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 volatility as a changing dollar rather than a changing bitcoin.
  • Eventually, vendors will begin spending the BTC that they acquire in commerce (or paying staff in BTC), rather than converting quickly back to national currency. More than anything else, this will transform Bitcoin into a stored value unto itself, and not just an exchange chit. This may seem to be a subtle footnote to adoption, but the ramifications are great. 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

3 thoughts on “Bitcoin Adoption: Series of reactions

  1. JD is a close friend and former IRS auditor. He is also
    a Bitcoin skeptic. He doesn't just doubt that Bitcoin
    could gain acceptance as a low cost transaction
    mechanism, he feels that Bitcoin will be worthless
    when it crashes back to earth.

    Upon being immortalized in bullet #1, above, JD replied
    with the following response …

    ______________________________

    Here’s what I think is going to happen with Bitcoin:

    MtGox will eventually be revealed as precisely the sort of scam I was warning about from the get go. In other words there was no hacking. It was in fact embezzlement by the founder and his accomplishes since the outset. The plan was to get away with it due to the anonymity of ownership of any given coin or fraction thereof. There’s no telling how many other such scams are going on and going undetected due to the Ponzi-like aspect of these embezzlement schemes.

    Meanwhile, the lobbying power of the big credit card companies will beat it’s utility down to the point that it’s little if any more attractive than Paypal. Please bear in mind that the reason credit cards cost so much is in large part due to the fact that the card companies absorb the liability for bogus transactions and not the card holder. This insurance is passed along to the merchants via high fees and ultimately to the consumer via higher prices for goods and services. Until Bitcoin is able to compete with the liability protection afforded consumers for fraudulent transactions it will never be anything more than a novelty or there will be a cost of insurance tacked on to Bitcoin transactions in much the same was as credit cards have been for decades.

    Then there is the illegal trade and money laundering aspects that will be eventually be addressed by the DHS and the Treasury.

    So if anything the ultimate benefit of the Crypto-currency phenomenon may be to pressure credit card companies and large merchants to better get their acts together so that losses from the enormous hacking of customer data that hit Target stores and others is prevented in the future due to the costs ultimately being born by the consumers. If in fact the bitcoin themselves maintain their integrity while showing weaknesses in the fight against hacking are the biggest culprit then perhaps a new era of data security may be ushered in as the most significant result.

    My 2p Worth
    Jonathan

  2. Mr. Ellery, regarding cryptos you always discuss Bitcoin. At some point, shouldn’t you also be comparing to alternatives out there like Ripple, that has the backing of Google and being looked at by big banks?

    • Hi Jeff. Welcome to Wild Duck!

      In fact, I wrote about Ripple and its over-achieving sister, Stellar, in early 2015. They were still novel and fresh. I acknowledged that Ripple was making waves (a pun, but you get the point!).

      Today, I believe that Etherium has deservedly pulled focus away from other alt-coins.

      But, Wild Duck has since made it a mission to focus on Bitcoin. It has, by far, the broadest recognition and largest market cap of any cryptocurrency; It is emblematic of the shift to permissionless, blockchain-based ledgers; and it has achieved a viable two sided market network. Despite some kinks in the road to transaction growth and governance, it is inherently flexible, adaptable and clearly ubiquitous.

      For now, at least, I am sticking with Bitcoin as a vehicle to evangelize and explain the move to a math-based system of trust and value exchange.

Ellery reads all feedback. 1st comment delayed for moderation