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Why Bitcoin is failing

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Bitcoin is arguably the single greatest invention of the new millennium. Its creation is so revolutionary that it almost defies logic. And like any inventive product, almost everyone I speak to has this automatic revulsion to the concept: "It can't be real!" they exclaim into my face. "It's for drug trafficking, contract killings, and money laundering," are the standard trifecta response of those who have heard about Bitcoin through the media. "It's unsafe, volatile, and risky," is the response from those who actually know a little more about it.


Why Bitcoin is failing


(Source)


Yes, as with anything speculative, it is risky. However, blaming illegal transactions on Bitcoin, which much of the mainstream media seems to do (with notable exception of The New York Times and Forbes), is like blaming the heroin epidemic on "cash." If we didn't have cash then people would have to use a traceable form of payment. Then we would be able to track them down, and the use and abuse of illicit drugs would end. Unicorns and puppies would rain down in celebration, and Jesus would ride his white horse in exultation.


Bitcoin attracts the same kind of logic argument: If Bitcoin did not exist, we would not have drugs or other illicit activities being sold online. The unfortunate reality is that people will find a way to get whatever illegal activity they want done. They'll barter, sell, or trade anything to make it happen. Bitcoin just makes it easier to conduct an illegal transaction online, and yet, it is also one of the most transparent payment methods that exists. There is a false sense of security to people who are using Bitcoin for illegal purposes in cases like this.


You hear politicians railing against Bitcoin and calling for its ban, as if it was the problem, and not the illegal activity. Janet Yellen, our current monetary mystic has said, "The Federal Reserve has no authority to regulate Bitcoin." She understands, and is intelligent enough to realize, that as it is outside the banking system, it is inherently hard to regulate.


Bitcoin has the potential to completely transform every aspect of the internet, marketing, content distribution, and third-world empowerment as we know it. And in the future, you will thank its mythical ghost creator, Satoshi Nakamoto, that it exists. However, before that time arrives, we must start with a question: What is Bitcoin?

Bitcoin 101


First, we have to get a handle on what the heck this Bitcoin thing is. The tech behind Bitcoin is so cool I personally get almost apoplectic when I think about it. It can be used not only for money, but for the transfer of anything that conveys ownership of property. However, this is the primary reason Bitcoin is failing. Techno-geeks tend to get wrapped up in the technology -- not the conceptual potential -- and end up talking about topics only a small group of people (other techno-geeks) can understand.


To help better explain what Bitcoin actually is, take a $20 dollar bill (or any other amount) out of your wallet and look at it. What is it worth? "Well, $20 dollars of course," is most likely the usual indignant reply. But what does $20 dollars mean? Where does it come from? We all know The Federal Reserve issues all currency for the United States. And then further elucidate on how it becomes $20 dollars. Believe it or not, U.S. currency was created out of thin air. The whole value of our currency is a faith-based system. We all accept the same belief that it has value. And such it is with Bitcoin. All it requires is the belief in it. And as of now, a lot of people believe Bitcoin is about as real as a unicorn.


Although technically the Fed can create money out of thin air, the central bank cannot simply print money as it wants. As with anything that has a higher supply than demand, the value will go down. As long as people have faith in a currency, a central bank can issue more of it. Since Bitcoin has no central bank, there will only ever be the capped supply of 21 million bitcoins. That finite amount creates an inherent scarcity within the Bitcoin system, which creates value.


Unlike gold, if Bitcoin does fail, it cannot be melted into a pretty piece of jewelry. So whether we are talking about gold or bitcoins, gold only has a higher "store of value" because more people believe it does, and not just because it can be made into something else.


In reality, Bitcoin is no different than gold -- a faith-based system with less followers. There is a floor to the value of gold because of that faith, but only from our perceived belief that mining has any value. And if faith-based systems (like religion) have shown us anything, it's that they have an amazing ability to survive regardless of the "reality" that tries to poke holes in its beliefs. However, because this little religion of Bitcoin has fewer followers and leaps-of-faith required to suspend logic, we can decide -- en masse -- not to believe in it. And then Bitcoin is just worth nothing.

"Didn't that Bitcoin exchange in Japan lose all of those peoples' money? See it is unsafe!" The transparency of Bitcoin is actually far superior to our current banking models. In fact, it is now becoming clear that instead of following basic Bitcoin security and transparency practices, Mt. Gox (the oldest Bitcoin exchange that recently shut down) was operating in an opaque centralized model more akin to existing banking systems. Following the banking model and not the Bitcoin model is what led to its demise.


This is where some people, who do not realize how our monetary system works, either get excited with me or want to shut me up for completely frying their synapses.


The difference between bitcoins and regular money


A notable difference between the U.S. monetary system and Bitcoin is that Bitcoin technically has no banking system. As such when people exchange the currency between each other there are no bank fees (or ones so extremely negligible as to have little to no fiduciary meaning). And that is where the first transformative aspect of the currency is. It's like cash -- when you exchange it with someone, there is no bank involved taking a cut. However, unlike cash, there is actually a simple record of the exchange -- how much and between which wallets. There is a very public and transparent record of every Bitcoin exchange ever done. The currency is inherently more transparent than cash.


Why is it so transformative?


It's transformative because of its two unique properties: no bank fees and no personally identifiable information being exchanged. And it is these two qualities that the U.S. banking system does not possess. To show you how transformative and powerful those two unique properties are, there are a whole range of possibilities. However, let me explain three business models and one unique group of people who will be profoundly affected by Bitcoin.

Publishing and content models


The internet was supposed to usher in a whole new era of publishing -- and it did. But what that publishing model became was neither what we deserved nor what we wanted. What was supposed to happen, what we were promised, was that these new online content models would be micropayment based. We would only pay for what we wanted to consume. Publishing was going to produce quality because quality is what people would pay for. And the writers who produced quality work would be rewarded with lots of micro-payments that the publications and that writer would split. Unfortunately, that promise never materialized, and what we got was BuzzFeed.


The answer is simple to why this happened: our banking system and the cabal of MasterCard, Visa, and American Express. That system is not designed for small transactions. Have you ever seen a sign hanging in a business that said "Fee for charges less than $10?" That's our banking system. It's just old-broke-ass banking technology that has a stranglehold on fees. About 2.25 percent to 3.25 percent is the usual range for transactions. But for smaller or manually entered transactions, there is often a basic fee.


For example, take Square. It has disrupted a lot of the businesses that sell systems to retailers by offering a simpler solution. It has changed a lot of small businesses, and yet, even Square has a 3.5 percent and $0.15 minimum fee entered for manual transactions, and a standard 2.75 percent for swipes. But what if you are a columnist for an online publication and you write a really excellent piece, on, oh, I don't know, Bitcoin? Now, no one is likely to pay for a monthly subscription to an online publication just to read that one article. So, it either has to be free, which means supported by advertising, or you have to charge a monthly subscription.


Because we do not have the ability to pay in micro-payments for these content publications, we have to instead rely on advertising for income, which means they need page views -- and a lot of them. It is not about the quality of the article, the long-form content, but merely the intrinsic curiosity behind wanting to click and see something. They cannot afford to invest in longer research articles, or in almost any research of any kind. They need to pull at our base instincts. Worse, because smaller publications have to rely on that advertising, the model is shifted toward that advertising, and not the quality of the content. Hence the 12 click-through pages of cats in compromising situations type banality masquerading as content.


Bitcoin offers almost any publication a means to "pay as you consume" model. Quality of content online may improve as a result, or it may not. Maybe the new model became too entrenched, but it would at least allow for some smaller quality publications to grow bigger, as opposed to those that concentrate on the size of Kim Kardashian's butt.

Low-margin retail models


The grocery retail model runs on razor-thin margins -- 1 to 6 percent -- as does the hospitality industry, airlines, electronics retailers, and everyone from Amazon.com to Overstock.com. These businesses are being financially strangled by the 2.5 percent interest charges that Visa, American Express, MasterCard, Diners Club, Discover, and the consortium of financial succubi leach out of the system. If you are a 5 percent margin business, then you are actually a 7.5 percent margin business that is being extorted worse than the mob by the credit card and banking industry. That's a 30 percent vigorish that could get a bookie in a lot of trouble for charging.
 
Bitcoin can make any low-margin online business instantly more profitable -- not by a little, by a lot! And in addition they do not have to face one of the other horrendous effects of the credit-card consortium -- credit-card fraud. With Bitcoin, there is no fraud, because there is no opportunity for there to be. There is no number to steal or card to duplicate -- at least from you. Like with any bank however, be careful where you exchange your bitcoins, because if that exchange is not secure, bad things can happen.


Startup BTC Trip is a travel site that exclusively accepts Bitcoin. Some major retailers like Overstock.com have understood that their margins can be greatly improved and are now accepting bitcoins. How would you like customers who are 30 percent more profitable for you for selling the same product to them? There are already myriad worldwide retailers jumping on the Bitcoin train. It's is only a matter of time before Amazon.com decides to accept Bitcoin -- it's just too tempting not to.

Anonymity models


In my experience, I would have preferred some of my online accounts to have been anonymous. As any online account that delivers me goods that requires a credit card to complete a transaction, it also requires my name and address. There are accounts that just deliver me services. For those accounts I could probably use PayPal, and yet that is still not anonymous. Why do they need so much information from me?


I have a lifetime account at Penthouse.com. Before you start passing judgment, let me make my point here. I got the account when the service was fairly new. Playboy.com was one of my clients, and for competitive research I signed up for its "competitors" in the sin business. When I signed up for Penthouse.com, it gave me the option to get a lifetime account for $300. At the time that was around the same price as a year subscription, so I did it. And yes, I got to expense it -- a strange perk in the advertising business. Now, I also have an account at Safeway.com. I view my Safeway account as inherently more dangerous to me than my Penthouse account.


Here's why. My Penthouse account is just porn. Yes, I have watched porn in my life. And so have most of you, I'm guessing. On the other hand, by checking my basket, and whatever is in it my basket at Safeway -- condoms, alcohol, diapers, bacon -- the danger is much more insidious. This data is dangerous to be associated with me personally because if a health provider or other insurance business gets that data, it can start to create profiles on me based on buying habits to assess risk. An actuary is buried in the back with algorithms calculating the exact date I am going to die and what the cost of that will be. And voila, personalized insurance. I am using Safeway only because I actually have an account, but potentially any retailer is getting more valuable information than you know.


At least with Bitcoin I could just pay for the items. And then all they would have is the household and an attempt at a match, but my name would not be associated with it anywhere.


So why would grocery chains not want to have Bitcoin? Because you may not realize that they are one of the most pervasive users of database information anywhere. They sell your information any time they get to because whole food/grocery margins are extremely low. You didn't think they were giving you all of those discounts when you used your club card because you are a "good" customer, did you?


If I used Bitcoin for online services -- in which nothing was shipped -- there is no need for any personally identifiable information to be transferred when I want to pay for something. If I make my IP address anonymous and go through a proxy server, I start to become very invisible.

The unbanked and the third world


The two untapped groups of people most likely to benefit from Bitcoin are the 10 milllion unbanked U.S. households, and the vast group of people around the world who have no bank account because of the onerous fees and penalties. If you are poor and unbanked -- anywhere in the world -- your access to an easy system of payments besides cash is negligible. However, significant portions of the unbanked -- even homeless -- populations do have cell phones.


For them, Bitcoin can be truly revolutionary. A Bitcoin wallet can serve this demographic with potential life-changing opportunities that would otherwise be impossible because of the lack of a bank account.


Conclusion


There is no real conclusion to this story, as this is yet the beginning. The promise of Bitcoin and the technology behind it is enormous. Yes, there are risks at this time, but I have personally not seen a technology this promising since I saw a demo Marc Andreessen gave of the Mosaic web browser in the early '90s. It was but the beginning of the potential of the internet. A friend and I went back to our ad agency and said, "This is going to change everything!"


There were others who chided us and could not understand how we would no longer want to make television commercials but would rather build websites. Unfortunately, for those that didn't have the foresight then, they all see it now and are trying to translate their skills as fast as they can into something useful in the new era.


I never had that mind-obliterating "aha" moment again when seeing a piece of new technology. And I have witnessed them all -- from working on the Palm Pilot as an agency for USRobotics to being a Google Glass explorer now. They have all been really cool technologies, but none of them have had quite the same impact as that internet product demo had. None until I finally understood how Bitcoin actually worked. Mind. Blown.


Sean X is digital strategy director for Amazon Advertising.


On Twitter? Follow iMedia Connection at @iMediaTweet.

One of my colleagues here gave me a recommendation calling me “darn near legendary in digital marketing.” I don’t know if that’s true, but I do think of myself as a marketing mastermind and agent of change in digital...

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Comments

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Commenter: Neal Palmquist

2014, July 03

Maybe Bitcoin won't fail if California hijacks the taxpayers and uses the United States Dollar harvested from taxpayers to weave Bitcoin into government contracts. Using government for sending the world reserve currency out of the country in exchange for absolutely nothing is just the kind of idea that makes California liberals have enlightened and illuminated smiles. Also, that would be another way California can make their budget problem even bigger than it has to be before they ask every other person in every other state to bail them out. Watch California governments, now.

Bitcoin is a sieve that would dry up without a source that is constantly poured into it. Also the valuation is a hot mess. The Bitcoin community will deny it to the death, but when USD has strength in trading against a basket of world currencies, it costs even more of those even stronger United States Dollars to buy a Bitcoin.

And then when the USD gives back that new found strength and more, Bitcoin crashes in sympathy to the United States Dollar. And the Bitcoin community finds a an obscure tweet from China or wherever to blame it on. Scam, pure and simple. When the price of gold jumps to new record highs, Bitcoin will be crushed and the Bitcoin community will throw every excuse in the book at us to throw us off.

Bitcoin is to the United States Dollar as Stuart Smalley is to his mirror: Bitcoin is an attractive currency. Bitcoin deserves it's fair share of happiness. Bitcoin refuses to beat itself up. And, doggone it, people like Bitcoin!

Commenter: Kirsten Osolind

2014, July 03

I still disagree, Sean. No matter how you attempt to color it, bitcoin is a monetary system, a social construct, akin to a decentralized public ledger, and hence a public good (even if now privately provided). We have to pay for it and protect it. Either we pay for it now, or we pay for it later. We'll have to wait and see. Let's you and me circle back in five years. Hard pencil today's date in. XO :-)

Commenter: Barry Dennis

2014, March 27

There IS huge potential ford isruptive change in a Bitcoin marketplace, IF and only IF it can generate real credibility, and most importantly trust. There are several important Investment Avisors all over the Bitcoin "opportunity, with trading programs, charts, and th like. The IRS has just regulated Bitcoin as an investment in regards to purchases and sales of Bitcoin "stock", and as reportable income when Bitcoin is used to pay a person for services like..."work."
Years ago, I wrote about a potential Digital Currency, capitalized in "bytes" a true international currency, a Great Equalizer in the wor,ld of internation currency trading-and speculation. Bitcoin is a step in that direction, but just an early step.

Commenter: Sean X

2014, March 26

Kirsten,

A monetary system is a public good. However, in order to protect the public good that monetary system does not have to be "externally" regulated, as in a government, which is what I am taking your comment to mean. It can be internally regulated. The key is to have it internally regulated by a trust system, and not a hierarchically dictated one. Which is essentially what the block-chain in Bitcoin does. The regulation is built into the currency design. It is the first crypto-currency technical solution to the Byzantine Generals problem (aka Byzantine Fault Tolerance) http://en.wikipedia.org/wiki/Byzantine_Generals%27_Problem

We are just used to thinking of "regulation" as coming from an external enforced governmental system rather than the internal design of the system itself. It's one of the reasons why the block-chain in Bitcoin is so radical in concept. And also why it has so many anarchist and libertarian fans.

The US Government, or shall I say the IRS announced that they are viewing Bitcoin as property, and not a currency, because by definition "it does not have legal tender status in any jurisdiction” so they cannot consider it currency.

http://dealbook.nytimes.com/2014/03/25/i-r-s-says-bitcoin-should-be-considered-property-not-currency/

However, in a way, by declaring it property, it both gives some legitimacy to Bitcoin, while also regulating it in a sort of indirect way. They key here is what type of property they are going to define it as so as to not hamper the main reasons it is vital, the almost non-existent transaction fees in a digital environment, and it's pseudo-anonomity.

Regulation only works when the regulators are not in the pockets of the companies and the older systems they are trying to protect. As in our banking system. Now THAT is definitely NOT in the public good. Even though it is regulated.

Commenter: Kirsten Osolind

2014, March 25

Bitcoin lends itself to laundering in the system, subject to private interest. A monetary system is a public good. To protect a public good, it must be regulated.

Commenter: Sean X

2014, March 24

I thought I'd add to the discussion with this...

Native American tribes adopt Bitcoin-like currency, prepare to battle US government
http://www.theverge.com/2014/3/5/5469510/native-americans-assert-their-independence-through-cryptocurrency-mazacoin

As with Philip I do not really view myself as an Anarchist, however, after we have gone from the Olympics back to the Cold War is merely three weeks, I am beginning to wonder why I am not one ;)

Commenter: Philip Raymond

2014, March 21

Sean X is among that rare breed of journalist who not only "gets it”, he can explain it with panache. He also appreciates the fundamentals and the realities of a disruptive technology.

Transformative -vs- Disruptive

The Internet was both transformative and disruptive. It's a stretch to say that Bitcoin is transformative, because we already had currency and even new-age currency (We all control a virtual balance at institutional accounts and in a gift cards. Just as with Bitcoin, we don't need to travel around with wads of cash in our pocket, and our wealth can easily be transmit from one "wallet” to another.

But Bitcoin is certainly one of those rare technologies that is disruptive. That's because the transmission of wealth is suddenly unchained. No central authority, no inflation, and very little cost. And for the anarchists among us: There is very little that regulation can do to halt its adoption and use.

I don't think of myself as an anarchist, but I am a Geek and economic purist. I take pride in the fundamentals of Bitcoin. It represents evolution. It is a higher form of currency than those printed by man and centrally controlled by pundits of ‘monetary policy':

? Inexpensive to pay, receive or transmit
? Resistant to legislation & regulation because it is P2P
? Impervious to inflation because the supply is capped
? Like cash, individual transactions and wealth are quasi-anonymous
? Unlike cash, it is resistant to forgery
? Unlike cash, it can be encrypted and backed up with ease
? Unlike national currency, it cannot be manipulated for political purposes
? Unlike national currency, redistribution for social purposes requires individual consent users

Safety & Security

But there is a problem that inhibits widespread adoption. The vast majority of legitimate consumers & businesses need their transactions conducted via a process that is transparent, ‘auditable' and with insurance or recourse. But I also identify with the Geeks, anarchists and economic purists who revel in the distributed P2P nature of Bitcoin. [*]

So how does one establish a framework to protect consumer and commercial transactions while leaving Bitcoin free to be private, anonymous, and effectively undercover? There is a way...

Actually, I am not too concerned about regulation. As Sean points out, businesses are seeking as a path toward consumer protection. But Bitcoin and regulations are like oil and water. Laws will help to deter certain activities, but the fact is that Bitcoin will be tough to regulate. It's a bit like trying to regulate feral cats. They will find each other regardless of the law.

But it is possible for transactions to be transparent, trusted, verifiable and guaranteed. This is achieved by giving businesses and consumers the tools to determine if an organization and a specific transactions merits their confidence. No one is forced to use these tools, but in an ideal implementation, all parties can verify a transaction in real time and link it to a particular contractual commitment (such as the shipment of a package from Amazon, the deposit that you leave on a new car, or a refund you were promised). Of course, a great tool needs no training and functions transparently—just like the secure lock icon on your browser toolbar.

Bitcoin will become trusted, but not as a result of regulation. It will become trusted because the assurances and guarantees that one expects from a credit card or bank mitigated transaction will be widely available for those who need a safe environment. With tools and a reputable standards organization validating tools and practices, the experience will almost seem to be controlled by a central authority. But even though Bitcoin resists both central control and authority, it can be made safe for business!

Philip Raymond
CRYPSA (Partner, Interim Co-Chair)
Cryptocurrency Standards Association

Commenter: Sean X

2014, March 20

Neal,

You may have missed Why Bitcoin is Failing. It is failing because tech geeks describe things like crypto-currency and block-chains to people when it's about the concept of how to take back anonymity and power from our banking system. Many other countries have far superior banking models than ours.

Your arguments lose some weight on "dumpers" because consumers have a choice to use another form of payment. And you are merely describing inflation which affects other currencies the same way. It's risky, as I have outlined several times in the article, but the fundamentals of the technology that enables Bitcoin can be transformative, as it could be used for transfers of ownership etc... The public block-chain method helps keeps the system of any value exchange accountable.

Then again, the whole thing may crumble, fail and implode. Lesson is "don't speculate in speculative things unless you can afford to lose everything." And the transformative nature to the third world only starts to become apparent when the currency stabilizes over time. As with any currency.

Commenter: Neal Palmquist

2014, March 20

I see there is no conclusion to the titled question, "Why Bitcoin is Failing." I can answer that in many less words.

Bitcoin is a hoax to get USD traded down to a third world currency. Behind that hoax is the same thing applied again onto the Bitcoin itself. People are trading Bitcoins for gold backed crypto currencies and this trade throws used Bitcoins back onto the exchanges when the price of gold goes up. People don't like buying Bitcoins when they figure out they buy them from sellers of gold backed crypto currencies.

People also don't like their Bitcoins being sold to them by dumping activity from Overstock.com. People are starting to understand that when they put cash into the Bitcoin exchanges then that cash is immediately used to buy somebody else's shoes for them.

Bitcoin is a currency that loses purchasing power as the price goes up and as the price goes down. If BTC drops, then I would have to buy even more BTC (From dumpers like Overstock) to get my item from Overstock. And if prices for BTC go up, then Overstock cannot afford the risk of being caught selling items of real and true quality for Bitcoin. As BTC prices rise it becomes even more so the third world currency that is only good for basic necessities of life, like socks and shoes and underwear and junk that is probably almost cheaper for the vendor to throw into the incinerator.

"We Accept Bitcoin" means "We Cannot Afford to Lose Our Merchandise. But We Can Afford to Lose Our Customers." Bitcoin is going to crash back to nearly the nothingness from where it comes. People are going to be pissed. And when they come to realize that vendors were dumping, that vendors have ALWAYS been dumping BTC onto the exchanges, customers are going to be furious at the vendors who accepted Bitcoin. People are going to have their wealth destroyed by Bitcoin and the vendors will be blamed.

In summary (Yes, I can write a summary. It is not too hard, actually. Others should try it sometime.) In summary, Bitcoin is failing because it has not crashed and destroyed the wealth of innocent people, yet.

Commenter: Travis Mitchell

2014, March 19

Very dated information, and the picture is laughable. If you replace "BitCoin" with "Dollar" you would be making a great argument to remove the Federal Reserve. And then I read on... great swing. Make sure you read all seven pages.