This is a re-post of Steve Faktor’s original article on Forbes
I was just on a panel on the future of payments. One of the other speakers was a Bitcoin disciple. It’s like inviting a PETA protester to judge a hot dog eating contest – expect a jihad that consumes the room. What is it about Bitcoin that turns otherwise normal professionals into apostles?
In case you haven’t heard, Bitcoin is the sexiest thing on the world currency scene. If The Da Vinci Code knocked up World of Warcraft, Bitcoin would be their baby – and Alex Jones its nanny. Supermodels will literally eat out of your hand once you flash some BTC at KFC. Except, you can’t…yet. Or likely, ever. Here are my thoughts on why Bitcoin is a zombie dressed up like Paul Revere – with one tiny hope of reanimation. Regardless, this undead revolutionary will have profound implications for the future of money.
Roots of Bitcoin Jihad
Remember that musty smell of cash? As I wrote in Econovation, it’s going extinct.
As an immigrant from the Soviet Union, I never touched a credit card until well into my junior year at NYU. Growing up in pre-Hipsteric Brooklyn, cash was real money. And the idea of a “cash business” meant merchants decided what went to the IRS and what fell under the table.
Then came credit cards. With big conveniences and tiny rewards, they let us get anything we wanted – if we promised to pay for it later. As consumers ate up plastic, “cash businesses” grumbled. When cards were forced on NYC cab drivers, it wasn’t the 3% fee or delayed payment they protested. It’s the 25% income tax they couldn’t escape. You won’t hear that on CNN.
The idea of Bitcoin is hard to ignore. I spent years at American Express and MasterCard building loyalty businesses that must convince consumers to care about their points – or currencies. Bitcoin has a rabid following most companies can only dream of. So it’s hard not to feel at least a twinge of excitement and envy over Bitcoin. And with the US pumping out dollars to cover up gross mismanagement of the economy, Bitcoin seems like a godsend. It’s money free from centralized authority. It’s easily transferable online. And it’s semi-private, like the partition between urinals – but not quite a full stall.
In 2007, candidate Obama represented a kaleidoscope of individual hopes and dreams. Countless business plans embody each entrepreneur’s aspirations. Similarly, Bitcoin represents a money utopia. Like all dreams, it now faces a harsh reality.
Who Are The ‘Coin Crusaders?
Your mom and dad are too obsessed with your flaws to worry about those in the US dollar. Cousins, neighbors, even finance professionals don’t care about Bitcoin or this article. So who does? There are two main groups.
Liberteers – You might see them stockpiling jerky on Doomsday Preppers or posting Senator Rand Paul’s rants on Reddit. These disenfranchised (mostly white) men of the liberty movement are mounting a war against government tyranny. Drone strikes and NSA wiretapping have them bouncing off the walls of their bunkers. The more technical Liberteers believe Bitcoin could be the antidote to a coming dollar collapse – or wealth confiscation by Darth Obama.
Pioneers – For tech idealists, Bitcoin offers off-the-charts geek chic. Only powerful computers can “mine” it, like virtual gold. It empowers them to build ewallets, exchanges, and merchant tools. It goes to 8(!) decimal places and was created by a mythical uber-geek who goes under the alias of “Satoshi Nakamoto”, which means “slippery electric eel” in Japanese. This is Lord of the Rings, Sim City, and Raspberry Pi rolled into one.
Profiteers – While traditional banks, VC’s, and merchants are just sniffing around, Bitcoin’s ups and downs are an aphrodisiac to speculators, who spiked trading earlier this year. A few investors, like the Winklevoss twins, are sprinkling some cash on Bitcoin startups, hoping it becomes the next Facebook…or their first. While early Profiteers were both Liberteers and Pioneers, the new breed treats Bitcoin like a penny stock waiting for the next set of suckers.
Governments have been taking it slow, drinking it all in. Like the producers of Survivor, they’ve been watching the players planning the finale. This $5M seizure from Mt. Gox is its first move. Meanwhile, Germany just approved Bitcoin for private transactions.
Despite promises of lower fees, merchant adoption has been tepid. You can’t yet build a dollar-free life around one German porn site and a Chewbacca collectibles dealer.
Though some criminals have plundered Bitcoins, few trust the semi-traceable currency for serious arms dealing, drug running, and terror funding. For that, cash is still kingpin. According to Ars Technica, one industry does account for almost half of all Bitcoin transactions – gambling.
Humans can travel into space and drink cookies inside their coffee. We can truly do anything. But just because we can, doesn’t make the cause worthy. Bitcoin evangelists are building a Taj Mahal for a lover who cheats. Here are just a few of the problems with Bitcoin. (You decide which ones are deal-breakers):
- It’s marginally legal. To put it simply – you can’t f*** with US government interests. And Bitcoin’s got it all – potential for money laundering, undermining monetary policy, and terror funding. This is like trying to convince Wal-Mart to sell “Wal-Mart Sucks” t-shirts. Yes, on some level, we are the government and could change the system, but Bitcoin isn’t the cause to rally around. In fact, the government just started cracking down on Bitcoin like it did with Liberty Dollars and gold before that.
- It’s easy to shut down. As the government proved with online gambling and offshore accounts, you can suffocate any business without banning it by cutting off money transfers. No financial institution is going to risk its US license for Bitcoin, gambling, or executives hiding assets from jilted spouses. Legit customers won’t crawl over barbed wire to fund a Bitcoin account. That extra friction is just enough to thwart adoption.
- It fluctuates wildly. That’s great for speculators but terrible for commerce…in a world built for dollars. If Macy’s accepted Bitcoin, your 1Bc jacket might deduct either $80 or $150 from your account. Jersey housewives are less volatile. The only workaround is to build a life in which everyone transacts only in Bitcoins.
- It’s scarce, by design: Bitcoin is programmed to never exceed 21 million units. As demand grows, its value must go up as long as more people want it. It works just like NYC taxi medallions. Government created artificial scarcity by limiting the number of medallions issued. What used to cost a few thousand dollars and could be bought by an immigrant, now costs nearly $1 million and requires a Saudi Prince. Why sell an asset guaranteed to go up in value? Same for Bitcoins.
- It’s deflationary. When the supply of currency is limited, new grads, immigrants, and others can’t get their hands on it. More people requires inflation. If a currency has a fixed supply and always appreciates in value, people will hoard it and not spend. This would crush the economy.
- People don’t care. Most people can barely be bothered to save the currency we’ve got. Our government spies on us, bombs foreigners with drones, and begs for “donor” cash. If that doesn’t matter, who’s going to pry the Cheetos from our sticky orange hands to riot in the streets for Bitcoin? Without mind-blowing benefits or a massive financial collapse, your best bet is blending Bitcoins into an Oreo Macchiato.
- It’s more complex than Linux. Don’t know what Linux is or how it works? Exactly. Bitcoins violate so many of the basic rules of payments innovation, I’ll shamelessly point you to my last article on that subject.
- Benefits to merchants are marginal. Bitcoin evangelists argue that Bitcoin is cheaper to accept and process than credit cards. Not really. To compete, Bitcoin would need to have chargebacks, customer service, transaction processing, system development/maintenance, and rewards. Factor in all those costs plus a small profit and the economics start to look almost exactly like those of credit cards. I did this exact math when evaluating if a low-cost merchant payments network could work. (Answer: only if all the executives lived on Ramen noodles.)
- It’s online only. All money goes away if there’s a major collapse. Bitcoin might fare worse without network access or electricity. Yes, you could issue Bitcoin paper currency – see Liberty Dollars.
- Sketchy origins and security. Would you put any of your life savings into something started by some unknown hacker? There have been plenty of Bitcoin heists and breaches. I listed this last because traditional financial companies get hacked all the time. We don’t always hear about it.
On the other hand, I might never stop laughing if someday we learn that “Satoshi Nakamoto” is really Barack Obama and the entire Bitcoin operation was a government plot to track down criminals! “Agents Winklevoss reporting for duty, Mr. President!”
The Race to Save Bitcoin
It all comes down to a race.
Politicians seem to be on a furious trajectory to kill Bitcoin. There are only two things that can stop them – the citizens or their customers. US citizens will not fight this battle. So it’ll have to be businesses, a.k.a. donors.
Several established players (likely in financial services or Silicon Valley) must first figure out how to make lots of money from Bitcoin. Then they’ll need to use their mighty political influence to sway government officials. They did exactly this in changing securities regulations for crowdfunding.
Without powerful influencers driving adoption, Bitcoin is destined to die alone, eaten by cats. OK, cat videos.
Bitcoin’s Killer App & Other Opportunities
It’s not all doom and gloom. As the nascent Bitcoin Foundation races the clock to overcome major hurdles, it’s hard to discount anything with such a rabid following. Here are a few ideas on what might save this noble experiment.
One killer app that could make Bitcoin work is insurance. Insured Bitcoins could appease government by making transactions traceable and they can protect consumers in case their accounts are violated or there is a dispute with a merchant. Credit card companies, insurers, investors, and exchange operators could profit from the fees generated. The only ones who suffer are those who want to hide their activity. In practice, this should be as private as bank transactions and provide dispute resolution comparable to credit card companies.
Another opportunity is to go where you’re wanted. The US will fight Bitcoin like a virus. However, OPEC, Russia and other oil-producers have made numerous, but (so far) empty threats to stop accepting dollars for oil. If those countries were truly serious, Bitcoin or another currency backed by a basket of commodities could work. Of course, if the US succeeds in mining its natural gas reserves, OPEC will have the leverage of an 80 year old gigolo.
Countries with runaway inflation, weak currencies, or those dependent on dollars might want something more stable. One challenge is how do they get their hands on enough Bitcoins in the first place? Unless fresh Bitcoins are created and issued to them, they’ll need to buy them with….wait for it…dollars. Defeats the purpose. Another challenge is creating simpler denominations and ways of transferring it. Some of the neediest countries have literacy rates as low as 50% and low mobile adoption.
Somewhere between crime and convenience lies shame. Bitcoin can offer anonymity for niche categories like gambling, gaming, adult entertainment, and virtual goods. Though offline, it’s still not as good as anonymous as cash.
The Unintended Consequences
I know that dozens of bright entrepreneurs will create the Facebook or Pinterest to Bitcoin’s MySpace. But no one will care. No private currency will achieve Bitcoin’s level of fundamentalism. Much of that is tied to the fact that it is open-source. Plus, fragmentation among fledgling currencies will only accelerate their decline. Broad payment or loyalty systems need universal adoption (countries) or powerful ecosystems (like theme parks or campuses).
For better or worse, it’s Bitcoin or bust. The mission for entrepreneurs is clear: 1) Fix Bitcoin’s flaws – if you can. 2) Win over regulators. 3) Build a business on top of Bitcoin’s open architecture. Of course there’s always Bitcoinland and BitWater Coindom.
This whole experience will accelerate The Bitcoining of the US Dollar and the death of cash. That will create some big opportunities and hairy challenges. (Sign up to IdeaFaktory to get that article first and other goodies.)