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.