Bitcoin And The Two Things You Need To Know
This post originally appeared on Forbes.com.
The discussions that are happening around Bitcoin feel a lot like those from the early days of the internet. It’s like when my parents asked me about AOL dial-up. “Who is the computer calling? Now the questions are, “what are these Bitcoins and can I see what one looks like?”
I discussed this topic with a handful of Bitcoin entrepreneurs and Bitcoin investors and so I figured it made sense to lay out some high level thoughts on Bitcoin for my own sanity and hopefully yours. To start, I think there are two important ways to think about Bitcoin.
1. Bitcoin as a currency.
2. Bitcoin as a technology.
Bitcoin as a currency. Like all things throughout history, we know that change is inevitable and currency is no different. Once upon a time forms of money included cattle, salt, shells, and precious metals. As time went on the world evolved and so did the currency that went along with it.
As Thomas Friedman would say, today the world is flat. Our telecommunications make it dead simple to communicate and transact with anyone, anywhere around the world at any moment in time. In short, Bitcoin is a new currency that was designed for this new world. In this video, Eric Vorheese does an excellent job explaining the evolution of money and why the characteristics of Bitcoin, as compared to gold and our dollar, make Bitcoin such an intriguing form of currency for a digital world. That analysis look something like this:
|Gold||Yes,there is only so much of it in the earth.||No,it’s very heavy.||Kindof, depending on where you store it.||No, no single authority owns gold.|
|US Dollar||No, the government can print money, which they often do (inflation).||Yes, its lightweight paper.||No, it can be counterfeit.||Yes, the government provides its full faith and credit to the US dollar.|
|Bitcoin||Yes, only ~21M bitcoins will ever be created.||Yes, it’s digital.||Yes, it’s secured by math puzzles that only super computers can solve.||No, like the internet, it’s not owned or controlled by any single entity.|
Only time will tell if Bitcoin can survive as a currency but fundamentally, it makes sense to me that there should be a currency specifically designed for a hyper connected, digital world.
Bitcoin as a technology. To fully understand what Bitcoin can mean as a currency, you must also understand how it works at the technology layer. This video does a nice job explaining the technicalities of Bitcoin, but the core innovation of Bitcoin is that there is a public ledger that is very secure because of some complicated math. Albert Wenger of Union Square Ventures describes it this way:
At the heart of bitcoin is a fundamental innovation: a distributed public ledger. A ledger in accounting is a book that you cannot edit once you have written in it. Instead, if you have made a mistake, the only way to fix it is to add another transaction to the ledger that undoes the error. As we know from accounting fraud, problems arise when people figure out ways to transact without recording it in the ledger or making ex post changes to the ledger (this is why Quickbooks isn’t really an accounting system). The bitcoin ledger is the so-called blockchain which uses the fact that there are many copies of it that are broadly distributed combined with a fair bit of math to ensure that once a transaction has been recorded in the blockchain that transaction can not be changed after the fact. There is no other widely used protocol in the world today that accomplishes this: with bitcoin anyone can make a statement (a transaction) and have this be recorded in a globally visible and fixed ledger.
Years ago, information was controlled and distributed by single entities. This is why media conglomerates and newspaper companies were so powerful. When we talk about how the internet disrupted those companies, we are really saying that new protocols created the disruption. The protocols provided a way to send and receive instantaneous information without anyone’s permission. The protocol behind Bitcoin is providing the same type of disruption only instead of sending information without any third-party involvement, we are now able to send money without any third-party involvement. In essence, we are democratizing money and rewriting the rules for how commerce can be conducted.
This creates a tremendous amount of opportunity. Naval Ravikant, CEO of Angel List published a piece in Wired magazine about the future possibilities of Bitcoin. Here is a clip:
Just as the web democratized publishing and development, Bitcoin can democratize building new financial services. Contracts can be entered into, verified, and enforced completely electronically, using any third-party that you care to trust, or by the code itself. For free, within minutes, without possibility of forgery or revocation. Any competent programmer has an API to cash, payments, escrow, wills, notaries, lotteries, dividends, micropayments, subscriptions, crowdfunding, and more. While the traditional banks and credit card companies lock down access to their payments infrastructure to a handful of trusted parties, Bitcoin is open to all.
So will this Bitcoin thing work? Is it a good investment? Should you buy some Bitcoins?
I have no idea. But what I do know is that this feels very much like the first time I signed on to AOL and that to me is very exciting.
It’s a new world.