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Bitcoin proponents: It can purchase goods without being a form of barter, it’s supply is reasonably predictable over time, the security features make it more secure for common fraud (such as stealing credit card info from Target), and it can theoretically provide a store of value/unit of account.
Bitcoin opponents: It’s inability to actually STORE value, the potentially high transaction costs of converting in and out of any local currency, and the lack of governmental support which therefore requires the consistent conversion into a local legal tender. All of this is covered in a great article by John Norman from J.P. Morgan.
Tech visionaries have even proposed future use-cases that support strong investment and a seeming simplicity of life. Given the right additional considerations, I’d agree. I particularly like the underlying ideas by Marc Andreesen when talking about a smartphone checkout.
I believe that the real value of bitcoin is understanding it’s financial pitfalls, and capitalizing on it’s transactional advancements.
— Store of value & speculative nature
— Legal/Social Tender, therefore Purchasing Power
— Costs of conversion
— Anonymous/secure payments & fraud reduction
— Inherent recordkeeping
— Zero transaction costs
…because that seems to be the most widely discussed.
As a store of value, Bitcoin frankly stinks. It has been as much as 10x more volatile than even hyper-inflated currencies of the world. That means that it’s currently being treated as a speculative tool. What does that sound like? Stocks? Derivatives? Lets simplify it and call it a commodity instrument like crude oil derivatives.
Speaking of government approval (we weren’t, but we are now), Bitcoin doesn’t have it. Anywhere in the world. What does that mean? Well, it’s socially supported. It’s value is backed by the faith of other Bitcoin users and the methods of mining/spending it. It also means that at some point, it will need to be converted to a local currency in order to transact with the government for sales tax, income tax, payroll tax, property tax, purposes etc. That means we’re now stuck paying conversion fees to get in/out of USD at least a few times a year.
Those transaction fees can’t be ignored because it’s a cost of using Bitcoin that doesn’t exist when using USD.
So, to call it a “currency” in my mind is completely misleading. It doesn’t store value any better than the crude oil derivative, isn’t any easier to use for paying some of the unavoidable expenses such as tax, and has transaction costs similar to that of a stock market brokerage. See where I’m going with this here?
A transaction in Bitcoin happens virtually and anonymously. What does that mean? It means you, as a wallet (or anonymous account number) holder, can tell the central ledger that you’re transferring an amount of Bitcoin to another person or entity (via their anonymous account number, aka: wallet). You provide a companion private encryption key to go with a public one which allows the transfer to be validated and executed.
Zero cost, zero personal information available for viewing or skimming either.
Without access to your private encryption key and wallet, no one can drawmoney out of an account, only deposit. Who would mind publicizing data that only allows someone to give you money?
Whats better, everything was recorded for you in a central ledger and there was no need to wait for a bank to validate the transfer, charge you 1.5% for the liberty of moving a few bits of data from one account to another, and more for doing it across borders.
You could pay a friend in Zimbabwe just as easily as you could pay your friend sitting across from you at the coffee shop. It’s an incredibly efficient and de-facto-secure* system.
So what does this mean? It means that a truly innovative company will see past the misnomer of Bitcoin as a CURRENCY, and move to find ways to harness it’s inherent capabilities as a TRANSACTION medium, very similar to what I believe Marc Andreesen was pointing out in his use case example mentioned above.
The need to insulate a user from transaction fees and the value swings suggests using Bitcoin at an infrastructure level for companies like Western Union. Harnessing the zero costs of transfer from one branch to another would allow for market-disrupting discounts for consumers. Making it available via apps like Venmo or other innovators in the payments space double or triple it’s potential adoption rate and ease of use for the customer.
Controlling the speed with which money translates into and out of Bitcoin as a medium allow for the mitigation of it’s poor ability to store value. A centrally-controlled system that doesn’t rely on different networked companies reduces the need to extract economic value or profit at every stage of this process. Suddenly I can send payments to my friend in Zimbabwe in USD, see it instantaneously sent and received, converted to their useful, local currency in seconds at the current rate, and pay a few cents, the equivalent of an advertising impression.
Are there difficulties inherent in this model? Yes absolutely.
Does it make the most of the strengths of Bitcoin while attempting to minimize it’s seeming failures? Yup, you bet.
*Note: this is in reference to common fraud in today’s market. Obviously there is plenty of evidence that it’s not safe against cyber attacks, but for now it’s pretty good against the typical skimmers.
Originally posted by Rob McGrorty on Medium