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Bitcoin is the first practical solution to a longstanding problem in computer science, Marc Andreessen writes in Another View. Marc Andreessen, a co-founder of the venture capital firm Andreessen Horowitz. The firm is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a de minimis amount of Bitcoin. A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. They see within it enormous potential and spend their nights and weekends tinkering with it. While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money?
What technology am I talking about? One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is. 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world. Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the B.
Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate. What kinds of digital property might be transferred in this way? All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker.
And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want. Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger.
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The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees. That last part is enormously important. In lots of other places, there either are no modern payment systems or the rates are significantly higher. Bitcoin is a digital bearer instrument.
It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. This is one part that is confusing people. It is perhaps true right at this moment that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible.
The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved.
The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want. Bitcoin as payment, given the currently small number of consumers who want to pay with it? Let’s say you sell electronics online. Profit margins in those businesses are usually under 5 percent, which means conventional 2.
5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers or taxed by the government. Of all of those choices, handing 2. 5 percent to banks to move bits around the Internet is the worst possible choice. In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud.
This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers. Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant. Credit card fraud is such a big deal for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent. Bitcoin’s antifraud properties even extend into the physical world of retail stores and shoppers. For example, with Bitcoin, the huge hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. You fill your cart and go to the checkout station like you do now.
But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. Well, maybe criminals are still happy: They can try to steal money directly from poorly-secured merchant computer systems. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology. Much like email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Bitcoin is a classic network effect, a positive feedback loop.
The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. All four sides of the network effect are playing a valuable part in expanding the value of the overall system, but the fourth is particularly important. All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before.
For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance. One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. 400 billion in total annually, according to the World Bank.
Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. In fact, it is hard to think of any one thing that would have a faster and more positive effect on so many people in the world’s poorest countries. Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system. A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments.
The fee structure of those systems makes that nonviable. All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free. Think about content monetization, for example.
Another potential use of Bitcoin micropayments is to fight spam. Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news article a few months ago. 25,000 in Bitcoin in the first 24 hours, all from people he had never met.
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Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anticapitalist political organizer.
The coming years will be a period of great drama and excitement revolving around this new technology. For example, some prominent economists are deeply skeptical of Bitcoin, even though Ben S. Economists who attack Bitcoin today might be correct, but I’m with Ben and Milton. Further, there is no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin. But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.
Enter the characters you see below Sorry, we just need to make sure you’re not a robot. Enter the characters you see below Sorry, we just need to make sure you’re not a robot. How High Can Bitcoin’s Price Go in 2018? What fueled the cryptocurrency craze, why Wall Street is joining the party, and whether the Bitcoin bubble will pop.
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Had Jerry Brito’s daughter waited longer to emerge, she might have been someone else entirely. 9,600 when Brito’s daughter arrived early Nov. In all, Bitcoin has seen a roughly 20-fold rise since the beginning of 2017, outshining virtually every conventional investment. For true believers, the soaring rise rewarded a deep-seated faith.
But Bitcoin’s spike also represented the revolution’s next phase. Less prescient investors, fearing they’d miss the opportunity of a lifetime, had jumped into the currency, spurring a frenzy. Going Mainstream Bitcoin has provoked hysteria before. Gox shook the confidence of many early devotees. It wasn’t until 2017, though, that Bitcoin hit a tipping point of mainstream popularity.
By November, one of the biggest U. Meltem Demirors, director of development at Digital Currency Group. The appeal of this tech is stoked by geopolitical unease. Since its inception in 2009, Bitcoin has fed off the festering distrust in institutions sown by the financial crisis. And as populist sentiment has spread in the West, so has the allure of a decentralized currency outside the grasp of governments and banks.
Bitcoin’s price jumped after the U. Brexit vote in 2016—and again when Donald Trump won the White House. Chris Burniske, cofounder of VC firm Placeholder and coauthor of Cryptoassets, a new investor’s guide. Trust them or not, banks and asset managers are poised to flock to Bitcoin too.
Tyler Winklevoss, CEO and cofounder of Gemini, whose cryptocurrency exchange partnered with a more traditional one, CBOE, on Bitcoin futures contracts in December, offering institutional giants a way to participate. It’s the bottom of the first inning. Skeptics see a familiar mix of new-paradigm euphoria and get-rich-quick mania, with an unhappy ending looming. Shiller, who foresaw those crashes, tells Fortune he’s contemplating a fourth edition of his Irrational Exuberance, updated to include the cryptocurrency craze. Still, for now the stampede of optimists continues, economists and possible calamity be damned.
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As investors pile in from Main Street to Wall Street, the question becomes, Is Bitcoin’s rise more than an ephemeral rush? Nakamoto was describing a physical analog to Bitcoin, and his point was to address a fundamental paradox of money: How does money get valued as a medium of exchange when its value lies solely in being a medium of exchange? The simple answer: It’s mostly subjective. Perhaps limited supply and instantaneous portability would be enough to justify a market value for Nakamoto’s magic substance. Investors, it turns out, wanted some too—even though Bitcoin’s usefulness remains largely theoretical.
The thing that gives it value is other people giving it value, which is a strange thing to wrap one’s mind around. To justify Bitcoin’s tremendous rise, bulls like the Winklevoss twins point to Metcalfe’s Law, which states that a network’s value increases exponentially with each additional participant. Tyler, along with his brother Cameron, entered the national spotlight after suing Facebook CEO Mark Zuckerberg, their Harvard schoolmate, for allegedly stealing their business plan. In Bitcoin they’ve found a lucrative second act. Bitcoin also enjoys the brand recognition shared by innovators that arrive early and dominate fast, like Google in search, Facebook in social networking, and Amazon in e-commerce. Prices of commodities like corn, oil, or gold often plunge when producers pump out supply to meet demand, creating inadvertent gluts. And nothing drives prices up like scarcity.
In the eyes of some supporters, these advantages add up to virtually unconstrained upside. Still, even Bitcoin’s greatest backers acknowledge the possibility that the cryptocurrency’s value could plummet—if, say, regulators in China or the U. It would hardly be the first craze that fizzled fast. Hockett believes blockchain tech will prove a game-changer.
But he can’t understand the fascination with Bitcoin, given its copious flaws. As the original cryptocurrency, Bitcoin suffers from drawbacks typical of first-generation technology. 20, even for transfers of small sums. Jim Rickards, chief strategist at Meraglim, a financial analytics firm, views Bitcoin with equal fatalism.
I view Bitcoin as a Neanderthal, an evolutionary dead end. When British scientists first encountered the platypus in the late 18th century, they suspected a hoax. The animal didn’t fit in their conventional taxonomic categories. It looked like a mole, but it had a duck’s bill, a beaver’s tail, and an otter’s feet. Plus, it was venomous and laid eggs. Bitcoin is not good at being a currency, a commodity, or a fintech company, but it’s great at being Bitcoin.
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It’s creating its own category and asset class. When skeptics dismiss Bitcoin, bulls like Bogart push back. Unlike gold, Bitcoin is not static. The software code is under constant development. For many, this is reason enough to play the long game. Most of the earliest investors seem to be doing just that.
There are many reasons, of course, to take the wait-and-see approach with Bitcoin—from the fact that it could be worth double tomorrow, to the reality that there are currently few nonspeculative ways to actually spend or use it. The wealth management giant Fidelity, for one, allows employees to buy lunch with Bitcoin in the company cafeteria, but so far the program has been a dud. Therein lies a problem: If a cryptocurrency is too volatile to spend, it can’t be a useful currency. Either outcome—proof that Bitcoin can’t work as a currency, or proof that it can—could suck speculative money out of Bitcoin and precipitate a painful crash. Still, big players have decided these are risks well worth taking. 1 on cryptocurrency exchanges, institutional investors have largely been barred from those venues owing to fiduciary and compliance requirements around custody of assets. And there’s another reason to believe Bitcoin can go up a lot more before gravity drags its value back down to something stable.
Silicon Valley, but international stock markets rebounded relatively quickly. 10 trillion, and that’s 20 times more than what it is today. 6 trillion before the dotcom bubble burst, not accounting for inflation. Bitcoin, for now, remains a platypus of unproven worth.
The more Bitcoin’s price runs ahead of its capabilities, bulls say, the more likely that its technology may catch up to the hype. Demirors of the Digital Currency Group. The gusher incentivizes programmers and businesspeople to dedicate time and effort to Bitcoin-related projects. Then again, the more wealth that flows into Bitcoin, the more conservative an approach its maintainers may take in updating it. This could present an opportunity for other crypto coins to outmaneuver their forerunner. Olaf Carlson-Wee, founder of crypto hedge fund Polychain Capital.
As a rule of thumb, I never bet against cryptocurrencies. To Jerry Brito of Coin Center, the future of Bitcoin isn’t about just the potential for limitless returns, but the promise that his daughter will grow up in a better world. Bitcoin’s allure, in this view, is not about the money, per se, but about technology. Maybe that’s why Brito insists there’s no fiscal significance in the name he and his wife eventually chose for the baby. A version of this article appears in the Jan.
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Powered and implemented by Interactive Data Managed Solutions. Beyond the Bitcoin Bubble Yes, it’s driven by greed — but the mania for cryptocurrency could wind up building something much more important than wealth. In the lingo of cryptography, they’re known as my seed phrase. They might read like an incoherent stream of consciousness, but these words can be transformed into a key that unlocks a digital bank account, or even an online identity. It just takes a few more steps. On the screen, I’m instructed to keep my seed phrase secure: Write it down, or keep it in a secure place on your computer.
That string is my address on the Ethereum blockchain. Ethereum belongs to the same family as the cryptocurrency Bitcoin, whose value has increased more than 1,000 percent in just the past year. Ethereum has its own currencies, most notably Ether, but the platform has a wider scope than just money. You can think of my Ethereum address as having elements of a bank account, an email address and a Social Security number. The whole exchange takes no more than a few minutes to complete. From my perspective, the experience barely differs from the usual routines of online life. But on a technical level, something miraculous is happening — something that would have been unimaginable just a decade ago.