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Author Topic: Bitcoin: the value proposition  (Read 1826 times)
Blinken
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April 08, 2013, 06:57:36 PM
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When discussing bitcoin with others, even very sophisticated investors and wall street professionals, there is a perception that it is a pyramid scheme or a bubble based on wishful thinking rather than genuine needs; I want to spell out for the record Bitcoin's value proposition so people can more clearly understand why it is increasing rapidly in value and why that value is real.

First of all, let me address the so-called experts, including some of those I have talked to, and point out that these men in most cases are not really economic theorists, but are typically investors who are familiar with equity investing or the bond markets. Then, there are the commentators like the NYT's lackey, Paul Krugman, who is a leftist macroeconomist. If you read Krugman's comments on btc carefully you can see he never really comes out directly and says its a pyramid scheme or anything of the sort. This is because he has enough background in monetary theory to understand the value, he just doesn't like it for political reasons so he makes oblique criticisms of cryptocurrencies. My remarks, however, are not aimed at ideological braniacs like Krugman, but at the average investor-type "experts" who think in terms of stocks and bonds. Once you start talking forex, commodities, acceptances, foreign trade, etc., they get confused in a hurry. For them btc is "tulips".

The key need a cryptocurrency fulfills is the ability to store and transfer cash reliably. The value of this ability is enormous. People will use anything, not just cryptocurrencies, to perform this essential function: gold, silver, diamonds, platinum, emeralds, pearls, copper, cowrie shells, whelk shells, quahog shells, giant limestone rocks, iron rods, you name it. Anything that is hard to counterfeit is fair game. I will tell you something interesting criminals do: they barter art. The way it works is a criminal, call him "Phil", steals a work of art, and then stashes it in his basement. Then Phil borrows money from criminal B, call him "Nick", using the art as the collateral. If Phil fails to pay Nick, then Nick "owns" the painting, but the painting doesn't move, it stays in Phil's basement, but everybody just acknowledges that now Nick owns the painting. Then, Nick trades on the painting and so forth. This is one way a currency can work.

Now, consider the Bitcoin. We can trade it irreversibly, reliably and within 10-15 minutes anywhere in the world. You can see the huge advantage this has over cowrie shells and paintings. Even versus a government currency like the dollar or Euro it is convenient. Ever done a wire transfer? Takes a LOT longer than 15 minutes. You have to go the bank, fill out a page-long form, pay $40-$100 in fees and then wait two days. Not only that, all the details of your transaction become virtually a public record, since most major spy agencies around the world have full access to the SWIFT database that records these transactions. Now consider a check. It takes 4 days in the US for a business check to clear, and even then the drawer can post holds to it that can cause clearance to be delayed for weeks. The drawer can also reverse the transaction by putting a "stop payment" order on the check. Even after all is said and done a check can be reversed by a frivolous and unsubstantiated fraud complaint, and, even if it clears, the Federal reserve makes a record of each and every check, thereby making your private business a matter of common knowledge to the US government and anybody else who has access to their systems. So, we can see cryptocurrencies have a huge value: (1) faster, (2) more reliable, (3) more confidential, than any other form of money. Just the speed of the transaction alone is enough to justify the value. In big international business deals, the difference between 48 hours and 15 minutes can be worth millions of dollars.

At this point, the doubter will ask, "If bitcoins are so great, why haven't they succeeded in the past?" The reason for this is simple: it was more convenient to use dollars or other currencies. It is hard to buy $1 million in bitcoins, and even harder to sell them. Not very long ago a $1,000 transaction was a very costly endeavor even on Mt Gox because it would move the market so much. The related problem is that nobody had bitcoins or was setup to handle them except a few wierdos. The time and grief you would have to spend learning the ins and outs of cryptography simply weren't worth the benefits of being able to quickly transmit $200 which you could do with Western Union anyway. Its like email, if just a few geeks have email its almost useless (and yes I remember those days well), but once everybody has an email account, the first class letter goes extinct.

What this means is that bitcoins are like any critical mass technology (think email/internet). I remember when the world wide web started around 1988. It was a joke. There were like 3 "web sites" in the world (with a text-only, numbered-item interface). It was absolutely pointless, especially compared to services like Veronica or gopher. Once critical mass occurred around 1996, snowball effect, everything changed. Bitcoins are exactly the same. The more volume you can do, the more valuable it is. When you can transfer $250,000 around easily, which is a realistic possibility now, you get to the point where it is worth learning the crypto for a businessman.

It is true that a lot of the btc buying is speculative, but it would be a huge mistake to think that phenomena is what is driving the market. What is driving the growth of cryptocurrencies is the ability to store and transfer wealth, the age old need of everybody on the planet.







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wopwop
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April 08, 2013, 07:10:33 PM
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glad you converted
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April 08, 2013, 07:31:52 PM
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very well explained.

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April 09, 2013, 04:57:21 PM
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Great post, nice to read
w1R903
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April 09, 2013, 05:21:21 PM
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Nice post.  Your comment actually touches on an observation I've made that driving me further into the market.  People often quote the Buffet investment advice to be fearful when others are greedy and greedy when others are fearful.  And it's true, when we look around in the Bitcoin community, we're in a greedy frenzy.  At last, the project that we've believed in from the start is taking off in the way we had hoped it would.  So of course our first instinct is to put more money in the market -- lots more!  However, most people outside our community are not greedy.  They're curious, but also extremely fearful.  They don't understand Bitcoin, and can't figure out why it's working, but they see it's gaining value.  So they're confused, curious, but most of all fearful to put significant money into the system.  Now, there are also very savvy VCs and tech investors who do understand Bitcoin are who are starting to put big money into the system.  I think this is the reason for the big run-up.  But don't forget that the average person, or even the average professional investor, banker, or stockbroker, is not only confused about Bitcoin but also fearful.  And these people make up the vast majority of our population.  As such, I think a lot of us are heeding Buffet's advice -- even now.

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acoindr
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April 09, 2013, 06:09:26 PM
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Nice post.

I particularly liked this line:

Quote
The related problem is that nobody had bitcoins or was setup to handle them except a few wierdos.

I imagine anyone poking around on a contraption with only 3 text websites could be considered pretty weird too Wink
Wekkel
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April 09, 2013, 06:46:49 PM
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Actually, the EU SEPA system is already a very good step in the right direction. Payment within the EU free and only one business day. If only the money actually transferred would have better properties...  Grin

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