Tuesday, June 7, 2011

Bitcoin is the Economic Singularity

By Ryan Dickherber
Astrohacker
Saturday, June 4, 2011

http://astrohacker.com/ahc/bitcoin-is-the-economic-singularity

Three weeks ago I discovered bitcoin. It sounded interesting enough that I decided to devote an entire Saturday to it—that was my “day of bitcoin.” My day of bitcoin evolved into my three weeks of bitcoin. In that time, I have been obsessively reading about it, writing about it, buying it, and creating businesses for it. As far as I can recall, I have never been so obsessed about anything. But the reason I am obsessed with bitcoin is simple: it is the most incredible thing to ever happen in the world. I am not exaggerating. We are presently witnessing the most disruptive change to ever happen to collective human behavior. Although there have been other disruptive changes to human behavior in the past, bitcoin is happening much faster than those. Consider, for instance, computing.

Charles Babbage invented the mechanical Analytical Engine in the 1830s. It took on the order of a century or more before those seeds of an idea blossomed into something that actually started being used on a large scale. Or consider, say, the internet, which was invented in the 1960s, but took on the order of decades before it saturated the world. That was faster than computing, but still long compared to bitcoin. Bitcoin was only invented about 2.5 years ago. And already, I have been able to ask random people about it, and they know what I’m talking about. If the growth of bitcoin continues exponentially like most widely useful technologies, it will only be on the order of years—not centuries, not even decades, but individual years—before virtually everyone is using it.

The standard term for such a rapid change is a “singularity.” Robin Hanson predicted an economic singularity. Bitcoin, as I will argue, is that singularity. (Hat tip to noagendamarket on the bitcoin forum for reminding me of Robin Hanson’s article.)

What is bitcoin?
Bitcoin is the decentralized digital currency. I say “the,” rather than “a,” because there can only be one. Since decentralized digital currencies rely on computational power to ensure security, the currency with the most computational power is the most secure. If we ever found ourselves with more than one decentralized digital currency, which ever one had more computational resources devoted to it would be the most secure, and thus more people would trust it, and thus more people would use it, and thus it would come to dominate and be the only one. Bitcoin is that currency. (Previously, I argued that there could be a market of currencies. However, I now realize that, while there can be a market of currencies, there can’t be more than one decentralized digital currency.)

Why is it gaining traction?
Bitcoin is useful for all the same reasons that any currency is useful: it is a medium of exchange. The advantage of being decentralized is that you do not have to rely on a third party for security. Thus, bitcoin is more useful than digital dollars for the same reason that digital dollars are more useful than paper dollars, or paper dollars are more useful than gold: it is just easier to pay people with them. No banks means less headaches, in the same way that no gold means there is a lot less weight you have to lug around. Bitcoin is thus a better answer to a problem humanity has been slowly solving for millenia: how do we remove barriers to payment?

There are other advantages to bitcoin too, besides being more convenient. The fact that no central party party controls the supply means no central party can inflate it to redistribute wealth in their favor. No one can debase bitcoin to pay for a war. Also, since it is deflationary (in the sense that prices reliably go down), it encourages savings, because everyone gets richer that way.

Exponential growth
Certainly, then, bitcoin is a candidate for an economic singularity, because everyone has incentives to use it, and it makes the world a better place. That’s great in theory, but the reason why it cleary actually is a singularity is because its adoption is, in fact, growing exponentially. There are at least two exponential curves we can see. One is Google Trends, where bitcoin has crystal clear exponential growth. And another is its value in USD, where again the growth is clearly exponential. Although these quantities are not the same thing as adoption, they are probably proportional to adoption. 2.5 years ago, there was one user of bitcoin. We may estimate that there are somewhere between 104 and 105 users of bitcoin at present. Thus, in another 2.5 years, there will be somewhere between 108 and 1010 users. Since there aren’t even 1010 people on the planet, we may estimate that adoption will be ubiquitous in approximately three years.

Attack vectors
This incredibly rapid exponential growth is being powered by the fact that people around the world are quickly learning about it. Thus, the exponential growth can only last until it saturates the world, at which point it will continue growing only at the rate that humanity grows (which is also exponential, but much slower). At present, there is no reason to think the growth will stop before that. There are no credible attack vectors at all; not even government (the US government or any other) can stop it, because the economic incentives are too large. A War on Bitcoin would have exactly as much efficacy as the War on Drugs: none. Bitcoin is susceptible to DOS attacks, but that would only slow its growth, not stop it. The only credible threat to bitcoin is quantum computers, because bitcoin relies on classical, rather than quantum, cryptography. But that threat is many years away. Bitcoin will be ubiquitous by then.

What will happen?
Bitcoin will take over as the currency of the internet. It will also take over as a store of value; why earn a measly, less-than-inflation interest rate in a savings account when you can have steady appreciation of value if you just keep your money in bitcoin? People will spend less and save more because they know if only they do that, they will be richer in the future. Companies will no longer produce things of no value, because no one will buy them. The world will become more efficient, because there will be less waste. Everyone will realize how much they lose by spending money on valueless things. There will be a more equitable distribution of wealth, because no one can inflate (or, to use a less charitable term, counterfeit) bitcoin at their whim.

Bitcoin will also take over any fiat currencies that inflate too rapidly (think Zimbabwe, Argentina, or any other country that presently has or will have a rapidly inflating currency). Central banks will be under enormous pressure to stabilize their currencies or become obsolete. Many banks will collapse. Many fiat currencies will become worthless. Probably, all fiat currencies will become worthless eventually, because it is only a matter of time before the central banks fall into the temptation of inflating their currencies just a bit too fast.

How to proceed
Since bitcoin appreciates in value very rapidly during the singularity phase, you should convert all of your liquid assets to bitcoin as quickly as possible. Do not keep any cash, savings, or checking beyond what you need to pay for goods and services that cannot yet be paid for with bitcoin. The more things you can buy with bitcoin, the more bitcoin you should keep.

Stop wasting money on excessively expensive meals, televisions, cars, and anything else that loses value quickly or instantly. Instead, put your money into bitcoin. You will be much richer that way. You may think having less stuff is less fun, but actually the pleasure of financial freedom far, far outweighs any losses.

During the singularity phase, you should also take out loans to buy bitcoin, since bitcoin appreciates far more rapidly than interest on any fiat currency loan. When bitcoin gets near saturation, which is the end of the singularity, you should pay off the loans, because at that point the rate of appreciation will probably be a lot closer to the interest on the loans, and you may not be able to reliably earn money that way anymore.

You may also be tempted to convert other assets to bitcoin. If you are invested in anything that is likely to be bitcoin-unfriendly, like a bank, it would be wise to convert those assets into bitcoin. However, if you are invested in companies that actually produce value, those companies will thrive after the singularity, so it is not necessarily a good idea to convert those assets to bitcoin.

If you own assets where the ownership of those assets is certified by a country that is likely to collapse after the singularity, such as if you owned land in a country where the currency is rapidly inflating, you should consider converting those assets to bitcoin, or risk losing it when your country’s government collapses.

If you own a business, you should start accepting bitcoin as quickly as possible to maximize your ownership of the bitcoin economy. If you don’t own a business, consider starting a bitcoin business. See my previous post to learn more about bitcoin startups.

Conclusion
The economy is going to change very dramatically in a matter of three or so years. You are likely to be doing a significant amount, if not all, of your economic activity in bitcoin very soon. The change will be as dramatic as, say, computing or the internet, except that it will happen much faster. The change will be for the better, since it is more convenient to use bitcoin than fiat currencies for digital payments. Fiat currencies may stick around if they do not hyperinflate; they will probably still be useful for buying coffee. The most interesting change is that we will all become more motivated and productive, since we will see very clearly how our work ethic affects how rich we are. And the world as a whole will be significantly more efficient, since it will be extremely difficult to finance huge wastes of money, like wars.

Personally, I have invested most of my savings into bitcoin, and am in the process of figuring out precisely how much more it is wise to invest. I have not yet taken out any loans to buy bitcoin, because that decision is too hard to swallow (I may yet do it if I can stomach it—Falkvinge did.) I have also begun producing bitcoin businesses which I am hoping will support me after I graduate. (My bitcoin savings alone will actually probably be enough to support me, but I will be richer if I work too.) Most of the other ideas I had about what to do with my life after graduation have gone into the toilet—I will probably do something with bitcoin.

In the future, books that summarize the history of money will have a line that says, “and then came bitcoin.” It is the economic singularity. And we are living in it now.

Reprinted with permission. Donations to Astrohacker appreciated: 1CU8KRSTcrYKyjfeGRTjpJ1S57jViwqrnh

For further reading:
"New Decentralized Currency Stimulating Underground Barter Economy", Eric Blair, June 3, 2011
"An Emerging Free Market Currency", Joel Bowman, June 3, 2011
"On the Potential Adoption and Price Appreciation of Bitcoin in the Long Run", cs702, May 29, 2011
"Bitcoin: More Important Than You Realize", Kevin Carson, May 20, 2011
"Bitcoin, Ven and the End of Currency", Stan Stalnaker, May 20, 2011
"What Happens When Anonymous Gets a Bank?", Dominic Basulto, May 18, 2011
"Is Bitcoin the Wikileaks of Monetary Policy?", Robert Tercek, May 17, 2011

20 comments:

  1. I discovered Bitcoin on 6 March. Beginning to wish I'd invested in a few hundred then. #hindsightisabeautifulthing

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  2. You are on drugs. First normal people have to trust in bitcoins and then we know that bitcoins aren't a bubble. I read many stuff about bitcoins, but your article is a brainwash

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  3. You keep alluding to "bitcoin" as an alternative to "fiat currency". However the only REAL difference between your "digital bitcoins" and "digital dollars" is government backing... Neither fiat currencies or bicoins are actually worth anything (physical intrinsic value) besides the faith you place on it to function as a "currency".

    "What Does Fiat Money Mean?
    Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith." http://www.investopedia.com/terms/f/fiatmoney.asp

    I guess all I am trying to say is that I hope your "faith in the bitcoin" is not misplaced.
    Here are a few other "alternative" currencies based off of different types of "faith"...

    http://www.behance.net/gallery/Monetary-Bondage/1069727

    http://www.exchanghibitionbank.com/

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  4. all exponential curves collapse because of physical limits. Bitcoin had some intriguing ideas but as it is formed at the moment it is doomed to fail.

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  5. I have also believed from the moment I discovered Bitcoin that cryptocurrency is the singularity. Bitcoin itself may not end up being it, though, due to either some technical shortcoming or a better competing cryptocurrency.

    So might want to hedge your bets a bit.

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  6. Computational power is not equivalent to security. If the secured item is secure enough to be unhackable within the timeframe it needs to be secure in then it is secure enough. Adding more computational power needs beyond that is a waste of resources.

    There can be many digital currencies and the ones that are the best managed, secured, most popular, easiest to convert in/out of will predominate. Most importantly the ones accepted for the most transactions will predominate.

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  7. "computational power is not equivalent to security. If the secured item is secure enough to be unhackable within the timeframe it needs to be secure in then it is secure enough. "

    With bitcoin's reliance on proof of work to establish the authoritative transaction record, computational power is equivalent to security. As bitcoin's market cap increases, the incentive of hostile or exploitive forces to attack it increases, so its computational power and security needs to increase in step.

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  8. Convert everything you own into bitcoin, and then take out loans to by more bitcoin? THIS IS THE MOST IRRESPONSIBLE PIECE OF ADVICE I'VE EVER SEEN. You make the tax protesters sound like freakin financial geniuses. In all seriousness, please seek psychological help before you destroy your own and your families' lives. Gambler's Anonymous might be a good place to start.

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  9. If you want to see the currency of the future, all you have to do is look back into the distant past.

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  10. Polly PrissypantsJune 13, 2011 at 5:26 PM

    yeah Astrocracker, why r you so cool?
    Is it becuz nobody has a job if they all only buy bitcoinz?

    Why thankyou Pollyprissypants that's very nice of you

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  11. I notice that Astrohacker's "blog" is no longer active.

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  12. The creators of Bitcoin do not understand currency, or why it is valued and used as the medium of exchange. It is a bubble, like tulip bulbs.

    US dollars have value for three reasons:
    1. They can always be used to pay taxes.
    2. They can always be used to pay court debts or personal debts.
    3. They can always be pay off bank loans to gain ownership of real assets, like cars and houses, no matter how much the currency is inflated.

    Bitcoins enjoy none of these value supports. They are only valued because a relatively small portion of the population thinks they are cool, like Beanie Babies. I would hope that you do not leave all or even most of your assets in Bitcoins very long.

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    Replies
    1. It's not their "Coolness." It is their utility. Bitcoin has achieved a level of usefulness that enough people would prefer to use them in place of dollars whenever they can.

      They'll stick around, but you've got a point that the governments of the world won't ever accept them... Some call this being a "Metacurrancy."

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    2. I'd be willing to bet that governments will in the near future take actions to shut down the trading platforms for BC. Part of national defense is the ability to "print money" quickly if the need arises, and bitcoins will threaten USD, which is accidentally threatening the sovereignty of world governments.

      Delete
  13. Very interesting, bitcoin.


    Another electronic currency:

    Http://personales.ya.com/kapitalverdad

    Man [and his values] is the measure of all things.

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  14. I don't think you have an optimistic enough view of the Singularity.

    I prefer to liken it to the works of Neil Stephenson and Iain M. Banks, where we enter into a "Diamond Age" or post-scarcity world where having a currency is pointless, because the things that a currency would get you when resources are scarce are freely available.

    In an age where scarcity of goods is irrelevant because nanomachines and AI are doing all the work, who needs money? Even Star Trek figured that out...

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    Replies
    1. That's what they said about the machines, then about the robots. They'll do all the work. In reality, all the benefits and profits have been skimmed by the capitalists. Resources (including leisure time) are scarcer for the masses.

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  15. I share your optimism for Bitcoin, but I do not think that investing a large percentage of your net worth is wise at all; You've still got the uncertainty of an out-of-control government to content with.

    The moment the Bitcoin economy displaces enough USD to make Ben Bernanke's panties get in a wad, you can be assured that Congress will declare Bitcoin a "Terrorists" tool and do everything they can to make life hard on bitcoin merchants.

    I'm not saying this will stop bitcoin; far from it... But it will certainly make our investments more risky than they should be.

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  16. Funny. I was right on track with you for 1 sentence. Then you said "it is the most incredible thing to ever happen in the world," and you lost me.

    It doesn't matter one bit what bitcoin says bitcoin is, or what the media says bitcoin is, or what some genius online says bitcoin is, the reality is that bitcoin must be seen as an investment...not a monetary system.

    And it's an investment that has absolutely no monetary value besides purely the sentiments that others place on it. If everyone loves bitcoin and uses it, it will rise in price, if they don't, it will not. All the blah blah about how bitcoins come into play and how you use them and the cybercurrency, none of it matters...

    All that matters is the value people place on it. It is a fiat currency. And there is absolutely nothing wrong with fiat currency. The problem is in the policies of the government.

    And as for a fiat currency, I would rather be in one supported by billions of people than one supported by a handful of thousands.

    Bitcoin could be an extreme money maker if you are looking at it as an investment. However, tomorrow there could be a run on the bitcoins and the price could plummet and never return.

    So understand this isn't backed by anything of worth. Bitcoin is a risk investment, it's like buying penny stocks, huge risk, huge upside potential. That's it. The fact that a few people will let you buy some camping gear online with your bitcoins doesn't matter.

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  17. There use to be 2 kinds of money, precious metals and fiat currency. Precious metals were a store of value and held their value over time, but didn't earn interest. Fiat currency is supported by government and used by most people, but loses value over time. It earns interest, but that interest doesn't keep up with inflation. So neither earned value over time.
    Now, we have a potential 3rd type of money. It may never gain mass acceptance and even slowly die. If so, that is the end of the story.
    On the other hand, it may totally revolutionize economics. Because the supply will never exceed 21 million BTC, the value of each BTC would reflect a growing portion of the economy. You would in effect earn interest on your money (BTC) simply by storing it. Save a BTC and it will probably buy twice as much in few years.
    This may end up being the greatest revolution of all time.

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