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.
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?
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.
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.
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.
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