Thursday, February 13, 2014

The Best Thing You Can Do for Bitcoin

I'll give you a hint. It's the opposite of buying things with them.

I say this hesitantly, as I'm currently paying my rent with funds coming from a company that facilitates Bitcoin payments. But I'm only one post in on this blog, and I can already repeat my caution to the reader, "If I turn out to be particularly clear, you've probably misunderstood what I've said."

This post was prompted by the attitude of most of the commenters on today's Reddit post about a porn site now accepting Bitcoin. Presumably, these Redditors are all Bitcoin enthusiasts genuinely interested in increased adoption of Bitcoin, and perhaps even its displacing the Dollar and other fiat currencies. And yet, here they all are, expressing the intention of doing the opposite of what would actually be good for Bitcoin. Sort of.

Let me be more clear. The best thing you can do for Bitcoin is to buy/mine/acquire as many of them as you can and to hoard them. Bitcoin will "succeed" if and only if it has a high market cap. The higher the better. When Bitcoin had a six digit market cap, CNBC did not do daily segments about it, and Larry Kudlow didn't say awesome things like that he would back Bitcoin if it were somehow linked to gold. The only reason the world is waking up and smelling Bitcoin is because it now has a $10 billion market cap. The higher that number goes, the more adoption there will be and the more resources will be poured into furthering Bitcoin's robustness.

But wait wait wait, you might still be saying. People will only want to use Bitcoins if they can buy things with them. And people can only buy things with them if merchants accept them. We must show our support for these merchants who accept Bitcoin to build the community. Aha! That last part is where you went wrong. Well, only half wrong really. I should give you more credit. After all, you're young and are up on the latest Reddit news, and I'm probably just some stuffy old guy who prattles on endlessly about beige books and interest rates.

The reality is that these merchants probably don't really care about Bitcoin. If they're smart (and they are), they recognize that all they have to do to tap heavily into the market of a fervent group of technophiles (that, as a sidenote, probably already consumes more porn per capita than any other demographic) is to pander to their Bitcoin enthusiasm. How dare they!

In all likelihood, these merchants are taking every Bitcoin that comes in the door and converting it as quickly as possible into dollars or whatever other fiat currency. When they do that, it has the effect of removing wealth from the Bitcoin network...assuming that every Redditor doesn't go out and buy more Bitcoins to replace those he just spent on porn. And even then, it would just be a wash, except for the little bit of "float" it would generate during the brief period between payment acceptance and subsequent liquidation.

In case the economics behind what I just described isn't crystal clear, let's have a very quick lesson on supply and demand. First off, we already know that the Bitcoin protocol puts its supply on a predetermined path to 21 million. So, the supply is fixed in a sense. If we want the unit price of a Bitcoin to rise from $1,000 to $1,000,000, which of course we all do, that only leaves demand. That means that every time you convince one of your friends to give up some of his dollars, or his stock portfolio, or his stash of 100oz gold bars in order to increase his demand for Bitcoins, yay! you're being a good Bitcoin Citizen.

On the other hand, every time you reduce your demand for Bitcoin by spending it on frivolous crap, not to mention transferring those Bitcoins into the hands of someone who has no true love for everything Bitcoin and is going to convert out of it immediately, a fairy dies. And Bitcoin's price drops.

So if you want to do right by Bitcoin, hold onto them. Only spend them if you were going to buy something anyway, and in that case, yes, absolutely, pick a merchant who accepts Bitcoin and pay with them! Just make sure to top of your Bitcoin allocation when you're done.

Having been a debbie downer throughout this post (at least for those who are jumping first and looking down later), I'll turn to being more constructive. One possibility for the Bitcoin community is to demand that merchants you patronize with your Bitcoins signal their love for it. I haven't explored the ecosystem enough to know whether a usable version of this already exists, but ask them to publish messages signed with their Bitcoin wallets to show that they aren't doing exactly what I described above. I know that BitcoinQt has built in sign/verify functionality, which I suppose is a start, but that's too clunky for what I'm envisioning. Merchants will need a mechanism to quickly and easily generate perhaps a QR code to display on their Bitcoin payment page, and you can use a smartphone app to read it then talk to a service on top of the blockchain that confirms the oh-so-sizable holdings of these genuinely, not superficially, Bitcoin-supporting merchants we're all coming to know and love.

If what I just described already exists someone please point me to it in the Comments section. If not, it seems like a feature that someone like blockchain.info could easily provide. Or if any readers have the resources, please go build it. I'll happily cover it here, and you can buy me a beer if you make it big.

4 comments:

  1. This is the best Bitcoin blog I've ever read, finally some quality analysis of monetary features of Bitcoin. Every article has great value added.

    Do you also write on other topics on a different blog?

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  2. Thanks for the kind words. I don't blog elsewhere as I don't really have anything to add on other topics that isn't already well-covered by others. I might stray some into non-Bitcoin economics and political theory here, but mainly I'm just trying to fill in blanks I perceive in the sound discussion of Bitcoin's future.

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