The State of Bitcoin, Cryptocurrencies, Distributed Transaction, and Trust Networks in 2015

Some thoughts on the state of Bitcoin, cryptocurrencies, distributed transaction, and trust networks at start of 2015! A year ago, I articulated my views on Bitcoin in the New York Times, and I wouldn’t change a word today. Over the last several months of 2014, there were three Bitcoin counter-narratives that I will describe and analyze.

The Dumb Critique

First, what I call the “dumb” critique: “Bitcoin BTC currency price dropped to below $300, proving Bitcoin is a stupid idea.” The same class of critics slamming BTC for price falling in 2014 were slamming BTC for price rising in 2013. The only consistency is the slamming. Further, the critique that BTC is bad because it was down in 2014 changes completely if one uses a 2-year window instead of a 1-year window.

BTC was below $14 in Jan 2013. If 1-year performance has been disappointing, 2-year performance has been spectacular. As a general rule, arguments that rely on cherry-picking specific date windows are not very good arguments.

The Smarter Critique

The second critique I call “smarter”: “BTC is too volatile. It goes up and down too much and so cannot be used as a store of value.” This is largely correct at the moment, and yet misses most of the point of Bitcoin as a distributed transaction and trust network.

Bitcoin was specifically designed to use speculation early on to overcome the normal chicken/egg bootstrapping problem for new networks. Attacking Bitcoin for having speculative levels of volatility is missing the point of how the system was designed for this point in time.

Now, yes, in the long run, BTC does need to stabilize, which I think will happen with a combination of scale plus the use of derivatives (hedging). In the short run, Bitcoin is still highly useful as a transaction and trust network in many use cases even with high volatility.

For example, payment applications of BItcoin don’t require users/merchants to hold BTC for any period of time. All of the benefits are still gained. Further, all other uses cases of Bitcoin and the blockchain are unhampered by volatility of BTC. The system continues working just fine.

The network bootstrapping process is happening pretty much exactly as Satoshi designed and anticipated. It’s a thing of beauty.

The Innocent Critique

The third critique I call the “innocent” one. “Are there enough sufficiently compelling use cases for Bitcoin to succeed at scale?” I previously identified many use cases here ranging from eCommerce to remittance, micropayments, and anti-spam. Two particular areas of focus today are (A) used outside the US where currencies plus banks are often awful, and (B) machine-to-machine payments.

At our venture firm, we continue to see an escalating stream of fascinating new Bitcoin use cases and applications from entrepreneurs. In addition, there are entirely new vistas of technological creativity opening up, such as sidechains. The price of BTC has very little to do with the level of creativity of thinking that’s going into new Bitcoin apps, or their usefulness.

By loose analogy, the price of domain names didn’t determine the usefulness of the Internet. This is a broad-based technology phenomenon. What to watch in 2015: New apps, new use cases, international adoption, consumer education, technological innovation and spinoff ideas!

Final thought: The entire Bitcoin system is 6 years old. TCP/IP was 6 years old in 1981. Big things take time. Onward!

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22,23,24,25,26

My Interview With Bloomberg Markets

Bloomberg Markets was nice enough to publish an interview with me this week, mostly on finance and banking topics. Since the interview is correct but abridged, took place in early April, and is just coming out now, I offer a few additional thoughts.

Unbundling banks: I think banks are getting unbundled with or without Silicon Valley or Bitcoin due to market changes plus regulation.

Any big bank executive will tell you: Over time, the ratio between what non-banks can offer vs what banks can offer is steadily increasing. Post-crisis reforms like Dodd Frank are accelerating the unbundling, whether that’s what regulators intended or not.

But Dodd Frank is a double-edged sword: It also makes it harder for new entrants to the core banking system. Banks both protected and restricted.

Bitcoin and regulation: Since the interview in early April to the present, there’s been substantial movement by many regulators on Bitcoin. There are plenty of discussions and disputes between market participants and regulators but overall, I think a lot of progress is happening.

Finally, much like the Internet 20 years ago, Bitcoin as a technology can and will be adopted by both incumbents and new market entrants. We are seeing a rapidly escalating level of engagement and interest in Bitcoin and cryptocurrency by large financial services companies. The opportunity is clear and present for both big companies and startups to use new technology to improve financial services broadly.

Since the interview, the other huge earthquake to hit the financial services industry is the launch of Apple Pay. Between Apple Pay and Bitcoin, I predict more changes coming in financial services and banking in the next 3 years than in the last 20 years.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13

When People Who Don’t Understand Technology Attack New Technology

Today, I said one of those things which ends up being relatively quotable. So here are a few points and elaborations for anyone interested. Warren Buffett is a personal hero of mine. He’s clearly a brilliant investor, business person, philanthropist and humanitarian! Warren is a world-class expert in many areas and in those areas he has forgotten more than I will never know.

But Warren has maintained for decades that he knows nothing about technology and does not seek to know anything about technology. However, that has not stopped him and several other similarly prominent and successful people like him, from opining negatively on Bitcoin. I’m on the record in saying that Bitcoin and more broadly cryptocurrency is one of the most important tech breakthroughs of our time.

When people who don’t understand technology attack new technology, it’s fair game to call them on it. People should know what they’re talking about and I seek to educate those that don’t. To that end, I would be happy to spend as much time with Warren as he wants, teaching him all about Bitcoin. My partners @a16z and I will also continue to write and tweet on the topic with a shared goal of mutual understanding and progress.

Source Tweets: 1,2,3,4,5,6,7,8,9

Bridging The Divide Between Techies and Non-Techies

Friends in the press are asking me why the Newsweek story has so many techies so upset. I will attempt to explain a generalized view…

  • First, the perpetuation of nerd stereotypes (wording in article, NOT Dorian himself): weird, loner, maladjusted, libertarian, odd hobbies.
  • Second, it transforms what many techies think of as an important tech breakthrough into a human interest freak sideshow devoid of substance.
  • Third, the story attempts to deliberately out the real Satoshi against his/her will, when he/she has done nothing wrong or harmful at all.
  • Fourth, the reporter evidently made little effort to learn anything about Bitcoin or cryptocurrencies, or cryptography or math or programming.
  • Fifth, assuming this story is right, this so-called forensic analysis behind the story is a complete joke.

Each of these would still be offensive to techies *even if the Satoshi story were right*. But if story turns out to be wrong, doubly so. If story is wrong (not saying it is, but if), then even worse: An innocent man was falsely outed, exposed, made vulnerable, and his life was changed forever.

The broader reason this all matters? There’s a growing CP Snow-style divide between techies and non-techies. We must bridge it, not expand it. We must build communication, build rapport, build trust. Many great reporters do this every day and are heroes. More of that, less of this.

Source: @pmarca tweets1,2,3,4,5,6,7,8,9,10


Questionable Forensic Analysis of Nakamoto’s Identity

I don’t know who Satoshi is, but I do know this “forensic analyst” simply does not know what she is talking about. First, modern systems designers talk about disk space all the time. It comes up constantly for engineers building large scale systems.

Second, modern systems designers talk about Moore’s Law all the time. It’s one of the key drivers for thinking about scalability over time. In our office at A16Z, there are probably 20 conversations a day about disk space and/or Moore’s Law. And they’re not getting less frequent.

Odd: “Moore’s Law is an old maxim that computing power will double. We’ve gone exponentially away from Moore’s law, [since] that interim period.” You don’t go “exponentially away from” the law that says that what you are dealing with grows exponentially. Who is this person?

Source: @pmarca tweets1,2,3,4,5,6


Press on Bitcoin and Crypto-Currencies

What passes for a good press column on Bitcoin and crypto-currencies in early 2014: Our Flawed Financial System is Reflected in Bitcoin.

  • Opening giant photo of physical gold coins that completely misrepresents the topic being discussed — CHECK!
  • Preemptive and condescending sneering that Bitcoin could be useful in any way — CHECK!
  • Nearly willful ignorance about technical specifics about Bitcoin, such as divisibility — CHECK!
  • Handwavy praising of a theoretically far superior system (“Bitnote”) that does not actually exist — CHECK!

And yet, some really good macro points that are worth considering — which is what makes it a good piece on balance. Pieces like this read IDENTICALLY to comparable pieces 20 years ago about the Internet, even the same sequence of points! So fascinating.

Source: Tweets – 1,2,3,4,5,6,7

We Live In John Law’s World

john-lawThe most interesting person in Western history who most people have never heard of is John Law, the inventor of the concept of paper money. Born in Scotland, Law began by killing a man in a duel over the affections of Elizabeth Hamilton, former mistress of King William III. Law fled to the continent, and ultimately — and improbably — became Finance Minister to King Louis XV of France in 1716.

Law believed that money is only a means of exchange that doesn’t constitute wealth in itself, and that wealth flows from trade. As such, Law proposed and implemented paper money issued by the French government, and banned gold and silver currency. Contemporary economists screamed in protest, and yet the paper money plan worked. French economy roared to life.

Sadly, Law’s other project — the Mississippi Company — spectacularly imploded. Law fled France and died broke in Venice in 1729. Law was right. The international monetary system finally fully dropped the gold standard in 1971, 300 yrs after Law was born. We live in John Law’s world.

Schumpeter later wrote: “Law is in a class by himself. Brilliant and profound, placed in the front ranks of monetary theorists of all time.” I am willing to lay odds that Satoshi Nakamoto is John Law’s great-great-great-great-great-great-great-great-great-grandson.

Recommended Reading:

Sources: Andreessen’s tweets on John Law – 1,2,3,4,5,6,7,8,9,10,11,12

Senator Joe Manchin’s Position on Bitcoin

manchinLet’s explore the newly announced positions of American Senator Joe Manchin (D-WVa):

  • Manchin is FOR suppressing pro-consumer and pro-small business innovation in financial services to increase choices, lower fees, and sell globally.
  • Manchin is FOR continuation of 2008-era US financial services industry for the long term; entrenchment of status quo and Too Big To Fail.
  • Manchin is FOR maintaining high credit-card fees for much of American economy, reducing standard of living for many Americans including poor.
  • Manchin is FOR sustaining ~10% remittance fees for hardworking immigrants toiling 60-hour hard labor in US to send money back to families.
  • Manchin is FOR crippling high-job-growth US tech industry in important new field; forcing Bitcoin innovation and jobs to foreign countries.
  • SUMMARY: Manchin is FOR high fees for regular consumers and poor immigrants, 2008’s brittle US financial system, and kneecapping the US tech industry.

Source: Andreessen’s tweets: 1,2,3,4,5,6,7


Bitcoin Birthing Pains

photo credit: zcopley - cc

photo credit: zcopleycc

The market price of BTC (Bitcoin) dropped going into the MtGox shutdown, and then has risen since. This is exactly what one would predict for a normally functioning financial market without systemic risk.

MtGox had to die for Bitcoin to thrive. Its former role from early Bitcoin days has been supplanted by better, stronger entities. People learning about or trading Bitcoin should deal with reputable, well-run, well-backed companies such as Coinbase (our choice).

It’s important to know that Bitcoin protocol and transaction network doing just fine in wake of MtGox shutdown; there are no substantive technical issues. Every important new technology has birthing pains. PC did, Web did, Bitcoin does. Our enthusiasm and commitment remains unchanged.

Source: Andreessen’s tweets on Bitcoin and Mt. Gox shutdown: 1, 2, 3, 4, 5, 6