Reuter’s reports that Germany’s justice and finance ministries have proposed to launch a state-run register to boost the use of blockchain. We’ve seen these same efforts repeated with other governments across the globe. While bitcoin is slowly being adopted, its underlying blockchain technology is being widely adopted. That the blockchain regulations, policing of the blockchain technologies, and the registration of blockchain based exchanges are being put in place now will later prove useful to a bitcoin economy.
Blockchain technology replaces a centralized network with a decentralized, distributed network. Instead of a central clearinghouse for all transactions, exchanges are made throughout the network. Instead of a physical token for each transaction, such as printed shares of stocker each trade, trades can be made in blockchain technologies entirely digitally. In order for investors to pay their fair share of taxes on blockchain transactions, both the government agency and the tax payers have to have the apps that allow them to compute the necessary amounts. To follow up on complaints of foul play, emergencies, and general police detective work, law enforcement agencies need to know what blockchain technology is and how to deal with it. There is no difference between researching a transaction made in a blockchain network for real estate and for a bitcoin transaction. The list goes on, but in short, learning to work with blockchain is the very skill required to work with bitcoin.
Cryptocurrencies are not a bubble, not a Ponzi scheme, and not a flash-in-the-pan, here-today-gone-tomorrow phenomenon. Cryptocurrencies (think Bitcoin) are here to stay. They are the next generation of money. As fiat currency (paper money) disappears, we use checks less and less, we use debit and credit cards more and more, and we send and receive money via all sorts of electronic methodologies, it is quite apparent to me that we are moving towards virtual currencies. In fact, we’re moving not just to replace dollars with virtual dollars but we’re moving towards a state where we have many different currencies to handle many different situations, many different circumstances that we will use throughout the day, throughout our lives (think Airmiles).
Have you ever wondered why we bother to purchase Metrocards to use in the subway? Why don’t we swipe our credit or debit cards through the turnstiles directly just as we swipe our Metrocards? The answer is because the Metrocard is doing something a Mastercard or Visa card can’t do. The Metrocard has an ID number embedded in the magnetic strip that tells the system who is using the card or under what conditions the card is to be used. If you purchased a monthly MetroCard, the card might look the same as any other MetroCard but the ID number lets the system know that you have paid for the right to travel in the system for a period of one month. You are free to use the system as much as you want during that time. Your debit or Visa card doesn’t have that kind of ID number nor can it hold that kind of information. The ‘contract’ you have with the system is unknown by the transit system.
In a future world, that sort of unintelligent ‘money’ is unacceptable. We are living in a world that is and will continue to be more and more dependent on ‘intelligent’ interactions between the systems we use. The transit systems, including buses, subways, taxis, airlines, water taxies, highways, tunnels, and bridges, will be smart systems which will allow us to establish ‘contracts’ with them. These ‘contracts’ will be like the Metrocard ‘contracts’ for different rates at different times, for different periods of time, for different numbers of people, at different rates depending on the age of the user, to what use it is being put, and for what duration it is to be used. The money will have to keep pace with these types of contracts.
We have EZPASS in the Northeastern United States for paying highway, bridge and tunnel tolls. The system automatically replenishes our accounts without our direct involvement. When our automobile passes through one of the EZPASS readers, the system knows what our ID number is and what ‘contract’ we have with the system. Similar systems will appear in the coming years for other systems that we use. There might be one for parking your car, buying and delivering food, taking taxis, using music, downloading information, buying online, vacationing, renting hotels, renting sporting equipment, online gaming, online gambling, education, going to the movies, renting furniture, renting art to hang on the wall, taking singing lessons, learning to skydive, and ordering a babysitter. The list is endless. Are you getting the idea? The way we will conduct our lives in the future will be systematic, without currency, by a computer, online and by a ‘contract’ which is a set of guidelines agreed upon by both the party ordering the goods or service and the system or party delivering the goods or services. To facilitate those transactions will be virtual currencies.
When people see Bitcoin’s meteoric rise in price they fear they might be witnessing a bubble, wide enthusiasm followed by loud explosions, such as the dotcom bubble of 1999. Remember when every actress with an idea for a website was creating an IPO (Initial Public Offering)? When it was over, they discovered websites aren’t so easy to create or build, and, a good domain name does not a financial success make. Boom!
What we’re witnessing is the rapid adoption of new technologies, cryptocurrency and blockchain. Cryptocurrency is virtual money, digital money that appears only on a computer screen but represents a value by virtue of the fact that everyone believes it does. Say what? People have been doing virtual banking for quite a while. When you log in to Citibank or Wells Fargo Bank and you see your balance on the screen, that is a virtual representation of the money you have. Blockchain is something else, entirely. Blockchain is the technology that makes cryptocurrencies like Bitcoin secure, anonymous and free of government or corporate controls. I won’t go into an explanation of blockchain here. There are some very good ones elsewhere on the Internet.
Why do we adopt new technologies? There is a simple answer to that. We adopt a new technology when it does something for us better than ever before. By better, I mean faster, smarter, smaller or cheaper. If a new technology does any one of these attributes better than any technology that came before it than it is an improvement that has a good chance of being successful. By successful, in these terms, I mean widely adopted. If it achieves more than one of these attributes, it can very well become wildly successful.
I remember my uncle Harry describing to me one of the first jobs he had, selling electric refrigerators at a time when everyone had only iceboxes. He said it wasn’t “selling” at all. It was signing up people because the improvement was just that compelling. It was faster, smarter, smaller and cheaper.
We only talk about Bitcoin because it was the first and best known of the cryptocurrencies but there are and will be many thousands. We will have to bend our notion of currency and cash. Think coupons. Remember when you went to the carnival and the first thing you did was buy a string of coupons that you could use to pay for rides? Each digital currency, each cryptocurrency, has specific characteristics to be used in specific ways. They may or may not be fungible as dollars are. Think Airmiles and Chucky Cheese coupons. They each have their own specific function and format.
There will be currencies for general spending purposes. There will be currencies for pocket money. There will be currencies for healthcare expenses, for virtual costumes for your Avatars, for real estate, for contracts, for international trade, for virtual kitties, for shopping at Walmart (think company store), for air travel, for stocks, for bonds, and, of course, dollars. There will be currencies which work faster, currencies which are programmable, and currencies which are anonymous.
Cryptocurrencies are specifically designed to work with computers. By that, I am speaking generally to include smartphones, thumb drives, pads, tablets, and other electronic devices to be included in the concept of computers. In our future, computers speak to other computers. They haggle and negotiate. They invoice and pay one another with our consent and guidance but not necessarily our direct involvement. For that, computers need cryptocurrencies. Fiat currency just doesn’t work. Imagine robotic arms counting out $15 in paper currency at a toll booth. I don’t think so.
Reading “Bitcoin: Ringing the Bell For a New Asset Class” by Chris Burniske and Adam White, what comes to mind is a quote from R. Buckminster Fuller — “I seem to be a verb.” Fuller, the inventor of the geodesic dome, an icon of forward-thinking, postmodernism, was one of the most progressive thinkers of the twentieth century. Fuller’s advice to students who wished to apply themselves to solving the world’s problems was to think ahead twenty-five years and figure out what needs doing. His other, lesser-known inventions included the Dymaxion car (three-wheeled), Dymaxion house (factory-built) and pressurized shower which only used one quart of water. Fuller was solving problems of over-population, water shortages, and material scarcity long before they were global concerns. Fuller loved to lecture. I attended a marathon three-day, eighteen-hour event given at Town Hall in New York City. He was also a prolific writer. This quote was also the title of a book he wrote.
Fuller was recognizing that we are, in a sense, a work in progress, that everything we did or hoped to do should be seen as being in motion, in a state of wanting to be. He coined the word ‘synergy’ to mean ‘the whole is more than the sum of its parts.’
What does all of this have to do with Bitcoin and a new asset class? Burniske and White did an excellent job of using the language of economics to identify and evaluate traditional asset classes, then went on to explain how bitcoin is the same and how bitcoin is different. The four features used to describe assets were: investibility, politico-economic features (value, governance, and use cases), correlation of returns: price independence and risk-reward profiles (returns and volatility). Bitcoin’s explosive popularity growth and unique use cases set it apart from other asset types.
Bitcoin’s open-source, non-governmental, communal nature is unusual and largely an unknown for the economists and traditional Wall Street investors. Bitcoin shows itself to be distinct and separate from any other asset class as far as price independence. So far, so good. That’s how Bitcoin is the same and different from other asset classes. But much like Fuller’s need to express our role in society and in the universe, something still is missing from Bitcoin’s definition, that makes it distinct. It goes without saying that Bitcoin serves a different purpose than other assets. In a changing environment, its purpose may well be an essential difference.
We live in a dynamic world; one in which everything is changing. Everything is in flux. Everything is in motion. We use calculus to determine next steps as much as we once used addition, subtraction, multiplication, and division. Relationships fluctuate in a continuous dance of ebb and flow. Fiat currency no longer is able to keep up with these dynamic systems. We have computerized functions speaking to other computerized functions. These computers have needs, too. They need, in addition to behaving in response to one another, to remunerate one another. We need cryptocurrencies in order to do that. Fiat currencies no longer work.
For example, my subscription to word-processing software needs to be updated monthly. Certain very expensive features are only billed when I use them. I rent processing time from a supercomputer by the micro-second. My social media advertising budget pays for click-through’s only when they lead to sales. The list goes on and on. My financial world is dynamic. My money needs to be dynamic, too. Bitcoin wallets can be set up to make payments in fine detail; eight decimal places, to be exact. Other cryptocurrencies can be designed to make payments as a result of a contractual agreement, then change the terms of that agreement, and then continue to make payments without interruption. If we wish to be part of this future world, we need the currency that is able to live in this world, too. Neither gold, nor dollars, nor stocks nor bonds can do that job. Bitcoin, on the other hand, is able to live the dynamic life this future world requires.
“Why Bitcoin?” is one of the first questions that comes up when I mention Bitcoin. It’s interesting to note that WordPress.com, the host of this blog, now includes space for authors to be paid in Bitcoin. My Bitcoin address is “14VNkTPR7N9kxjPkYc1Gvf3R9TNbME615W” just in case you are interested in sending me some Bitcoin. It’s just that easy to set up, send and receive Bitcoin.
If I wanted to set up the ability to receive payments by MasterCard or Visa it would require a bank, a merchant account, an ability to read card numbers, username, date of expiry, a three-digit security code, and a signature. There might even be a waiting period before any transactions go through, despite all of this security.
Bitcoin requires none of that. Bitcoin that is sent to an address is received by the address. That is the end of the transaction. There are no banking fees, there are no exchange rates or credit card charges. There is a small fee attached to each transaction that pays for the processing. Every bit of the Bitcoin sent as a payment is received by the recipient. This is true for any sender and any receiver anywhere in the world.
Imagine your brother, someone you trust more than anyone else in the world, owed you a large sum of money. To pay you he hands you an envelope full of cash. You might not even bother to count it. He’s your brother after all. In this trusted relationship, counting isn’t necessary. You put the envelope in your pocket. End of story. The reason that this transaction was so simple was that it is a trusted relationship. The reason Bitcoin transactions are so simple is that they, too, are trusted relationships.
Why Bitcoin? Because it’s so much easier, faster, smarter and cheaper than any other form of payment.