Thursday, October 11

Adventures in Alternative Currencies: Bitcoin Goes Mainstream

Continuing on with our series covering adventures in alternative currencies, many were quick to proclaim the death of Bitcoin, particularly following the June 2011 bursting of the Bitcoin bubble. For example, here is some doomsaying from the normally reliable Tyler Cowen; and for a pessimistic economic historian's take see here.

But following an undeniably rocky road the little digital currency that could appears to be having the last laugh. A good read can be found here on how Bitcoin is beginning to go mainstream.

At this stage the obvious first question is why has the decentralized, 100% digital currency proven so resilient? Scientific American provides one good answer:
When they (a merchant) finalize a deal in Bitcoin, they do so knowing that the transaction can never be reversed. The Bitcoin network doesn't edit its ledger. As such, merchants no longer have to worry whether they are charging a stolen credit card. 
"'The fraud mitigation is big for Internet merchants, because they are all handling card-not-present transactions. And the business has to eat the loss if the payment is reversed later on,"' Gallippi says. "'Using Bitcoin, a business can receive a payment from any country on the planet, instantly, with no risk of fraud."'
In addition to helping cut down on fraud costs for merchants, Bitcoin is chic. Using Bitcoins to transact business is a mark of digital savvy for both tecno hipsters and the merchants who cater to them.

What the future ultimately holds for Bitcoin is less interesting to me than a more general issue, which is the apparent growing trend in alternative currencies coming into existence.

We have already seen some Congressional saber rattling about Bitcoin prior to its flash crash. Will governments continue to tolerate it, Bristol's new pound note, etc., while they remain small? Or will we see a more formal move in the not too distant future to stamp out these fledgling alternatives to government fiat money? As the article points out, government's might have a hard time shutting down Bitcoin:
But perhaps most consequential for the future of Bitcoin—in order to shut down a peer-to-peer currency exchange, one would have to terminate every node on the network. The few lawyers who have studied Bitcoin all agree that the currency inhabits a legal gray area. No one really knows how governments would react if it gains traction, but many consider the exchanges to be the easiest target for people who want to regulate Bitcoin. Decentralizing the exchanges would make that job nearly impossible. Bitcoin developers are quickly proving that they can design decentralized alternatives to even the most sophisticated financial institutions. 


  1. Mainstream?

    Square just finished year two since launch and is now seeing transactions at the rate of $8 billion a year. And they are just approaching mainstream.

    But the difference between Bicoin and Square is there is no Jack behind Bitcoin. There is no board with the CEO of Starbucks on it (nor Mary Meeker, Vinod Khosla, Larry Summers, etc.).

    Those multi+ millionaires aren't as interested in a payment system in which fees are not collected (there are a trivial amount of fees, but they aren't collected by the Bitcoin project, but by independent Bicoin miners).

    Those millionaires might give philanthropically but their aim at Square is to become convenient enought to attract the merchant and then skim the fees. That's not a bad thing and the world is better when merchants pay less fees, but they aren't really doing anything particularly novel.

    But the general concept of Square, transferring value person-to-person, is where Bitcoin is different. As a merchant using Square, you can get with with a chargeback weeks or months after the sale completed. Bitcoin transactions, once confirmed, are non-reversible. For some merchants, losses to chargeback fraud are huge.

    But still those inconveniences are minimal compared to the big picture. Square keeps the merchant's money and customer's money in the dollar. When your rent goes up or gas goes over $4 that isn't because those thing are more valueable but instead because the dollar is losing its value. The government says that rate is under 2%. Your eyes are seeing much high price increases.

    Bitcoins float against the dollar. Your money is not being devalued by some out of control government. Be like the chess player. Look down the road a little. Do you want to be 100% dependent on debt-based money whose value is decreasing, or would you prefer sound money?

  2. Regarding the forbes quote...Bitcoins don't solve the problem of fraud. It is merely shifted to the customer. The customer pays, but who knows whether the merchant will send the product? To solve that problem you'd still need someone in the middle who makes sure that both parts of the transaction fulfil their obligations.

    Also, it's nowhere as stable as other leading currencies (as many deficiencies as they may have). It's been trading between 5US$ and 13US$ within the past year. Doing business in a currency that fluctuates that wildly is a nightmare...

    But I can understand that people are looking for alternative places to put their money...just like the rest of the globe.

    1. Nobody who gave their money to Jon Corzine / MF Global was execting to be defrauded. They were given a false sense of security.

      Maybe it is time to shift responsibility to the consumer, to demand that those holding customer funds switch to using triple-entry accounting for the transparency it offers.

    2. Yes, Bitcoin shifts risk from sellers to buyers. More specifically, to whomever sends first. There exist means of risk mitigation such as escrow services and reputation-based systems. However, corresponding mechanisms and practices are yet to be widely adopted. A problem here may be that many people are not used to such models and are not ready for the change. Bitcoin gives users power over their money, and with power comes responsibility. Many of those who haven't learned to be responsible, would have to learn it the hard way.

      Here is a quote from a comment to an article about Bitcoin: "All that I hope is that when the whole thing comes crashing down you don't go running to the government with your hand out crying that someone should have protected you from yourself." Even if it may sound ridiculous, it does carry a bit of sense regarding some people's behavior.

  3. Just give it will stabilize.

  4. Escrow is perfectly possible in Bitcoin (as a higher layer.)

    See Silk Road, for example.