Calculate Bitcoin Value: Modest assumptions

An experienced investor recognizes a speculative instrument or commodity. Depending upon your frame of mind and your opinion about its future, Bitcoin is either a payment instrument or a commodity. But either way, its supply is capped (not by edict, but by an indisputable mathematical formula), and so its value is a product of simple supply and demand economics.

Value: What assumptions are reasonable?

Value: What assumptions are reasonable?

I would never claim the foresight to predict the value of a bitcoin five minutes from now, let alone five years from now. Yet, I am baffled by its dollar exchange value today ($450 as I write this Wild Duck article). A reasonable and conservative calculation suggests that it should be—not $1200, as it was in late November 2013—but rather 100 times its current value.

Let’s consider one way to approach a calculation of the exchange rate necessary to support a low ball likelihood of its future utility…

Conservative Assumptions

  • Let’s say that Bitcoin never achieves the status of a currency—and that eventually, the expectation of enthusiasts that it will become its own “value store” turns out to be wishful thinking. Let’s assume that exchange rate mania was no more than the Dutch tulip-mania.
  • As a result, let us further assume that all speculative “investment” ends. Let’s just say that in 5 years, no one is interested in holding on to a bitcoin based on the expectation that its value will rise.

But, clearly, Bitcoin is very cost effective when used simply to transmit money for a purchase, loan, gift, or exchange. Even if both parties expect to convert back to regional currency after a short time, it reduces cost and leads to increased retained revenue.

Furthermore, it’s cost effectiveness is maximized as users retain their receipts in Bitcoin pending their own purchase of goods and services. In this way, they avoid any cost associated with a round trip exchange.

  • So let’s assume that consumers and businesses eventually hold 10% of their receipts in Bitcoin longer than a day. In this way, a certain amount of “coins” are required just to cover circulation.

Now, for more of our facts & assumptions…

  • Today, 85% of transactions are US dollar denominated.
  • Each day, the world needs about $3 trillion dollars to float current transactions. Additionally, the currency markets require another 3.98 trillion dollars for banks, exchanges, escrows, reserves and other activities driven by currency “markets”.
  • Let’s further assume that these 2010 figures never grow. Despite China’s massive growth and significant recover in the west after the 2010 recession, we will effectively freeze the world economy at 2010 levels.

There is no reliable data on the turnover rate of purchase and settlements, cash reserves—or how long a dollar typically stays in an individual’s pocket.

  • But if we assume that each dollar is turned over twice each day, we still require more than $3 trillion to grease the world’s daily needs. And that’s just US dollars.

Now, let’s make some reasonably conservative assumptions.

• Let’s assume that in 5 years, the faction of global transactions conducted online amounts to about 5% by value. (I believe that it is already far past this, but I am striving to be very conservative).

• Let’s further assume that 5% of these transactions use a new age cryptocurrency built on Satoshi’s model.

• My boldest assumption is that Bitcoin will be the market leader in virtual currencies. If any become viable, Bitcoin will be involved in 90% of digital currency transactions. That’s because it has already attained critical mass as evidenced by media frenzy, attempts at regulatory action, and the comparative market caps for various “coins”.

For these reasons—and the mechanisms of a two-sided market effect, it is unlikely that two parties will find it quick, simple and inexpensive to designate an alternate cryptocurrency for their transaction.

Finally, here is a fact rather than an assumption.

• There are currently 12.6 Bitcoins in circulation (all that have been mined to date, less the few that have been lost). But the total number of Bitcoins that can ever be available is 21 million. That’s it. There will never be inflation. No one can mint additional coins to cover national debts, public works bonds, or war reparations. It simply cannot be done. Bitcoin is product of math and not of monetary policy.

O.K. So, where does this leave us? It leaves us with a fairly straightforward calculation. Let me set up the calculation this way:

If there are eventually 21 million “units” divided amongst a daily liquidity requirement for $6 trillion dollars. And, if we divide the liquidity assumption by our very conservative assumptions, how thin must you slice the unit to buy a house or a hamburger? Or, more specifically, what fraction of a bitcoin will be equivalent to $1 of purchasing power?

If I were to complete the calculation, my Blog subscribers would think that I have lost my senses! The resulting value of Bitcoin dwarfs any speculative assessment that I have seen—even those that don’t restrict their analysis to conservative assumptions. But just because I am copping out of the final numbers crunch, don’t let it stop you! Play with the assumptions and the numbers…Just don’t play with the facts!

Now, it’s your turn to speak up. Where do you think that Bitcoin will be in 5 years?

— Worthless?
— Still around $450/BTC?
— Or very much different?

Others perspectives on the value of a bitcoin:

Disclosure:  AWildDuck and its editors are charter members of the Cryptocurrency Standards Association.
CRYPSA has no currency investments, and no stake in the exchange rate of any digital currency

Malaysia 370: Unexplored possibility

Malasia Air flight 370With nearly a month since the disappearance of Malaysia Air flight 370 with 239 souls on board, the pundits have put forth many theories to explain the mystery of the missing jumbo jet. They explore possibilities such as mechanical failure, terrorist passengers, a mentally unbalanced pilot or copilot, a fire or electrical problem caused by batteries or something stored in the cargo bayand the leading early theory: a plot to steal the plane.

But I have not seen another explanation—one that, to me, seems entirely more likely…

Malasia Air pilot & copilot

Zaharie Ahmad Shah,      Fariq Abdul Hamid

A reasonable explanation for the disappearance of this plane is the accidental lockout of authorized individuals from the cockpit. In the past decade, the cockpits of large planes have been turned into fortresses. The cockpit door has been fortified to withstand attack by axe or explosive. To enter the flight deck, a layered security protocol requires a passcode from the outside in combination with authorization from the inside or 3rd party cooperation. If the flight crew rushed to the doorway due to an innocent event (say the injury of an attendant who was just entering or someone falling as they stood up), or if the crewman remaining in the cockpit was incapacitated by accident or illness, it seems entirely possible that the plane could fly on autopilot while the crew struggles in vain to re-enter the flight deck.

No one at the controls

No one at the controls

Cabin-Ground Communication?

I wonder if Boeing or a jumbo jet pilot can tell us this: If all individuals are locked out of a cockpit as a plane flies on, is there any way to establish voice contact with the flight controllers in Malaysia, Vietnam, or even via satellite? I can imagine that a call might be possible from the cabin phone or perhaps there are Bluetooth-like devices in the galley. But with the recent fortress-like upgrades, I wonder if designers had sufficient foresight to ensure that every plane shipped in any configuration was equipped with cabin-ground capability—and that the all devices were charged and the crew regularly tested on their location and use.

New Topic: Black Box Pinger

While we’re discussing the disappearance of Malaysia Air flight 370, here is something else that I could never figure out.The media informs us that the best batteries we can achieve in a small, indestructible container last for only 30 days. (And that assumes that they are fresh, were recently charged, and stored at the proper temperature!). But this raises a very obvious question (obvious to Wild Ducks, that is)…

“Pings” broadcast from gray cylinder (left)

“Pings” broadcast from gray cylinder (left)

Rather than using a limited reserve to continuously ping for help, why not listen instead? After all, the ping can only penetrate ocean water for a a mile or two. It would consumes far less power to wait in “standby” mode until the unit is interrogated by a roaming device seeking response. In fact, if the pinger was primarily in a passive state until polled, I bet that the designers could budget for a much bigger energy burst on the ping. After all, when sensing an interrogation, someone is getting within range and we saved all the energy we would have spent on thousands of useless pings during past months!

Ellery Davies is a partner at CRYPSA, the Cryptocurrency Standards Association.
He is a frequent contributor to Yahoo News, Forbes and The Wall Street Journal.

CRYPSA foreshadows 2nd wave of Bitcoin adoption

Who Uses Bitcoin Today?

Bitcoin-08Early Bitcoin adoption was driven by by Geeks, anarchists, Libertarians, criminals and speculators. After all, cryptocurrency fascinates bleeding edge techies, anyone suspicious of government, people with something to hide, or those—like me—who simply value privacy.

But even with the indisputable fact that Bitcoin dramatically reduces transaction costs, it will fail to gain more than 2% traction (and this share, only for E-commerce), until certain things happen.

Bitcoin Benefits Mainstream Use (even if it is not a currency)

Even if you don’t accept that Bitcoin has inherent value, like currency backed by gold or a government, it offers as a medium of exchange are indisputable:

  • Inexpensive to pay, receive or transmit
  • Resistant to regulation and intervention because transactions are private and direct
  • Impervious to inflation because the supply is capped
  • Like cash, individual transactions and wealth are quasi-anonymous
  • Unlike cash, it is resistant to forgery
  • Unlike cash, it can be encrypted and backed up with ease
  • Unlike national currency, it cannot be manipulated for political purposes
  • Unlike national currency, redistribution for social purposes requires individual consent of users

Yet, despite the theoretical safety of cryptocurrency, recent, spectacular events suggest that Bitcoin is anything but safe. The biggest exchange has failed, someone loses millions on a discarded hard drive. An investment adviser fleeces his minions in a Bitcoin Ponzi scam. A well known media mogul is hacked. He loses everything.

Are the news sources faulty? Not really. Mechanisms needed to make Bitcoin safe for the average consumer—and especially for the businesses that they trust—are lacking. But even the relative immaturity of tools and techniques is not what is holding back adoption.

What Leads to Mainstream Adoption?

Bitcoin will wither on the vine—or it will gain the legitimization needed for mainstream adoption. What will it take to bring it past early adopters and into the realm of commerce?

—Regulation?  —A deposit insurance fund?  —Crossing an adoption threshold?
—Or do we just need to wait for a reduction in exchange-rate volatility?

Wild Ducks do not believe that these are limiting factors. The obstacle to mainstream adoption is a lack of commercial protocols for safety, security and transparency. Without well-defined standards & practices for those desiring transparency and recourse, Bitcoin will remain the province of early adopters. It must be perceived as safe and practical before it will attract the masses.

Standards and Practices

Early adopters may value the decentralized, model and the privacy afforded by virtual currency transactions. But businesses and consumers need optional user identification, transparency, performance guarantees and recourse (refund, rescission and arbitration). After all, would you use a new form of currency if you could not get a receipt? How could you demonstrate that an insurance policy was paid on time, that you are due a refund for a cancelled flight, that you were overcharged for groceries, or as a cost basis for equity?

crypsa-logo-pr02_lRegulations won’t solve this. But voluntary standards and practices will. Especially, if transactions and transparency-compliance can be tested in real time. That’s why CRYPSA (Cryptocurrency Standards Association) has Gavin’s attention and it is why banks are working with CRYPSA as they quietly prepare to offer Bitcoin services.* They want processes in place that broadcast trust to prospective clients. They want to offer provable security, safety, reserves and mechanisms of recourse. They want standardized methods of bookkeeping & audit.

Mainstream Adoption; A Series of Events

As individuals and businesses begin to trust Bitcoin, adoption will pick up steam. This will be evident as a domino-chain of events. Each event will lead to the next…

  • A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.
  • Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.
  • Sellers begin pricing merchandise in Bitcoin rather than national currency—because they are less anxious to exchange out of BTC immediately after each sale.

When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenal tipping point will follow…

  • If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.
  • Adoption-CoinIf goods and services are priced in BTC, then the public will begin to perceive exchange rate volatility as a changing dollar rather than a changing bitcoin.
  • If buyers also begin to save their BTC (i.e. they do not worry about immediately moving it back to national currency), it means that Bitcoin is being perceived as a stored value—rather than just an exchange chit. This may seem a subtle footnote, but the ramifications are earth shaking. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified currency that we can all trust.

Summary

Bitcoin won’t reach the next plateau because of regulation or intervention. Adoption will follow trust. And trust will come when the assurances and guarantees that we expect from a credit card or bank-mitigated transaction become widely available. With tools and a reputable standards organization validating standards & practices, the use of virtual currency will feel right. It will be as safe as days of yore, when we trusted printed slips of paper and a central authority. Even though Bitcoin resists both central control and authority, it can be made safe for business!

Incidentally, CRYPSA launches in April. It has already garnished attention and goodwill from banks, state regulators, and several Bitcoin pioneers. But don’t let the regulators throw you. The organization is all about making Bitcoin safe for Business—but only for transactions in which both parties agree to a transparent and secure environment.

Disclosure: AWildDuck is a charter CRYPSA member.

Newsweek relaunches to finger Satoshi

Last year, Newsweek magazine retired the print edition. As with most publishers, it is very difficult to fight the Internet. Not only have eyeballs moved to tablets and smartphones, but web sites are quicker to publish. Even if the audience exists, there are no dollars to pay reporters, editors and layout staff. That’s because advertisers have shifted their budgets to online venues such as the wildly profitable Google Adwords.

Unmasked? Not so fast!

Newsweek-coverBut today, Newsweek made the decision to relaunch their print edition with a jaw-dropping exclusive. Investigative reporter Leah McGrath Goodman and forensic analyst, Sharon Sergeant, claim that they have identified the mythical creator of Bitcoin. Even more peculiar, Goodman says that he is a 64 year old Californian whose real name has always been Satoshi Nakomoto. (Whaaht?!)

According to Newsweek this is a coup of epic proportion. But Wild Ducks reserve judgement for a future update… Newsweek has been a great American institution for almost 100 years. But I am confident that this story is just beginning to unfold and the facts as presented bu Ms. Goodman have an odd finish.

Satoshi Nakamoto-01s

March 7 update:  I did not create Bitcoin

In an exclusive, two-hour interview with Associated Press, a very private programmer, Dorian Prentice Satoshi Nakamoto, 64, denied he had anything to do with Bitcoin. In fact, he claims that he never heard of Bitcoin prior to the Newsweek investigation.. For Wild Ducks, The jury is out, but this is certainly one very interesting interview!

Fascinating Facts:

  • Mr. Nakamoto claims that he had never heard of Bitcoin until his son was contacted by reporters three weeks ago.
  • Researching the cover story, Newsweek writer, Leah McGrath Goodman, had an exchange with Mr. Nakamoto on his doorstep, in front of two police officers. When questioned about Bitcoin involvement, she claims that Nakamoto said “I am no longer involved in that and I cannot discuss it.”  But, in a two hour interview with The Associated Press, Nakamoto states that he was misunderstood—that the words “no longer involved” referred to a past career in programming and not to Bitcoin.
  • Today, The Wall Street Journal reports that the email account and credentials of the original Satoshi was revived to issue a single statement. The real Bitcoin creator also denies being the Californian fingered by Newsweek.

In the 24 hours since the story broke, you might think that a community of crypto currency enthusiasts is combing the web for every salacious detail of the possible unveiling. But, you would be wrong!

Most Bitcoin enthusiasts (including the editor of AWildDuck) are also privacy pundits. We have no problem if the identity of the elusive Satoshi Nakamoto remains a mystery. As an active member of several Bitcoin forums, I sense that most participants don’t want this man to be harassed—and don’t really care if he is or is not the brains behind Bitcoin.

Moreover, the person being sought did not commit a crime and clearly wants to remain anonymous. Therefore, serious attempts to uncover his identity using methods of forensics, pattern analysis or even chasing down every clue amount to invasion of privacy.

From the Wild Duck Archives…

  • Ted Nelson coined the term ‘Hypertext’. He suspects that Shinichi Mochizuki is the mysterious Satoshi Nakamoto. Check out the last section of our April 2013 article.
  • Find all of our Bitcoin posts here.

Trust a Bitcoin Exchange without Regulation

Yesterday, after the spectacular failure and bankruptcy filing of Mt. Gox, the world’s largest Bitcoin exchange, Peter Finn, an IBM architect, launched a survey within a LinkedIN discussion group. The single question and multiple choice options were:

“In Light of MTGOX what level of transparency should there be for Bitcoin Exchanges?”

1. None. Exchanges Can do as they please
2. All Public Keys Disclosed and Signed
3. Show Public Keys, Source Code, Processes
4. Fully Regulated, Monitored, Audited

One day after it was published, respondents were decidedly negative on the option #1 (no regulation). They responded like this: 1–14%, 2–28%, 3–28%, 4–28%. I am among the 14%: No regulation. But only because Peter failed to cover all the bases. There is a far better option than regulation. But I am getting ahead of myself…

Regulation in a Decentralized, P2P
market, with Open Source Tools 

Suggesting that Bitcoin be “fully regulated” is like demanding that feral cats be licensed to procreate. Perhaps the point can be better illustrated by a metaphor closer to home: Perhaps we should regulate the use of file encryption or bit torrent clients. After all, they can both be used for circumventing copyright law or transmitting illegal content.

Governments are inevitably weakened by legislating against what cannot be regulated. The US has already tried to regulate encryption (PGP/Zimermann and Clipper chip) and they tried to legislate against the use of torrents (Actually, it was a prelude to torrents. Who remembers Napster?)

You can enact laws and regulations, but when you ignore motives, access and facts in evidence, you promote bureaucracy with a head-in-the-sand morality. Feral cats don’t read edicts. Their compulsion to reproduce is strong and they possess the tools they need to procreate. The same is true for bit torrent, encryption and a fully-distributed, low-cost, p2p payment mechanism that is adding users like a wild fire.

Considered in another light, Bitcoin was created to circumvent—or at least—transcend regulation. For many legitimate users, the whole point of a distributed, p2p network built upon open source tools is to unfetter users and disentangle government.

So the real question is not whether we should engage in useless legislation that ignores the facts on the ground. A better question is “How can we make the Wild West a bit safer?” I understand the need for public trust. ! But trust comes from transparency, accountability and outside audits. It doesn’t come from government regulation. Peter alluded to this in the very last sentence the text accompanying his sruvey. He said:

Certified-01

“Will users decide through consensus that
exchange XYZ chooses to fully disclose?”

Bingo! Create standards and practices—especially for security and transparency. Then, make it simple for anyone choosing an exchange or entering into a transaction to determine if the organization complies with industry best practice. Finally, offer a modest level of consortium insurance (to the user, or at least compliant exchanges), so that public trust can be tied to something tangible.

On Feb 25, one day after championing a joint statement from the few credible Bitcoin exchanges, Coinbase took a big step toward this goal when then invited a research analyst from a competitor to audit their internal security practices and randomly compare a customer transaction log to the public blockchain. The report includes an explanation of the test conditions and the results.

Laws are meaningless in a market that cannot be regulated. But industry standards, audits and certification can certainly step up to the task. They can build trust, confidence and stability. Just as importantly, they won’t interfere with the fraction of users who demand personal, private, p2p transactions without auditing or oversight. After all, we must never forget that these individuals started the revolution from which we will all benefit… even the “legitimate” commercial transactions that require transparency, security and an audit trail.

So, let’s revisit Peter Finn’s survey: What level of regulation should be mandated for Bitcoin exchanges?…

I propose Option #5: None. Exchanges can do as they please. But establish an easily verified, independent certification of standards & practices that can be tested at the URL throughout user interaction. Users can avoid the tool, add the tool, or ignore its warning. The certification (and a gut-simple way to see it & test it), empowers the user instead of the government. It also avoids entangling a new technology with unimaginable potential in red tape.

Incidentally, a group of individuals from this discussion group is working toward this goal right now. Although they have barely completed introductions, the Virtual Currency Collaborative Cryptocurrency Standards Association [CRYPSA] has hammered out a charter that will lead to a set of voluntary standards and practices to facilitate open, transparent, safe and auditable transactions within a community that often takes pride in their inherent freedom from regulation. Taming the Wild West will not be too difficult. And it won’t even be necessary to restrict gunslingers from walking into the saloon at high noon.

Bitcoin Adoption: Series of reactions

What is Bitcoin?

Bitcoin-05Sure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.

But what is Bitcoin, really? To what class of instruments does it belong?

  • The most ardent detractors see it as a sham: A pyramid scheme with absolutely no durable value. A house of cards waiting to tumble. This is a position of my close friend, JD, a former IRS auditor and the first to comment on this post below.
  • Many people recognize that it can be a useful transaction medium—similar to a prepaid gift card, but with a few added kicks: Decentralized, low cost and private.
  • Or is it an equity asset, traded by a community of speculative investors, and subject to bubble psychology? If so, do the wild swings in its exchange rate diminish its potential to be used as a payment mechanism?
  • Does Bitcoin have the potential to be a full-fledged currency with a “real value” that floats based on supply and demand? Can something that lacks intrinsic value or the backing of a bank or government replace national currency?

Regardless of your opinion about Bitcoin, it does one thing that few pundits dispute: Although the exchange value fluctuates, it reduces transaction costs to nearly zero. This characteristic, alone, is a dramatic breakthrough. It was achieved by virtue of its designer overcoming the “double-spend problem”.

Peering Into the Future?

Removing friction is certainly what it is all about. As a transaction medium, Bitcoin achieves this, but so does any debit instrument, or any account in which a buyer has retained house “credit”.

Bitcoin_pullback-sCurrently there is a high bar to get money exchanged into and out of Bitcoin. It’s a mess: costly, time consuming and a big hassle. Seriously! Have you tried using an exchange? Even the most trusted one (Coinbase of San Francisco) makes it incredibly difficult to get money in and out of BTC. Fortunately, this situation is gradually improving.

Where Bitcoin really shines (or more accurately, when it will shine), occurs at the time when more vendors choose to leave revenues in BTC, pending their own purchases from suppliers, shareholder payouts, or simply as retained savings.

When this happens, all sorts of good things will follow…

  • A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.
  • Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.
  • Sellers begin pricing merchandise in Bitcoin rather than legacy units (i.e. national currencies)—because they are less anxious to exchange out of BTC immediately after each sale.

When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenal tipping point will follow…

  • If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.
  • If goods and services are priced in BTC, then the public will begin to perceive exchange rate volitility as a changing dollar rather than a changing bitcoin.
  • If buyers also begin to save their BTC (i.e. they do not worry about immediately moving it back to national currency), it means that Bitcoin is being perceived as a stored value—not just an exchange chit. That may seem to be a subtle footnote, but the ramifications are earth shaking. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified and currency that we can all trust.

People, everywhere, will one day place their trust in a far more robust and trustworthy mechanism than paper promissory notes printed by regional governments. A brilliantly crafted mechanism that is fully distributed, p2p, transaction verified (yet private), has a capped supply and is secure.

What Then?

O.K. So we believe that Bitcoin is the future of money and not just a replacement for credit cards. But what does this really mean? Can the series of cause-and-effect be extrapolated beyond widespread user adoption? Absolutely! …

Adoption of Bitcoin as a stored value (that means as a currency) leads to the gradual realization among governments that Bitcoin is not a threat to sovereignty nor even to tax policy. Instead it presents unbounded opportunity: The opportunity to stabilize markets, eliminate inflation, reduce costs and restore public trust. In short, Bitcoin will ultimately level the playing field, revive entire economies, transform the role of government, and save consumers and businesses billions of dollars each year.

Did I mention that Bitcoin is the future of commerce and a very possible successor to legacy currencies? Aristotle must be smiling.

Lease rooms in the US Treasury to pay off some of the debt brought about by inflation

Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation

Is Bitcoin subversive?

The debate on whether Bitcoin presents a credible opportunity to become a world currency has two components…

You could add a dozen other discussion points, such as “Is the math reliable?”, “Will it be outlawed by government X or Y?” or “How can a virtual fiat that lacks intrinsic value ever be a value store?” But for this discussion, we flush out the two remaining questions of viability that keep insiders awake at night:

• Can it be adopted as a transaction medium, like a gift card or credit card?
• Can it be accepted as a value “in and of itself”, based simply on supply & demand?

Most early adopters and even some governments acknowledge that a historic time may be upon us. It certainly appears that the time may be ripe for a gradual shift to secure, electronic currencies, whether by design or by a groundswell of adoption.

LinkedIN icon (3D)-sI am a frequent contributor to a LinkedIN discussion group that is a place of intense debate. Participants are cryptocurrency enthusiasts, and so the debate doesn’t address the viability of Bitcoin as a valid mechanism. We all believe that adoption is likely—at least as a transaction medium. Rather, our debate is focused on adoption mechanisms, geopolitical fallout and intrinsic value. Among issues that we address are:

1. Must a cryptocurrency be tied to a government backed fiat currency? — Or can it float based only on trust, supply & demand, and a supply that is capped but divisible?

Most in our group believe that it can float and be a value store on its own merits.

2. Does a cryptocurrency need a perpetual supply-growth mechanism to be viable? — Or can it serve commerce and act as its own stored value with fixed supply cap?

Bitcoin has a fixed, ultimate supply cap of 21M units. Some analysts and pundits are concerned that the supply cap will cause large scale deflation as it is adopted, even if used for only a fraction of Internet commerce. They believe that the deflationary mechanism is a liability. Most people in this group believe it is an asset—maybe, even, the whole point.

3. Could government regulation and disparate national rules eventually damn the whole virtual currency experiment?

Most people in this group believe that certain grassroots movements cannot be easily squashed. Moreover, even strong supporters of government believe that—in the long term—Bitcoin presents more of an opportunity than a threat. There really is no maxim that says national governments must be in charge of a treasury and tinker with value, growth and incentives through a national currency. Bridges can be built and wealth can be redistributed through tax policy and by other means. In the age of global commerce and the Internet, we are beginning to recognize that the trust upon which a currency relies can be based on something that is less political and more involatile than regional authorities.

4. Some wonder if a currency can survive without an underlying asset like gold, or the requirement that taxes be paid in the new form. But the US dollar is not tied to a specific asset and virtual currencies do not need to be the mechanism/unit for paying taxes. For those using any currency with a supply cap and growing adoption, dollar conversion will always get cheaper and cheaper.

Does Bitcoin facilitate crime?

Bitcoin-08One member of our group points to the black eye that Bitcoin acquires after news events such as the take down of Silk Road (a market for criminal activity), mismanagement at Mt. Gox, government intervention or high profile hacking. They wonder if an early association with greed, graft, drugs or p○rn○graphy is an inevitable step (or a necessary step?) toward wider market adoption.

That question is not only insightful—it is brilliant! On the surface, Bitcoin has no more role in facilitating crime than cash transactions. But the question is valid, because large amounts of cash are difficult to slip into and out of monetary systems, and it cannot easily be transmitted with impunity.

Vice and markets with prurient appeal often drive adoption of new technology. This connection is a widely recognized axiom by economists. In fact, it suggests a good reason as to why non-criminals should not be alarmed. Even though they represent the underbelly of a paradigm shift, Silk Road and other news making scoundrels or events are playing a role in the early diffusion of a fascinating technology. Law enforcement can address these things as they arise. But, they no more spell long-term doom than p○rn did for the VCR.

This same discussion participant opined that wild gyrations in the Bitcoin exchange rate (the relationship to national currencies) would retard adoption for quite some time.

Bitcoin Volatility: A Wild Duck opinion

The wild gyrations of Bitcoin are a byproduct of (any) rapidly growing and somewhat misunderstood technology. These will iron out. On this point, I am certain. Eventually, as a subset of Bitcoin users store the coins rather than convert them with each transaction, these gyrations will be perceived to be instability in the Dollar, Euro or Yuan and not with Bitcoin. That is, for now, vendors are setting a price in legacy currency (Dollars) and offering to Bitcoin buyers at the current exchange rate. Then, they are converting back out of Bitcoin. But a gradually growing body of vendors will hold their BTC either for future transactions, or because they trust and value it as a holding. This simple fact will gradually iron out the wild swings. As adoption grows; as supply and demand find a reasonable meeting point; and as individuals retain their holdings, the volatility will abate.

The Virtual Currency Collaborative

Incidentally, a newly formed collaborative was formed earlier this week by members of the LinkedIN group, Bitcoin P2P Digital Currency (same thread). It is already playing a role in the long term viability of Bitcoin. These entrepreneurs are defining mechanisms and policies that will ensure that Bitcoin is just as friendly to business and commerce as it seems to be for parties to anonymous or unreported transactions. The Virtual Currency Collaborative (working title—the developer’s site is still under wraps), is the working group that will specify secure, trusted protocols and mechanisms for legitimate businesses everywhere. These businesses often require user identification, escrow, recourse and the support of audits & forensics.