Bitcoin and the surprising “disturbance in the force” that will upend our financial systems
In 1984, Congressman Jack Kemp introduced the “Gold Standard Act of 1984.” At the time, many people found it inconceivable to have anything more stable than gold to serve as the basis for our economy.
32 years later, gold is losing its luster, and the emerging new kid on the block, Bitcoin, would have seemed like science fiction back in 1984.
Today, we are seeing clear signs that Bitcoin is replacing gold as the safe haven currency of choice for key investors in countries all over the world.
When surprises happen, people buy Bitcoin.
In Venezuela where hyperinflation is causing the bolivar to spiral out of control, the smart money has moved to Bitcoin.
When Greece threatened to leave the European Union in 2015, investors surged into the digital currency.
The same thing happened with the Brexit vote in the European Union, and when Donald Trump defied polls to win the U.S. presidential election. Recent economic surprises in China, India and Philippines that threatened to destabilize those countries’ paper currencies sparked an interest in the digital alternative as well.
In China, Bitcoin use is skyrocketing. Much of the time Bitcoin use is tied to a sense of desperation, and this desperation-driven demand is what’s forcing the value of Bitcoin higher. Over time, its value will be driven more by its usability because a digital global currency is infinitely more usable than cash, gold, diamonds, and even digital national currencies.
Ironically, I’ve often said that for Bitcoin to become widely accepted around the world it would have to learn how to play well with national currencies. Instead, the tables are starting to turn and national currencies are beginning to realize that they have to play well with Bitcoin.
The Limitations of Gold
All forms of currency are based on trust. Not just those that are commonly referred to as fiat money, which means “trust,” but absolutely every form of currency is based on some level of trust.
Gold has typically not been considered fiat money because it’s always been scarce and therefor always valuable. But that may not be true much longer.
Twenty years ago, few would have believed synthetic diamonds would become more plentiful than natural ones. Can synthetic gold be far behind?
Gold is also hard to exchange. It requires physical handling and comes with constant levels of paranoia over purity, theft, and a variety of other slight-of-hand deceptions. In addition, stolen gold, once melted, becomes nearly indistinguishable from non-stolen gold.
Whenever large amounts of gold pass through a system, like customs, it instantly raises red flags and suddenly taxes, tariffs, and watchdog scrutiny kicks in.
Since digital currencies are infinitely more usable than a physical commodity, the governments of China and India have severely constrained citizen’s investment in gold. For this reason, people are abandoning it and turning to cryptocurrency as an alternative investment vehicle.
Cryptocurrencies, such as Bitcoin, are far more liquid than gold, and they come with the added benefit of being somewhat anonymous.
Bitcoin – Safe Haven Currency of Choice
Since its introduction in 2009, Bitcoin has been integrating itself into our global culture. Each of these usage nodes represents another hook into the fabric of society, a hook that builds stability as well as a growing user base.
While it’s true that criminals and those skating on the edge of the law prefer to work with Bitcoin, so do many legitimate investors.
Even though Bitcoin is often referred to as an anonymous currency, which it’s not, it would be more accurate to describe it as a “neutral currency,” not favoring any one country.
All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of a particular bitcoin address. Yes, the identity of the user behind an address is typically unknown, but there are ways of uncovering the identity of the person through purchases or related activities.
That said, cryptocurrencies have no geographical or cultural constituency. They operate outside the control of any one nation.
As such, cryptocurrencies do not have an obligation to help a local economy or improve the lives of a particular citizenry. They have a way of automating “authority” out of the equation, which makes central banks very nervous.
The Emergence of Fluid Citizenry and Fluid Economics
We’ve been raised with the notion of a captive citizenry. Everyone belongs to the country they live in. No matter what crazy shenanigans your national leaders might pull, you are obliged to pay taxes to your particular country.
At the same time, crossing country borders has become an increasingly trivial event with many people crossing multiple borders on a daily basis.
Sending money to loved ones back home has become one of the primary functions of Bitcoin. It’s been a painful process until now, but Bitcoin allows families in other countries to access funds instantly (within minutes) with less than 2% transaction fee instead of the 10-20% banks onerously charge.
The Internet has given us borderless economies and a global marketplace. Over time, drone taxis and other forms of passenger drones will make national borders even less significant as crossing a border becomes as easy as going to the grocery store.
Every year people become more fluid in their ability to travel, but this is a double-edged sword. Along with a fluid citizenry comes a waning loyalty to a particular a particular city or region.
Similar to credit cards making national currencies invisible to the consumer, cryptocurrencies will make wealth transfers invisible to national governments.
As much as governments wish to exert additional authority and control over our lives, cryptocurrencies, along with most of the tech world, are working overtime to break the “big brother” bonds.
Level One Disruptions
Its already clear Bitcoin will be a major disruptor. Here are some of the industries currently dealing with the effect of Bitcoin.
1. Banking – Bitcoin is already disrupting the banking industry, allowing people to access a form of money that’s not controlled by an agency of the central government. Over the past couple years, several global financial institutions like MasterCard, BNP Paribas, Visa and J.P. Morgan have invested in blockchain startups after realizing Bitcoin could save the industry billions each year by eliminating the middleman.
2. E-Commerce – There are any number of reasons why a consumer would prefer to use Bitcoin over credit cards or PayPal when making a transaction. A number of cryptocurrency payment processors like CoinBase, BitPay, BIPS, and Blockchain Merchant now offer tools to integrate bitcoin e-commerce into a website.
3. Charities – Humanitarian efforts in countries with nearly worthless currencies have realized that Bitcoin is a valuable tool. A few of the organizations already accepting Bitcoin include the Human Rights Foundation, the American Red Cross, Electronic Frontier Foundation, and the United Way.
4. Music – Bitcoin and blockchain startups have already started to disrupt the $15 billion music industry. By using companies like Ujo Music, Stem, Kashcoin, and PeerTracks fans can directly pay artists for their music, without record labels and producers taking a huge cut.
5. Gambling – While most governments have restricted online gambling on some level, Bitcoin players are generally free to step into some of the world’s most popular casinos without leaving their home. One of the biggest of these online gaming portals is Dragon’s Tale, a role-playing game that uses Bitcoin instead of chips. Another, SatoshiDice, saw as many as 12,400 bets per day in 2013. A study that year showed that at least half of all Bitcoin transactions were related to gambling.
Why does Bitcoin have value?
Normally we can apply some form of supply-and-demand equation to virtually any commodity and we can gain a sense of its value. But Bitcoin is different.
Since our societies rely heavily on trade and commerce, anything that facilitates the exchange of goods and services has some degree of value.
In the past farmers would farm, fishermen would fish, and widget-makers would make widgets. But trading fish for widgets, or trading grain for fish was a messy and inefficient way to conduct a transaction. For this reason currencies were invented.
By agreeing on one intermediate commodity, say silver coins, we only need to pay attention to the number of silver coins involved in every transaction.
But silver has its own set of problems, especially when we’re dealing with very small or very large transactions. On one hand they’re not easily divisible, on the other, they’re not easily manageable.
Bitcoin has a way of solving all those problems.
Today’s monetary systems are old and tired, with so many patches in place that even the patches have patches.
We previously patched our problems with gold and silver by introducing paper banknotes. We patched further problems by removing the precious metal backing those banknotes, and then patched them again to allow wire transfers, credit cards, debit cards, direct deposit, and online billpay. All the cornerstones of modern life are just patches on patches inside a prehistoric system.
Every IT guy knows that from time to time you have to take drastic measures and scrap the old system and build a new one from scratch.
So what would happen if we scrapped our decaying old financial systems along with the barnacle-people making absurd profits by maintaining them? That is exactly what Bitcoin was intended for.
Bitcoin isn’t another bank or payment processor coming up with new ways to move old dollars. Bitcoin is instead a simple and elegant replacement for the entire concept of money. It has value for exactly the same reason as the paper money in your wallet: It simplifies the exchange of goods and services.
So let’s go back to the original question, “Why does Bitcoin have value?” We can answer that in two words – network effect.
The network effect is a fascinating way of explaining why networked products and services tend to have more value when more people use them. The most common example is the telephone. During its early days when few people had access to telephones, and therefore its value was minimal. Today practically everyone has a phone, so its utility and value is extraordinarily high. In a similar fashion the value of Bitcoin is directly tied to its number of users and the frequency of their use.
As the usability of Bitcoin increases, its user base will grow, and its value will increase exponentially.
The Overall Size of the Bitcoin Universe
Several years ago an architect working on dome houses explained to me why the dome shape always comes across as an optical illusion. “When people walk into a room, their eyes unconsciously look for the corners of the room to gain a sense of perspective about the size of space they’re walking into,” he said.
Without corners, a dome will appear abnormally smaller from the outside and strangely larger from the inside.
This paradoxical perspective has forced me to constantly “search for the corners of the room” with every new situation, technology, and system, and in this case, gain an inside and outside perspective about the size and shape of the Bitcoin universe.
There are a total of 21 million Bitcoins in the Bitcoin universe. While most currencies are loaned into existence, Bitcoins are mined into existence, a complex process requiring increasingly vast amounts of computing power, cryptic algorithms, and a bit of luck.
Through this mining process, over two thirds of all Bitcoins have already been mined into existence, an activity that, over time, becomes exponentially more difficult to accomplish.
With 21 million possible, if each Bitcoin is worth $1,000, the total Bitcoin universe becomes valued at $21 billion.
To individuals, this seems like a huge number. But to countries like the U.S., China, and India, with a gross domestic product (GDP) of $18 trillion, $21 trillion, and $9 trillion respectively, a number like $21 billion is little more than a fly on the backside of an elephant.
At the same time, $21 billion is the equivalent to the GDP of Jamaica, Armenia, or Tajikistan.
However, every Bitcoin can be subdivided into 100 million bits, a tiny slice of currency known as 1 Satoshi. If each Satoshi grew in value to become worth $1 USD, then the entire Bitcoin universe would expand in value to $2,100 trillion, an incomprehensively large number that would overpower most national currencies.
If we actually moved up the valuation scale from $21 billion to $2,100 trillion, naturally a number of world-changing seismic shifts will occur.
Bitcoin and the surprising “disturbance in the force” that will accompany it
With Bitcoin, as its network effect climbs the exponential value chain; we will witness a series of disruptions. Every level of disruption will involve some level of psychological turmoil, economic turmoil, and growing national hostilities.
Venture Capitalist Tim Draper predicts that Bitcoin will hit $10,000 by 2018. That means the Bitcoin universe will expand from $21 billion to $210 billion.
In a similar fashion to the way stocks divide, leapfrog jumps in valuation will empower new technologies and new investors at the same time.
While it’s true that faster money will create a better economy, Bitcoin will find ways to route transactions around today’s power brokers and remove some influential people from tomorrow’s revenue streams. For this reason many will feel betrayed or left out of the inner circles, and a new age of monetary skirmishes will ensue.
Here are some possible implications with each 10X increase in value. When Bitcoin reaches:
- $1,000 – Many new currency-related technologies will spring to life. We’re seeing this now.
- $10,000 – Bitcoin becomes the global standard for e-commerce. A high percentage of gold holders will switch to Bitcoin. Most of today’s banks will begin to disappear as new institutions arise.
- $100,000 – Most countries will establish Bitcoin reserves, and will attempt to tie their national currencies to the value of Bitcoin.
- $1,000,000 – Bitcoin will be universally acknowledged as the first global currency and spawn a series of complementary currencies.
- $10,000,000 – Most global infrastructure projects will be financed through Bitcoin.
Admittedly it’s not feasible to develop a realistic list like this with any level of confidence because of the tectonic plate-shifting changes that will accompany each of Bitcoin’s exponential leaps in value.
It may even collapse under its own weight.
However, what will become glaringly clear along the way are all the deficiencies we have with today’s economic systems.
Bitcoin has become the flag bearer for an emerging cryptocurrency industry with literally thousands of players waiting in the wings.
There is little doubt in my mind that Bitcoin will achieve lofty valuations in the future. How high and how fast still remains a fascinating topic for debate and I’d love to hear your thoughts.
Will your financial future be controlled by Bitcoin?