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Bitcoin tulips

From the early days, crowd psychology has always been part of our society's modus operandi. We worshiped idols drawn on the cave walls, we obeyed the shamans, we crucified and burned people at the stake. Mass hysteria then took more civilized forms when we bought and sold various forms of "snake oil" - from tulips in the 1630s to Boo in the 1990s. 

The madness of crowds is now spreading to Bitcoin. Not a day goes by without another announcement heralding some Bitcoin-related venture.

What is it that draws various players and investors to Bitcoin?

In very simple terms, it's a limited supply "commodity". Unlike with gold or diamonds, that limit is confirmed - only 21 million Bitcoins can ever be "mined". However, since every Bitcoin is divisible down to eight decimal places, the total Bitcoin supply is over 2 quadrillion units (2,099,999,997,690,000 to be precise). That doesn't sound like a "limited supply"...

There are other perceived "advantages" of Bitcoin, such as lack of the central issuing authority. Well, gold is in the same category too, as is any naturally mined or grown commodity - we are all free to grow oranges in the kitchen and then flog them to our neighbours. 

Bitcoin offers anonymity. If your child gets kidnapped and the ransom is demanded in Bitcoins, how would you feel about the anonymity in that case?..

If you are a legitimate business, why would you want to be paid in Bitcoins rather than in dollars, euros or pounds?..

Would you base your retirement plan on Bitcoins?.. Why not?..

The list can go on, but the message is clear.

The only parties who would derive tangible value from Bitcoins are the early smart VCs who could skillfully hype up their investments in Bitcoin startups before selling them on to the late dumb investors. Kudos to the former? Well, they could have applied their skills and money to more valuable - for the society - areas (White Space in Africa is one of them; or EMV infrastructure in the USA), but it's their money after all, and they are free to do whatever they want with it.

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Comments: (13)

Michael Hardy
Michael Hardy - St. Cloud State University - Minneapolis 04 June, 2013, 21:51Be the first to give this comment the thumbs up 0 likes

"If you are a legitimate business, why would you want to be paid in Bitcoins rather than in dollars, euros or pounds?"

I know at least two reasons:

(1) Elimination of credit card fraud risks.

(2) Elimination or immense reduction of transaction fees.

A Finextra member
A Finextra member 05 June, 2013, 07:20Be the first to give this comment the thumbs up 0 likes There are simple and effective ways to mitigate CC fraud. As for the processing costs, we happily tip ten percent in restaurants and taxis, yet complain about two percent "payment service charge". If your Bitcoin loses half of it's value overnight, how would you feel about it? If your Bitcoin wallet gets hacked, do you have any protection against that? If your Bitcoin transaction goes wrong, what number will you call? Free cheese is typically not in a fridge.
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 June, 2013, 09:16Be the first to give this comment the thumbs up 0 likes

If there are simple and effective ways to mitigate CC fraud, none of the banks I bank with seems to be aware of them. All I've been getting from them are CVV, then VbV, now Mobile OTP. With phone trees and long hold times, banks have made it very painful to contact them if my transaction goes wrong. Against this backdrop, I'd give BitCoin a decent chance for transactions with low-to-medium ticket sizes. While on the subject, one great use case I came across for BitCoin is the introduction of a new feature by a leading T&E solutions provider for settling T&E claims with BitCoin. Having already spent the money, many people - me included - treat reimbursement as "funny money" and don't mind taking a gamble on its true worth. With its innate nature of being a currency having a fluctuating value, BitCoin panders to this behavior very well.

A Finextra member
A Finextra member 05 June, 2013, 09:36Be the first to give this comment the thumbs up 0 likes

The funny thing is, Bitcoin has nothing to do with money or payments as such. It's no more a "currency" than any other crypto tool.

If I were to attach a banknote to a pigeon and sent it to you, would I be using BirdPay or BirdCoin? Ultimately, we still want our dollars, euros and pounds back in our hand, not some Bitcoins in our (vulnerable) wallet.

A Finextra member
A Finextra member 05 June, 2013, 10:03Be the first to give this comment the thumbs up 0 likes

BTW, speaking of fraud, Bitcoin is not immune - your Bitcoin wallet can be hacked and your "stored value" is gone forever. With traditional payment rails there is always a trail.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 June, 2013, 11:06Be the first to give this comment the thumbs up 0 likes

1 US$ held in PayPal or Google Wallet or leather wallet and tranferred by CHAPS or FPS or pigeon is always worth US$ 1. However, 1 BitCoin is worth wildly differing amounts of US$ from one day to another. Therefore, it seems to me that BitCoin is as much a currency as JPY or INR or AED. Just to clarify, in the limited use cases of T&E reimbursement and others mentioned by me, I'm ultimately happy to keep my BitCoin as BitCoin. If the parallel system goes bust, I don't mind seeing my BitCoin proving worthless. On the other hand, if the primary system becomes shaky - remember Cypress - my BitCoin might prove to be a multibagger some day. That's the calculated risk I'm willing to take.

A Finextra member
A Finextra member 05 June, 2013, 18:03Be the first to give this comment the thumbs up 0 likes

There are many things that change their value over a period of time, long or short - that doesn't make them "currencies". Likewise, a bunch of oranges have some value, that doesn't make them "currency" either.

Take M-Pesa. What is the "currency" their? What do people actually send/exchange with M-Pesa? Is is based on "limited supply"? Does it matter?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 June, 2013, 08:17Be the first to give this comment the thumbs up 0 likes

Wikipedia and other Top 3 Google SERP results call "BitCoin" a currency. No one calls oranges currency, besides they're perishable and anyway don't meet the durability prerequisite for a currency. M-PESA is clearly not a currency, it's a method of payment that is used to transfer the regular local currency (KES, Kenyan Shilling). That said, that there could be a rigorous definition of the term "currency" that BitCoin doesn't fulfill, but that doesn't reduce its appeal in the limited context I've described.

A Finextra member
A Finextra member 06 June, 2013, 09:34Be the first to give this comment the thumbs up 0 likes

That was exactly my point, Ketharaman.

If I create an encrypted file with some data inside, how much is it worth? Nothing. At all. Does it represent something? Nothing. At all.

If you and me and N other people agree that the file can be exchanged for $100 dollars, does it become "currency"? In a way. A payment method? Sort of. As long as the ecosystem is in balance.

If Bitcoin pegged the value to, say, US dollar, then Bitcoin would be more usable (disregarding inflation). "Cryptodollar" if you like, with other Bitcoin functions still there. Ukash did that in the UK, and it works well.

As Bitcoin is run by geeks, not economists or financiers, the whole system is broken. Money and currency is not (just) about crypto algos or "limited supply".

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 June, 2013, 16:31Be the first to give this comment the thumbs up 0 likes

Ah, looks like I'm not the only one who has seen the multibagger potential of BitCoin:

"At Draper University of Heroes, we accept Bitcoin payment of tuition because it is a promising currency with appreciating value. For the time being, we still accept dollars, too,” said Tim Draper, founder and managing director at Draper Fisher Jurvetson and founder of Draper University." 

http://www.businesswire.com/news/home/20130611006142/en/Draper-University-Educational-Institution-Accept-Tuition-Bitcoin

A Finextra member
A Finextra member 13 June, 2013, 16:40Be the first to give this comment the thumbs up 0 likes I bet DFJ has some BTC companies in their portfolio...
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 June, 2013, 13:49Be the first to give this comment the thumbs up 0 likes

Not yet, but this could be a "preemptive strike".

Brilliant catch!

Before my motives are questioned, here's the full disclosure: I have absolutely no personal or professional vested interest in BitCoin. 

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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