Wednesday, April 30, 2014
news these days with attempts by Chinese authorities to steer bitcoin legitimacy. This gives us an excellent opportunity to contemplate and reiterate the core attributes of bitcoin’s overall strength.
Bitcoin shows that national fiat money systems are an artificial construct. The debates around regulation are really restrictions on getting into or out of the US dollar rather than getting into or out of bitcoin. Dollar and other national currency endpoints will always be regulated.
Aside from the fact that bitcoin survives and outlasts political institutions just like the Internet does, its greatest strength lies in the fact that it does not require government or other third parties to sanction its legitimacy. Bitcoin’s legitimacy derives from its market adoption and continued usage among its participants.
The exchanges, or on-ramps to the legacy financial world, are just convenient enablers and it makes sense for some threatened political institutions to clamp down on the facilitating enablers. Incidentally, it also reveals to the world which nations feel the most threatened by the existence of an incorruptible, non-political monetary unit.
Far more important to bitcoin’s future are the robust mining communities and the decentralized global nodes. Ultimately, any new bitcoin regulation yields market-based reactions to that jurisdiction’s regulation. Outright bans simply do not work. Price discovery still finds a way.
Of course, people in certain countries get annoyed when they cannot use an exchange to acquire or sell bitcoin and instead must go to excellent sites like LocalBitcoins to arrange a transaction. It can make you feel like you’re engaging in something seedy, but that is the intent of the regulators and the Fourth Estate. They drive it underground to dampen or slow adoption.
The way forwardWe can do something. There is a solution. First, don’t worry every day about the USD or EUR price of bitcoin. Manage the risk via currency diversification.
Secondly, don’t fall victim to believing that nation-states can bestow legitimacy on a monetary unit. The most that governments can do is demand a favoured monetary unit in payment for taxes and other payments to the authorities, thus declaring a legal tender. A declaration such as that has little to no effect on person-to-person digital exchanges.
Also, reject the premise that bitcoin must be mainstream in order to be massively successful. Of course, it wouldn’t hurt for bitcoin to go mainstream, but not at the risk of diluting some of its core attributes.
Bitcoin needs to be successful on its own terms unlike PayPal, which capitulated from its original mission to then become a watered-down version of itself, enabling the same third-party choke points and legacy financial roadblocks that it originally set out to challenge.
Lastly, while research articles may tout a seductive future where ‘Bitcoin’s Promise Goes Far Beyond Payments‘, it is unlikely that a future of block chain-like applications will dispense with the original building blocks of bitcoin.
Bitcoin stands to winDistributed trust networks are built upon gradually expanding computational strength provided by the network’s increasing hash rates. The incentive for continued mining is directly related to the value of the network-embedded monetary unit which is the bitcoin unit.
Side chains that exploit bitcoin’s early mover advantage are more likely to be the future of block-chain applications than government-managed trust networks that centralize and malign the incentives.
Therefore, bitcoin wins more broadly even though payments may only represent the first application of block-chain technology. The bitcoin monetary unit is the inseparable part of the world’s largest and computationally strongest distributed computing network.
Like languages, value standards trend towards commonality, which is why we will never see over 300 independent altcoin valuation standards succeed.
A standard for measuring value is similar to a standard for measuring volume, length, or temperature. The world may accommodate a few competing standards (like Fahrenheit and Celsius), but the market will reject an abundance of counterproductive competing standards.
Issues that broad adoption solvesAs bitcoin is a global unit, we must talk about adoption on a global scale. It is insufficient to talk only of bitcoin adoption within a single country because its global nature breaks down borders for more robust international trade and transactions.
Unlike boundary-specific monetary units, bitcoin facilitates exchanges between different jurisdictions, thus weakening the advantage of the providers of the regional monetary unit. Bitcoin does not recognize the relevancy of jurisdictional borders and sees them as damage that it needs to route around.
Many positive things begin to happen with broad bitcoin adoption. For instance, the need for online local fiat exchanges begins to diminish because people on the receiving end of bitcoin are also able to spend bitcoin. A closed loop is created.
Also, the focus of bitcoin-related businesses shifts to usage rather than concerns around regulation, because if people are not exchanging bitcoin with fiat there become fewer regulatory endpoints to the legacy financial system.
All that remains are people trading digital scarcity ‘tokens’ for goods and services via their personal electronic wallets. Economic growth is centred around the participants of that new economy which reinforces market-based legitimacy for bitcoin.
Strategies for increasing adoptionHow can we increase bitcoin adoption? This is the famous chicken-and-egg question. Do consumers lead the way for merchants to provide bitcoin payment choices, or do merchants provide fabulous bitcoin offerings that drive consumers to enthusiastically acquire their first bitcoins?
Both can be correct and there is no right or wrong answer. Aggregate consumer purchasing power could indeed influence merchant payment choices, while the fabled ‘killer app‘ for bitcoin will probably be merchant-driven.
Local groups and bitcoin nonprofits around the world could start holding contests with awards for the merchants that have the greatest bitcoin sales in a given period. ‘Bitcoin Accepted Here’ decals could be distributed in the same way that other payment decals are distributed. Large and influential merchants could debut shippable products to parts of the world that have no ability to purchase goods in the global economy without a bank card.
The existing bitcoin merchant processors like BitPay, BIPS, and Coinbase play a significant role in increasing adoption, especially since they provide streamlined apps and plugins for existing e-commerce software packages.
This will continue to be a high growth area as both physical and virtual merchants seek to plug into the rapidly growing bitcoin economy.
Consolidated consumer pressure promising large Groupon-like sales volume could also be directed at favoured merchants, thereby adding new bitcoin merchants to the ecosystem. This also creates a reason for consumers to acquire bitcoin.
As the chart above demonstrates, we are already witnessing greater bitcoin payments turnover than we were in the early years. This is encouraging because it means that new bitcoin is being transacted and used in some manner generally within 24 hours.
Furthermore, all of this has happened without an official government pronouncement or declaration of a legal tender. The future belongs to bitcoin.