#fromthefrontier: Marc Andreessen on bitcoin

INTRO:

#fromthefrontier

News used to be about speed. Now it's about understanding.

Whether it's new technologies, changing policy or quickly developing news stories the modern world is becoming very complex. The problem is journalism hasn't adapted to the fact that it's no longer enough to just churn out the latest headlines, readers need a larger context to help them understand.

#fromthefrontier is a series of articles that:

  1. CONTEXT : a brief summary of the key ideas, concepts and history of the technology, market, issue etc.
  2. EXPERT: Gives the key views of an expert 
  3. UPDATES: Gives news updates from the expert

This article is on legendary Silicon Valley entrepreneur (@Netscape, @Opsware) turned venture capitalist (@Andreessen Horowitz) Marc Andreessen's opinions on the cryptocurrency bitcoin.


CONTEXT:

#bitcoin

 

Bitcoin is a new and alternative form of digital currency and payment system.

Historically, digital currencies have suffered from the double-spending problem where John might send the same digital dollar to both Alice and Katy without them knowing and thus 'double-spend'. Of course, physical currencies don't suffer from this problem because the transfer of the store of value involves the physical transfer of a coin or a paper note. Digital currencies solved this problem by having a centralized ledger run by a Visa or Mastercard where they would keep track of all the transactions to make sure there is no fraud or double-spending. In return for running this service Visa would take a cut on all the transactions.

Unlike other digital currencies bitcoin is decentralized and has a public distributed ledger called a block chain allowing users to transact directly (peer-to-peer) without the need for an intermediary. For this reason bitcoin is often referred to as a cryptocurrency which is a subset of digital currencies where cryptography (rather than a middle-man) is used to secure the transactions and to prevent fraudulent creation of new units. However, it should be noted that the ledger is maintained by third-party miners who are paid in bitcoins which creates a small inflationary effect on the value of the bitcoins.

Bitcoin was created by Satoshi Nakamoto, the pseudonym for an unknown person or team of people, who in 2008 wrote a paper called 'Bitcoin: A Peer-to-Peer Electronic Cash System' with bitcoin's software itself was released in early 2009.. 

Since then bitcoin has grown rapidly with the number of transactions in bitcoin rising from a few thousand per month in 2009 to more than a several million in 2015.

 Number of transactions per month of bitcoin (logarithmic scale).

Number of transactions per month of bitcoin (logarithmic scale).

Nonetheless, bitcoin has been controversial with software problems, legal issues and perhaps, most significantly for investors, the price has been extremely volatile peaking to as much as $975.45 in Nov 2013 but falling off from that dramatically since.

Despite his bitcoin has slowly become more mainstream with companies like WordPress in November 2012, Chinese internet giant Baidu in October 2013 and Microsoft in December 2014 accepting the currency. Venture capital investments in bitcoin related companies has been increasing significantly and is on track to be even more in 2015.

For a good introduction watch this documentary 'The Rise and Rise of Bitcoin'.


EXPERT: 

#marcandreessen

 

At the heart of Andreessen's argument for bitcoin is the comparison that Bitcoin now looks a lot like personal computers in the 1970s and the internet in the 1990s. They too had lots of legal and regulatory problems, unproven commercial applications and highly uncertain futures but look how they turned out!

At a deeper level Andreessen's view is rooted in economist Carlota Perez's model of 'Technological Revolutions & Financial Capital' in which technological revolutions occur in two stages: the installation phase and the deployment phase. Crucially, whether it's steam engines, the combustion engine or bitcoin all new technologies in the installation phase are neither accepted or understood by the broader society which is still trapped in the thinking of the previous wave. It's only in the deployment stage that these technologies are adapted to and therefore their true is unlocked. The significance of this model for bitcoin, of course, is that Andreessen, as a venture capitalist and someone who is betting on the future, is looking for technologies that are in the installation phase because by the time they are in the deployment phase it is too late. 

This section is divided into three parts 1. Andreessen on bitcoin technology 2. Andreessen on criticisms of bitcoin 3. Andreessen on current and future use cases.

1. Andreessen on bitcoin technology

Bitcoin, like most widely used stores of value including gold and fiat money, is intrinsically valueless and is only useful if lots of people use and accept it. However, Andreessen argues that bitcoin is more than just a hyped up speculative asset because as the first practical solution to the so-called 'the Byzantine Generals Problem' it is a genuine breakthrough in computer science. The significance of bitcoin is that it provides a way for unrelated parties to trust each other over an untrusted network and transfer (not copy) a digital asset which could be anything from contracts, to passwords and of course money. This in turn means you can have a system of payments without a middle man and therefore no transaction costs.

2. Andreessen on criticisms of bitcoin.

There are several criticisms of bitcoin Andreessen disagrees with. 

  1. Bitcoin is too volatile. Andreessen argues that volatility is a function of speculation which has actually helped with adoption of the currency whilst the transaction use case is still weak. He concedes that in the long-run volatilty needs to be lower but as transaction volume increases when compared to speculative volume that should happen naturally. Also with derivative (hedging) and a wider acceptance of the currency should help stabilize things
  2. Black market/illegal activity. Andreessen argues this is over-stated and actually compared to gold, cash or diamonds digital currency is much more trackable because there is a ledger which anyone can see recording all the transactions.

He does concede though that:

  1. Bitcoin may not be the final form of digital currency and that some future cryptocurrency built on the block chain technology may replace it. 
  2. Bitcoin has a genuine chicken and egg problem that all networks have which is a currency isn't useful to consumers until merchants accept it but merchants won't accept it until consumers use it. Thus in the short-run, less revolutionary but better adapted to the current system systems like Apple Pay may at first win out.

3. Andreessen on the use cases of bitcoin.

Current uses case of bitcoin include:

  1. Speculation. As previously argued this may be how bitcoin gets around the chicken and egg problem before its primary use case as a currency emerges.
  2. Lower transaction costs. Without the need for a middle-man managing the ledger there are no need for transaction costs.  
  3. Bitcoin can be used just as a payment system without any exposure to bitcoin price volatility.
  4. Bitcoin can be used to prevent credit card fraud because the information transferred is related to the bitcoins not to the transacting parties.

Futures use cases of bitcoin include:

  1. Increased access to modern financial services both for unbanked people in the US and people in less developed countries, especially those with corrupt, unstable and undeveloped financial systems.
  2. The low transaction costs are particularly significant for international remittance where transaction costs can be very expensive.
  3. With limited to no transaction costs suddenly micro-transactions, tiny fractions of an american dollar in value are possible and could be used from anything a tiny cost to sending emails to preventing spamming to a way to determine who gets access to that car parking spot.
  4. Finally, the low transaction costs allow for a new way for charities and movements to easily and freely raise money for good causes.

UPDATES:

#marcandreessen

September 2015

Andreessen tweet.

  • He teases those who fail to see that the commercial value is in a technology's applications not the technology itself.

January 2015 

Andreessen delivers tweetstorm on bitcoin. 

  • Fights against three negative bitcoin arguments 1. bitcoin price fallen a lot 2. bitcoin is too volatile 3. not enough use cases.

November 2014

Andreessen's fellow VC at Andreessen Horowitz, Ben Horowitz at Stanford on bitcoin.

  • Explains the problem bitcoin solves and compares it to the internet.

October 2014

Andreessen at a Salesforce conference.

  • Admits to chicken and egg problems with bitcoin and long-term and high risk nature of the bet but argues that the reward makes it still worthwhile.
  • Cryptocurrency will definitely happen however.

March 2014

Andreessen at Pandomonthly interview. 

  • Admits to lots of legal issues, but argues bitcoin is a response to the over regulation of traditional finance, in the long-run more clamping down might make bitcoin even more compelling. Hasn't made a bet yet because conflict of interest issues mean they can only make one bet. 

January 2014

Andreessen writes in the New York Times about 'Why Bitcoin Matters'.

  • Includes how bitcoin works, rebuttals of criticisms, examples of use cases and speculation on the futures of bitcoin.