Monday, July 04, 2011

Bitcoin does have intrinsic value

In response to an article which states that bitcoin has no intrinsic value, here are my thoughts.

Bitcoin does have characteristics which make it potentially more userful than than existing mediums of exchange. It is has near-zero transaction costs. Compare this with Visa/MasterCard. And try sending gold in the mail.

Bitcoin also has real intrinsic value because it is more secure than Visa/MasterCard in that the recipient of payment cannot extract from your account more than you intended them to. When you give someone your credit card number, they can then use that number to take any amount of money they want from you. When you send money via bitcoin, they can’t because you aren’t sending your private key. With Visa/MasterCard we are giving our private key to a merchant. Bitcoin is not a crazy idea, Visa/MasterCard is!

By reducing cost of money exchange world-wide, Bitcoin has huge potential economic benefits for the world economy.

Who is a potential customer for Bitcoin? Everyone in the world. Not one country, not one language, or one demographic. Everyone. Talk about market potential. If you thought the China market was big …

The biggest threat to Bitcoin, in my opinion, is that early adopters include shady folks and bitcoin could potentially get a bad reputation because of it. But look back at the Internet, the most profitable business in the early days included a larger proportion of shady uses (pornography). The Internet got a bad reputation because of it. However, as the masses of people adopted the Internet, more honest/legitimate people became the majority and look how many good/legitimate things happen on the Internet today. Gavin Andresen has an interesting post suggesting folks contact their local representatives pointing out that bitcoin will create jobs in order to boost the chances of bitcoin being legitamized in the eyes of government.

I must state that bitcoin is not something I recommend as an investment. It is currently in early infancy and has a few years yet before the bitcoin ecosystem will be robust enough to support the hundreds of millions of dollars currently in circulation. A bitcoin today, honestly is not worth the $15-30 dollars they have been trading for for the past 30 days. The current price is the product of hype and speculation.  However, as a software engineer, and an Economics major, the technical and economical foundations of bitcoin are potentially quite sound. I have read all the technical posts on the bitcoin wiki and Satoshi's paper, and I am impressed. On the other hand, I am not impressed with the bitcoin client, mtgox or mybitcoin. It is almost emarrassing how poorly written these sites are, and they all need to be dramatically improved before millions of dollars of value is entrusted to them. This is why I don't recommend bitcoin as an investment. These sites are in early beta and are not ready for prime time use. However, give these sites a year or so and I am hopeful they will dramatically improve.

I think competition is good. Vista/mastercard and baking currently have little competition. Banks and national currencies are currently much more stable, safe and predictable than bitcoin. However Bitcoin has some very clever ideas on making transaction costs lower, reducing fraud and identity theft, and reducing costs of exchanging money internationally. People need to demand that banks find better ways than exchanging credit card numbers which is really quite silly. Bitcoin may give banks a few ideas, or else it will replace them. I am confident that banks and credit cards and their employees will rise to the occasion and come up with some clever solutions of their own. The biggest threat to bitcoin is not goverments declaring it illegal, but bank innovation. In either case if banks or bitcoins win the battle of innovation, quality of life is the winner.