructure / service … is money (bitcoin as a mean of payment).
Bitcoin does not need fixing. It does not need anyone in particular to understand it. It does not need regulation. It is just a protocol. Whether or not any of these things happens, bitcoin will continue to exist, and some people will use it to their advantage.
There’s an alternative center of bitcoin thinking based around the bitcoin-assets IRC channel (http://log.bitcoin-assets.com/) and the web of trust. If you haven’t spent any time lurking there, you should — it’s well worth tolerating a few trolls. The channel is populated by conspiracy theory wingnuts who accuse everyone they don’t like of being agent of the USG. But, on a technical and economic level, they are right about many things where the US tech journalism mainstream, and certainly derps such as Andreas (who is a repeat, though plausibly unintentional, promoter of bitcoin-related scams such as Neobee) and the bitcoin foundation (a veritable den of thieves), are dead wrong.
I’ve watched multi-million-dollar deals sealed on bitcoin-assets (in bitcoin of course), which have gone entirely unnoticed and unreported elsewhere. The organizers control meaningful amounts of bitcoin, and are organizing to produce more elegant, pared-down software implementations of the protocol. This is a promising ecosystem that is completely overlooked. I happen to think that this community will become the dominant force in bitcoin eventually. For now, the bitcoin-assets / WoT folks are largely irrelevant to the concerns of VC’s. Partly because they are unfundable (illegal securities offerings, bad politics, etc.). But also b/c they are very early bitcoin adopters who control such a large portion of the total tokens that they would never seek outside investors or risk losing their principal. Their entire play is to produce elegant cryptography-inspired baubles such as the “cardano,” and the erstwhile Game of Life, and hold onto their bitcoins until further notice.
I hardly have any authority to speak about bitcoin, as I barely understand it after a couple years. Nowhere near that Ken Shirrif guy who solves blocks with pen and effing paper! (http://www.righto.com/2014/09/mining-bitcoin-with-pencil-and-paper.html) I just like listening to myself talk, so thought I would chime in with my two cents here.
WM (and Fred) are in my view laying out rather weak arguments for bitcoin. We all went down the same rabbit hole and are entranced by this technology. But you are irrefutably correct in assessing the relative strengths of conventional payment networks vs. bitcoin today, and it’s hard to see how the imposition of slight delays and transaction fees on conventional funds transfers justifies the extreme risk of transacting in bitcoin for ordinary people anytime soon. This is not a solution for remittances to Africa, for crying out loud! At least, not for a long time. It’s raw financial power in the hands of individuals — use at your own risk — kind of stuff.
To take a somewhat painful look at Coinbase, which is the only VC-backed startup I trust at all in this space, and which I rely on occasionally to buy btc. I was really surprised in the recent AMA when one of the founders said that the company was not yet making a meaningful profit. I had assumed they were raking in bitcoin-denominated profits hand over fist by arbitraging exchange rates on the various dodgy bitcoin exchanges, and/or by matching buys and sells between contemporaneous Coinbase orders. But no, they seem to be engaging in conventional startup methods to grow their network at the expense of current income, paying to acquire customers. These guys know a lot more than I do, so they might be onto something. But if I were them, I would be trying to accumulate as much btc-denominated profit as possible and defer user growth until later (yes, this is heretical around these parts). Think about it, would you rather be Brian Armstrong today, or the guy who sold alpaca socks for thousands of bitcoins 4 years ago and is now rich from selling homespun socks to cypherpunks. From a purely financial perspective, mind you. The Coinbase guys are having a great ride, doing good work, and probably get laid more than the alpaca socks guy.
On a related note, Coinbase has been encouraging users to trust them with the private keys to users’ bitcoin wallets. I am guessing Coinbase does this b/c they want as little friction as possible in processing payments on the platform (basically becoming a wrapper around the users’ bitcoin wallets and the conventional payment systems). But if I were in their shoes, there is absolutely no amount of insurance in the world that would make me comfortable say 5 years from now, if bitcoin is worth 100x what it is today. Any flaws in their security would afford crackers a super high-value target. I’m sure they use deterministic wallets created on air-gapped computers, store their keys in secure locations, etc. But what if there’s a flaw in their entropy source? A physical security compromise or infiltration? There would be a strong incentive to attack them, and it’s not like a bank robbery where you can chase the guys down to recover the funds.
The reason I am optimistic about bitcoin is b/c it is a powerful tool for people who need a financial power tool. It allows software to spend and receive money. It gives programmers a financial incentive to contribute to open source projects. It can be used to establish decentralized markets in really exotic digital assets (mostly a bad idea, but occasionally not). Over time, this is gonna work its way into all the conventional finance channels, and will be the basis of everyday transactions. Until then, I largely agree with your observations (if not your predictions).
If you want to put your money where your mouth is:
http://bitbet.us/bet/786/bitcoin-to-surpass-berkshire-as-an-investment/
did someone ever come up with the bitcoin sms solution?
Not that I know yet.
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William Mougayar
Managing Partner and Chief Investment Officer, JM3 Capital
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