Today, the nattering nabobs of bitcoin negativity are smugly pointing to mounting evidence that Bitcoin is just one big bubble on its way to becoming something pretty itsy-bitsy. With prices flopping between $1,100, $500, $900, and then below $100, all in the space of a few months, who could blame them?
And if that isn’t enough, we have one of the major Bitcoin exchanges, Mt. Gox, telling bit-depositors that they couldn’t withdraw their money. People camped outside the door of the exchange in Tokyo. Police had to break it up. It almost sounds like a bank run. It makes you think that Bitcoin could soon follow the hula hoop, leisure suits, the tulip craze, Paris Hilton, and transferring money by shaking phones into fad heaven.
But before we all come down too hard on Bitcoin, let’s stroll down memory lane to the early days of credit cards.
Banks started hawking credit cards to the masses in the mid 1960s. They actually sent people preapproved credit cards in the trusty U.S. mail. In fact, millions of cards were sent out in the late 1960s. Of course, they were stolen and people started getting bills for cards they never used. Congress, thankfully, put a stop to this go-to-market strategy.
The credit card industry was almost strangled to death in the 1970s – usury laws capped interest rates in a lot of states. When interest rates skyrocketed in the late 1970s and early1980s, that made the credit part of credit cards just about useless. As Evans and Schmalensee point out inPaying with Plastic, the credit card industry didn’t really take off until the 1980s. Then, there was no looking back.
Yep, you did the math right. That was 30 years after the whole idea of the general-purpose card was invented, and two decades after Bank of America mailed out the first batch of unsolicited cards in California in 1958.
So the moral of the story is, when it comes to new financial services products, it can take a long, long, long time to work out the kinks and truly go mainstream. We’re all living that right now with the move to mobile payments, too.
So, then the big question for Bitcoin is, just as it was for the early card: where’s the beef?
In retrospect, it’s clear that there was a lot of beef in payment cards. They were “more than money” – they were really platforms for providing a lot of services to consumers and merchants. The original charge card inserted an intermediary that gave the merchant their money right away and allowed consumers to manage their finances better by not having to produce cash right away when they bought something. And say what you will about the credit cards, but they made it a lot easier for consumers to get bank loans. And they continue to finance a lot of small businesses.
Supporters of bitcoin – and this includes most of the venture capitalists – say, in my words, not theirs, “it’s the protocol, dummy.”
Here’s what that means in plain English. Bitcoin is really a set of technologies. Those technologies make it possible to do several things.
First, it’s all software based, so it’s like replacing your dollar bill, check or credit card payment with a chunk of software code that can then do a lot of stuff. So let’s say that Joe the buyer wants to buy a car on an auction site like eBay. He doesn’t want to turn his money over until he knows he has the car and it’s in good working order. Sam’s Auto Dealer doesn’t want to ship a car unless it knows that the buyer is good for the money. The Bitcoin technologies would make it possible for Joe to send Sam’s Auto Dealer money for the car but be programmed in a way so that Sam’s only gets that money if a trusted third party – say an automobile dealer or garage that is part of a network of trusted third parties – verifies delivery of the car and the passage of inspection. The third party holds the keys to releasing the funds.
Second, the blockchain – what many seem to think is the coolest invention of all time – makes it possible to have a public database that provides proof of ownership that doesn’t require a third party. The idea is that this cuts a lot of intermediaries out of the game.
Bitcoin then becomes nothing more than a container that can provide proof of ownership for any valuable asset. Currency is just one – and maybe not even the most interesting – application of this. Who’s to know?
But that is what has some members of the Bitcoin community so jazzed. They see the possibilities of the “Bitcoin idea” as so promising that they are convinced that the current Bitcoin technologies are too limited for what this approach to financial markets and contracts could achieve. One smart and truly forward-thinking guy is Vitalik Buterin, a 19-year-old hacker turned entrepreneur and Innovation Project 2014 speaker, who is the founder of Ethereum, which you can think of as Bitcoin 2.0 (or maybe it’s Bitcoin 10.0).
So this is why venture capitalists are opening their checkbooks pretty wide for Bitcoin entrepreneurs.
Others, and that seems to include just about every mainstream economist living or dead, just aren’t convinced there’s any there, there.. Some of them are the same folks who sounded the alarm bell over whether Bitcoin was a bubble – and a pretty darned obvious one –pretty early on. The Bitcoin currency itself seems to be pretty central to all of the Bitcoin-like schemes that leverage the “protocol."
Economists are skeptical about any currency without a stable and predictable value, which is why they condemn the bitcoins, and all of their imitators, to being unstable and subject to asset bubbles. In fact, perhaps the most amazing accomplishment of Bitcoin to date is to get virtually all economists to agree on something: Bitcoin isn’t, won’t be, and can’t be a currency. They aren’t even saying the usual, “on the one hand and on the other” stuff, which is also remarkable.
But then there’s that darned protocol thing that keeps popping up and those autonomous agents that the protocol enables. So, what if we could replace the central bank with a set of rules that could be better than our not-so-great central banks? OK, to be fair, no one has actually suggested this, but there’s talk about replacing corporations with autonomous agents (who wants to volunteer their company for the pilot – I have to admit that there are days that I’d like to be) Here’s Mike Hearn from Google talking about the future 50 years from now: The Future of Money.
Crazy, science fiction stuff? Very possibly. But then again 50 years ago it would have sounded pretty crazy to suggest that we’d be using our phones to take pictures of checks so that they could be deposited into our checking accounts or having micro robots conduct surgery. Remember how wacky Dick Tracy’s watch used to seem? Well, we’ve got them coming to a wrist near you as part of the wearables craze. But, as much as I love shoes, thank goodness we passed on the shoe phone.
But I promise that we’ll take a look back at all of this during Innovation Project 2064, which is currently scheduled to be held at a location to be decided in the Kepler-62 solar system. It remains to be seen whether Satoshi Nakamoto will be chosen to receive the Lifetime Achievement award at that time and, if he does, whether he’ll show up to get it.
But if you want to shape how that 2064 conversation is likely to go, I would suggest that you sign up for The Innovation Project 2014, which is being held in Boston. We’ve got the Bitcoin panel of all panels who will move us well past the “is it or is it not a bubble” debate and get down to that critical question: hey, Bitcoin and you Bitcoin believers, show us the beef!
You can apply here – but, unfortunately, bitcoins are not accepted. Maybe by Innovation Project 2064.