Over the past twelve months, I’ve become a bit of an obsessive follower of Bitcoin. It started after I read Satoshi Nakamoto’s original Bitcoin paper. It was a fascinating read and my first introduction to crypto-currencies. I even had a couple of lunches in Boston with Gavin Andresen, Bitcoin’s current project lead.

I was close to buying some Bitcoin when I first got interested, but backed off. It was too bad because Bitcoin's value increased from $13 a year ago to around $1,000 at the time wrote this: a 4,000% increase in 12 months. I didn't buy my first Bitcoins until a month ago. I bought them with some reluctance but I figured that people felt a certain reluctance when paper money first came along. But I bought them because to me it seemed like Bitcoin could work and also because I wanted to have a better understanding of what it was all about.

Bitcoin is a purely digital currency. There are no records of Satoshi's identity so no one knows who invented it, no one controls it and it is not backed by gold. It is something akin to a digital version of gold. It's fascinating. At the core of the Bitcoin system is a global, public log, called the "blockchain", that records all transactions between Bitcoin clients. A user can send Bitcoins to another user by forming a transaction and committing it to the blockchain. The blockchain is maintained not by a central body, like a central bank, but by a distributed network of computers, called "miners". Everyone can be a miner, and the miners collectively record and verify all transactions.

Compared to traditional banks, the advantages of Bitcoin are significant. Bitcoin payments can be made at any day of the week, any time of day to anywhere in the world. The fees and delays involved are small compared to those imposed by banks; pennies compared to dollars and minutes compared to days. And unlike paper money, it is unforgeable. Unlike gold, its supply is perfectly verifiable. It is also immune to inflation: governments can't print more Bitcoins to pay off their debts.

The design and architecture of Bitcoin is both a curse and a blessing. The lack of central authority governing Bitcoin raises questions. Governments tend to enjoy power of observation; it makes it easier to fight money laundering, tax evasion and other crimes. As Bitcoin continues to gain popularity, governments may grow increasingly resistant and attempt to shut down Bitcoin. And banks don't like Bitcoin either. Money transfer is an important part of their business; it has almost zero risk, almost zero cost, yet provides them billions of dollars in revenue. In a world where Bitcoin is universally accepted, banks may have a diminished role.

The jury is out on whether Bitcoin is a fantasy destined for failure, or whether Bitcoin will underpin the future of finance. Some predict the value of one Bitcoin could climb to hundreds of thousands of dollars if it becomes universally accepted. While I risk losing some money, it could also turn out to be a massive investment home-run. I felt that the risk/reward decision made it a bet worth taking.

I certainly don't advise you to buy Bitcoin as I'm skeptical that Bitcoin will succeed. I predict Bitcoin to have an extremely bumpy ride, and at best, to follow Gartner's hype cycle. If Bitcoin ends up collapsing, I will be disappointed but I won't feel stupid. I already sold some Bitcoin and recouped my original investment; I'm long with my remaining Bitcoin.

So is Bitcoin a case of speculative greed, or a utopian cyber-libertarian ideology? In a world where everything is going digital, why not currencies? Bitcoin makes it faster, cheaper and easier to store and transport value. It was designed to overcome problems faced with traditional currencies and banks. At a minimum, Bitcoin has created a lot of debate throughout the world, and has shaken a stagnant banking market. Longer term, the concept of a crypto-currency makes a lot of sense to me. It is massively beneficial for the world that we can transfer money easier, faster and cheaper. I find it hard to believe that a hundred years from now, we'd still be digging up gold, and that we wouldn't have a global, digital currency to replace it.

If you believe a digital currency is the future of money, I'll leave you with one question: how would one launch a world-wide crypto-currency like Bitcoin? It can't be owned by a commercial organization, and I simply can't imagine all the world's governments work together to build and launch something like this. Creative disruption often comes from the outside, and not from the inside. It pretty much has to happen in a grassroots way, not unlike the way the Internet was created. Even today after 30 years, the Internet operates without a central governing body and is comprised of independent, voluntarily networks. It works well and changed the world.

The blog post above is a Dutch opinion piece I wrote for the Belgian financial newspaper De Tijd.


James Mist (not verified):

Hey Dries,
Awesome article, really interesting question you pose at the end of your blog too. So maybe a silly question, but do you see this being (or maybe it already is) integrated into organizations like Amazon or eBay?

Richard (not verified):

Bitcoin still isn't anywhere near reaching a point of practical usability, where people have many options for getting paid an income that's actually set in bitcoin (not just set in a regular currency and converted to bitcoin) and buying most of the things they need with it (again with actual bitcoin prices, not just a converted price). If it reaches that point then it will likely be self-sustaining even if it's not widely used. The value needs to be a lot more stable for that to happen.

As a non-US resident with a lot of income in USD I've seen the value of our currency go from $0.65US to $1.10US in a decade which means my income is worth less here. At the same time things like local housing prices have doubled due to economic changes. People who live in the US often don't realize what it's like to deal with more than one currency - 10 years ago I could afford to spend 4x as much on a house! (if I hadn't just entered college at the time) That's still manageable. Having the value double in a week is not.

Two of the major threats are the uncertainty and the possibility of competition. Currently it's impossible to actually set a price in bitcoin and stick to it. It's hard to tell what the real value would be behind all the speculation so it could be a lot more or a lot less than the current price. Even if the speculation does die down, natural market forces could still make the value unstable as it could easily go through rapid inflation or deflation depending on how people are using it in any given month.

There is also nothing stopping thousands of other currencies from coming up since everything is open-source and there is no law or authority behind it. All it would take is one tweak to the algorithm to come up with a more practical currency that would make bitcoin all but worthless.

For now it's good entertainment, like a live-action science fiction novel. I've thought about buying a little but just haven't had the time (the current difficulty might be one good argument for why it could be under-priced now). I'm perfectly ok with watching from the sidelines.