The Critical Path #106: Can Bitcoin Be Money?

This the the first of hopefully a series of talks on Bitcoin. The hope is to assess it as a disruption but first we need to understand the differences between a store of wealth, a currency and money. Then we need to understand what jobs each of these is hired to do and whether Bitcoin is better or worse than the incumbents and whether it has “headroom” to get better in those cases where it’s not good enough.

via 5by5 | The Critical Path #106: Can Bitcoin Be Money?.

  • razorgoto

    Am I crazy? Or, was there a hidden message in the audio around 53m:46s?

    • Horace Dediu

      Only if my son’s coming by to ask when I’ll be done is a hidden message.

    • neutrino23

      Yeah, that was creepy. I thought my iPad was haunted.

  • Grainsofbitcoin

    t seems your thinking has evolved since your response to my comment on ‘seeing what’s next:

    “The only job a currency needs to do is to be liquid.”

    I think you see now that the error in your thinking was that Bitcoin is a currency only. It’s like saying “the only job for a phone to of is make calls”. In the most literal sense that may be true but it ignores that the phone hardware can become a computer and assume many other jobs. The phone ‘device’ can become a computing device with a ‘phone’ app.

    That is what I mean when I said it competes asymmetrically. There is nothing quite like Bitcoin. It is this mutant commodity/payment network/currency trifecta. True, as a currency, it is currently ineffective, but as you point out, it can do other jobs, like the job of Gold, and arguably better. You touch briefly on global remittance. Again, if you can work around exchange volatility, you can build an affordable Western Union. Same with wire transfers. This is just scratching the surface though.

    Since bitcoin is a ledger with a scripting language, and tokens can be tagged and tracked through the ledger, I would argue that nearly everything in financial services could be programmatically layered on top of bitcoin. Any financial job can be done on the block chain.

  • Walt French

    Thanks for a great discussion on Bitcoin. I’ve followed several intriguing lines of thinking, including a paper from some Federal Reserve economists on this new currency, but especially as you emphasized the Jobs To Be Done and “Moonshot” considerations, you stepped ahead of the pack.

    I’d like to add four interrelated perspectives on trust (the last of which I’ve not seen called out explicitly).

    Trust, the first point: The different jobs to be done by money reflect an inherent tension, if not exactly opposition, between conservation of value and transactions (business, i.e., “growth”). As I’ve chosen to help clients both preserve and grow their personal or non-profit foundation/endowment wealth, I respect both. But it seems a LOT of the Bitcoin revolution comes from a subset of conservatives, libertarians, who are actively trying to privatize government functions that have run “too” democratic. (Think of Mitt Romney’s “47%” and the stereotypical beliefs about them.) Yesterday was the 100th anniversary of the Federal Reserve, yet many of the Bitcoin advocates would strip the government of its ability to “sensibly” manage money because they trust the invisible hand behind the mostly anonymous, but obviously self-interested Bitcoin speculators.

    I think this underlying difference in political beliefs means that many pieces, pro and con Bitcoin, make points the other side misses. Krugman’s interesting arguments in provoked a flurry of outrage, none of it that I saw addressing his “dead stock of digits” point. (Google “krugman bitcoins” for lots of internet outrage.) Pretty soon, we’re talking “Libertarian” versus “statis,” which comes down to who we trust.

    Trust, the second point: The status quo banking/currency systems around the world are mostly judged a great success, but as we know, success doesn’t insulate a technology from disruption. Part of the question of whether Bitcoin will be a successor is whether the zeal of advocates will indeed make up for Bitcoin’s less desirable features.

    You said that there’s no cost to Bitcoin transactions, but that’s not exactly right: per Wikipedia’s Bitcoin article, “This master list of all transactions is maintained by a distributed network of computers that does the payment processing work of Bitcoin. Users who devote computing power to maintaining the blockchain in this way are called “miners” and are rewarded with newly created bitcoins as well as fees.” In other words, each transaction results in a slight debasement of the currency, a transfer from existing bitcoin holders to the bookkeepers. It’s further been stated that a transaction might require 30 minutes to be validated/logged, which makes bitcoin ridiculous for almost any retail transaction. These features suggest that Bitcoins are being crammed onto the public by the advocates. What important, socially-acceptable transactions demand anonymity and newness over traditional trust, speed and cost concerns?

    Trust, the third point: We talk about volatility of Bitcoin’s worth as measured by traditional currencies, but little wiggles are of minor concern compared to the uncertainty of what one is worth. Bitcoin can lose a large fraction of its value in hours; see BusinessInsider’com’s link to a research paper at They show about ten times the volatility — about ten times the uncertainty —of their value than say, the rate of fluctuation in swapping Euros for dollars (which has jiggled around 0.6% per day since the Euro’s inception). Bitcoin valuation reflects stock-company type uncertainty; we know that for instance AAPL moves around according to sometimes wildly diverging sentiment or beliefs about its (secret) future activities. That makes Apple a terrible way to store the result of your past labors, that you’ll want to retire on (a friend is working well past a reasonable retirement date due to having a nest egg 100% in Sun Micro shares), or send your kids to college with, in 20 or 40 years. A share of AAPL, however, gives you a piece of an economic dynamo that has been generating strong earnings (i.e., it has potential for future growth), while Bitcoins have only scarcity plus variable demand to push the price up, so a “trust” that some anonymous person will want your Bitcoin in the future is all you have. As a student of equity markets, I note that putting a large sell order into thin trading, such as today’s, is suicidal; Bitcoin is currently a very thin market with very few identifiable participants and therefore the opposite of the “free and fair” markets that capitalism depends on. Wherever there is a high level of uncertainty, a prudent person will look for the potential for manipulation or other exploitation. Nothing I have seen on that score is very comforting.

    Finally, Trust, the fourth point: Bitcoin is an innovative currency (substitute) that depends, as all currencies do, on trust. The question is whether the trust is well-placed (something that cannot be known until it’s no longer relevant), but we can look at past abuses of trust using old-fashioned dollars or Reichmarks or whatever as a guide. This is the most troubling concern for me: I cannot see how Bitcoins can be shown NOT to be a very well-crafted Ponzi-type scheme, one subject to forces very much like the bank runs that plagued the United States prior to the requirement that banks be backed by the very government that the Bitcoin bugs so distrust.

    Ars Technica has a colorful account today of one man’s view of Bitcoin and several scams that attached to it, but I want to paint a picture for which I claim ZERO evidence. It is merely a scenario that I don’t see as impossible—I add some comparisons to Bitcoins only for plausibility. Until I see it disproved couldn’t possibly see Bitcoin as anything better than two trains rushing at each other on the same track.

    Imagine a clever individual or small cabal who wanted to start a virtual currency for essentially illegitimate purposes. They would devise a way to create a lot of the currency into their own accounts at very low costs. (Interestingly, the first Bitcoin transaction was 1 Bitcoin = 0.76¢; 1309 to the dollar.) The originator(s) expand the circle with some partners who are willing to put up with the uncertainty in exchange for the anonymity and ability to bypass traditional currency controls on some nations’ intra-country transactions (and essentially ALL nations’ inter-country transaction requirements). The disruption has now been established, and it attracts others with political or philosophical or commercial interests. As the currency snowballs, “astute” speculators enter, and the market price continues to escalate. (Bitcoins today are worth very approximately 1 million times their value at inception). The originator(s) now have Bitcoins worth many millions, possibly billions. But now (and again, I emphasize the hypothetical/speculative nature of my story), the originators walk quietly thru the exits; their work is done. The Pinklevii clan buys all the originators’ coins just before some 4-year old kid asks why the emperor is naked. No problem, the Pinklevii and everybody else says, but they cautiously book a part of their gains by selling a few, unfortunately finding buyers only with a rather reduced price. “Bottom-fisher” speculators step in (even as people bought shares in GM after it’d filed for bankruptcy and the SEC forced a ticker change to MTLQQ, “Motors Liquidation (in bankruptcy)” and the stock was widely understood to be absolutely worthless in all future claims on GM earnings or assets.

    This fanciful story is how schemes end. Even well-intentioned, real investments can create a company with no assets worth selling, but I have never seen a system set up with exactly ZERO inherent income generation, one that depended on parties with a strong incentive to deceive as I indicated, and no obvious misrepresentation that’d even make the originators subject to fraud charges — the enthusiasts, Libertarians and Neo-ists have done it all for them.