Many people got attracted to bitcoin the last couple of months. This
explosion of interest probably caused the monetary value of bitcoins
to show the same shape as the google trend-line chart pictured below.
In this article I will ignore the exponential increase in monetary
value since its inception and focus on some intrinsic properties of
bitcoin and why those are valuable as such.
The sudden interest in bitcoin is not coincidental in my opinion. The
bitcoin ecosystem tries to solve a number of problems with the current
systems of trade, currencies and the economical structures in general
we have in place for them, like our national banks, the currency and
stock exchanges and the IMF. The last couple of years we have been
confronted, sometimes in very painful ways, with the shortcomings of
those systems and, not in the last place, the shortcomings of the
people involved; all of us.
The financial crisis is obviously a complex issue and no single cause
can be determined. Whatever these causes are however, they have
provided a trigger for many to look for alternatives to create wealth
or, more important, create ways to hang on to wealth, especially if there
is not a lot of it to hang on to.
For the rest of this article I’m going to assume you know how bitcoins
work. You will not have to be an expert in economics, cryptography or
computer programming, but a basic understanding of the workings of
bitcoin will be necessary. The websites http://bitcoin.org en
http://weusecoins.com are good starting points. Some of the points
below won’t make sense if you do not have at least a rudimentary
understanding of how the system operates.
The trust issue
Most people will worry (a lot) if they have money issues. This alone
dictates that you absolutely want to trust all parties involved with
handling your money.
These parties include the people you receive money from, like your
employer, the local banks you trust to keep your money safe for you,
the government which monitors the usage of it, but also the ‘coins’
that represent the money. All of these need your continued trust, and
that is a lot to ask. Especially if things do go wrong at times.
Employers need your trust that they possess enough of the ‘stuff’ to
be able pay you for work, local banks need your trust so you let them
keep your savings, governments and central banks need your trust that
they won’t screw up (by printing too much money for example) and the
coins also need your trust that they are the real deal. All of the
examples in some way betrayed our trust in the past. That has an
effect on people. It may not be visible for a while, but broken trust
Bitcoin tries to address some of the trust issues people have; I think
it was one of the main motivations for creating a system like
bitcoin. It does this, amongst other things, by shifting a few of the
trust items from people/institutions to verifiable technology.
For example, instead of trusting a bank to verify transactions to be
valid, because they are the only party who can oversee all
transactions, trust is placed in hashing techniques to demonstrate
that, for example, double spending is very, very unlikely. These
techniques are easier verified and proven to be right than the bank
which is now responsible for it, if only because we don’t have access
to these verifications. The major goal of both verifications is to
prevent the same coin to be spent multiple times. (fraud)
Another trust shift is the ‘keep-save’ mechanism. If you keep your
savings on your savings-account at your bank, the combination of the
banks trustworthiness and, should that fail, the (limited) guarantee
the government gives on your savings makes that you can feel
comfortable on parking your money there. With bitcoin, your trust will
be in cryptographic tools and the network so you keep all your savings
in a computer file. The mechanism you could use to keep it safe is to
encrypt that file and spread it all over the network to many places to
minimise the chances of losing all copies of it. There is no-one to
trust but yourself, but there’s also no-one which can protect you in
case you screw up yourself.
Distance is not important, value is
Another property of the bitcoin system, not unique to it but
especially well implemented I think, is the way it makes the distance
to receivers irrelevant and allows value to be put to use
effectively. I’ll give an example below.
Say I want to transfer 2 euros to someone which is in a country far
away from mine. The amount of time and money it takes to get this
modest amount into the hands of that someone distant is ridiculous in
the current financial system. My bank does provide a service but it
will cost me at least 10 euros, double that amount if I want to get it
done ‘fast’. Fast, in this case meaning within 24 hours! For larger
sums, the cost may be acceptable, but for small amounts both time and
cost are ridiculous.
There are many services which try to solve at least part of the
problem outlined above. Services like paypal with on-line accounts to
make things go faster, or proxy companies which gather up all the
small amounts and transfer to the real supplier when things have piled
up. Up until bitcoin I did not encounter a service which chose the
simplest concept for this problem: “Set up a secure, verifiable,
immediate non-refundable transaction between the involved parties.”
I do not believe the technology to do this has not been available to
banks and/or credit card companies, so that can’t be the reason they
have not implemented a cheaper and more efficient system. It’s not
very hard to imagine what their reason is though. Distance used to be
a major hurdle, it is not anymore.
The key differences bitcoin provides here are:
- the receiver and sender communicate directly, trust is a lot
easier to maintain if there are less parties involved. “No middle
man needed, nor wanted”
- the ‘act’ of payment is almost immediate, the receiver can check
almost immediately that a transaction has been made. (Verification
for validity by the network can take a while though) In relation
to the 24 hours described in the first paragraph this can
certainly be considered very fast, near real-time
- a transaction fee is optional. If you specify one, you make it
more attractive for others in the network to check your
transaction and have a go at collecting that fee. If swift
transaction handling is not important, but transferring, say 0.05 euro,
to a certain person is important, bitcoin is about the only way I
know to do that effectively.
Remember, the amount of 0.05 euro may not be much to you and me, but
there are parts in the world where it can buy you a meal or a bottle
of water. The fact alone that bitcoin makes these kinds of
transactions possible is enough reason to give it more than a casual
Bitcoin increases the value of my € 0.05 by allowing effective use.
No unreasonable control
It’s probably true that bitcoin, or systems like it, scares financial
companies and governments and therefore will have a rough time
ahead. This scare is in part caused by a fear of decreasing control
over the system compared to the classic system. Almost all economic
commentators or government representatives will argue that ‘some form
of control’ is needed to correct and stabilise the system. I’m not
very convinced of that being effective or wanted anymore.
Recently, the unreasonable control over money flow in the wikileaks
dry-out attempt confirmed this once again for me. It doesn’t really
matter if companies like mastercard and paypal decide not to handle
transactions for wikileaks themselves or that they have been put under
pressure to do so. The fact that it happens shows they have control
over where I spent my money. I don’t want that. Bitcoin offers a
system where this type of control is impossible by means of the system
itself; personal threats will be effective I’m afraid with any system.
Next to the self-control over spending purposes, anonymity is also
important for some people. The example often used, mostly in critical
pieces on bitcoin, are criminals. Bitcoin makes it possible, when used
in certain ways, to bring money from A to B without exposing
identities to each-other and to third parties. This is obviously
attractive for criminals, including people who want to evade taxes.
This is a valid concern and should be addressed properly, but I don’t
think it has anything to do with bitcoin as such. With regard to this
aspect, bitcoin has no other properties than cash, it’s just more
effective and easier to use than exchanging bits of paper money. The
real use-case here is the non-criminal people who want to perform
semi-anonymous transactions for valid reasons.
So, what’s the verdict?
Bitcoin is a good idea, generally speaking. From a technological
viewpoint it’s excellent. It’s trivial that libertarians and
anarchists will be attracted by bitcoins, we don’t need to argue the
case for them. The challenge is to present the extra-, not the
replacement-, values of bitcoin for all the other people out there. I
have touched on three of the most important ones to me. There are more
properties which make it very attractive as an alternate choice for
Many ‘digital cash’ systems have been presented before bitcoin, but
for all of them I could point out critical weaknesses within a very
short time. For many of them this was not even a technical weakness,
but an organisational (like a paranoid initiator, looking for patent
protection) or an economical issue (creating a metal backed currency
in the hands of a private company). With bitcoin there are certainly
weaknesses in the system, but I have not been able to find a critical
The goal of bitcoin is not necessarily to take over existing
currencies or existing financial systems, although I would love to see
that play out. I would like it to augment the current systems with new
ways to trade, more effective ways to put wealth to use, more
transparent ways to work together. It needs to put banks and
governments on the edge of their seats and keep them a lot more aware
of their obligation to reasonably deal with their control over over
Having a transparent, technologically sound system for exchanging
value is in the interest of many. I’m sure bitcoin has many things
that can be improved. Its its complexity of use and the rather clumsy
exposure of meaningless addresses come to mind, but the foundation is
solid and the issues I found are by no means critical or
unsolvable. The fact that bitcoin, the program, is open source does
help to understand and validate the system and thus gain my
trust. This contrasts on many levels with the services offered to me
through financial companies.
When was the last time you validated your bank’s software?