Economics/Class Relations

Bitcoin: Comes out swinging off the ropes

The Daily Attack

In spite of attention grabbing headlines, Bitcoin has proven its resiliency the past few days by maintaining a stable price in the $16-17 per BTC range. Many wrote off Bitcoin as doomed after it’s largest exchanger, MtGox was taken off line following a wave of abuse, hacks and fraudulent manipulation that resulted in prices on the exchange market to drop as low as $0.01 per Bitcoin. What most have failed to realize, however, is that the attacks were not on the infrastructure of Bitcoin itself, but on MtGox. Bitcoin itself remains intact and as secure as ever. The only thing that has changed is that scammers have taken note of what was an immature, innocent community that had sprung up around the crypto currency. That same community has pulled through, and is unlikely to fall for the same tricks again.

Why has Bitcoin retained value through it all? The reason is that its fundamentals are intact.

What are its fundamentals?

  • Its low transaction cost – you can send payments across the world for less than a penny. Try that with a credit card.
  • Its decentralized nature – no issuing authority can manipulate it, nor can an outside entity. Compare that to E-gold or the Liberty Dollar. Granted, Bitcoin is yet to be tested by a crackdown from the Federal Government. Still, what exactly could they seize? They’d have to shut down the internet or at least ban individual users to fully stop it.
  • Its relative anonymity – taking a few precautions, you can expect a pretty reasonable level of anonymity in spending bitcoins.
  • Its cash like nature – what’s spent is spent. There are no automatic charge-backs. Though some may count this as a fault of Bitcoin, I know there are merchants out their who would see it as an asset, compared to the nightmares that a service like paypal and credit cards can cause.
  • Its finite nature – we know the maximum number of Bitcoins that will ever exist, 21 million. The usefulness of this feature is debatable. But one thing is for sure, this feature differentiates Bitcoin in the market from fiat currencies, which tend to be inflationary.

Bitcoins other strength is its development focused economy.

Author and urbanist thinker Jane Jacobs argued that the economic engines of the world weren’t Nation States as a whole, nor were they to be found in high efficient, high capacity corporations and factories. She argued that at the forefront of technological innovation and economic growth was small firms and individuals, working on innovative projects with high rates of failure within the messy, seemingly disorganized networks only to be found in great cities. The development of the automobile in Detroit can be attributed to this process. The consolidation of the auto industry and its subsequent demise shows the innovative dead end of abandoning small entrepreneurship, and the process of development work through decentralized networks. The dot-com boom has followed a similar pattern thus far, with a number of innovative leaps having been made in web development and programming over the past two decades; all driven, at least at first, by small firms and individuals pushing boundaries, mostly failing, but also succeeding brilliantly. The community of developers that has sprung up around Bitcoin is an offshoot of this development process.

Take a look at the Project Development sub-forum at the forums. Everyday you’ll find new projects proposed, and a network of web developers, programmers and designers ready to jump on board for little or no pay up front. This is the making of explosive growth. It was from the garages of tinkerers that we got the automobile, flight, computers, electricity, and virtually every good or service you use today. They can all be traced back to hot beds of innovation; networks of inventors, and high concentrations of talent working together on an ad hoc basis. This is exactly what you’ll find in the Bitcoin community of entrepreneurs.

Bitcoin is creating its own economy, much like the internet did in the late 90’s and 00’s.

The environment that this innovation and development is taking place is itself a technological leap forward: Bitcoin. Think of Bitcoins features as the infrastructure and economic policy of a city, Bitcoin City. This city has infrastructure to move goods and services around, between producers and to consumers. The anonymous, decentralized nature of the currency creates a virtual free market when coupled with Tor that is highly difficult to regulate or tax. It has the ability to import goods and services, add value, and export them. To begin with, much of the imports will be goods and services targeted at Miners.

Miners are the folks who are creating new Bitcoins, each new Bitcoin being harder to mint and consuming more energy than the last. Entrepreneurs who recognize the fundamental advantages of Bitcoin can offer goods and services to miners, everything from inputs of production like graphics cards, to consumer goods like BitMunchies and the Silkroad are offering. Of course, the economy of Bitcoin City can’t experience explosive growth serving only miners. But, important development work to serve customers within Bitcoin City is generating exports for the economy. The Silkroad has set up an important marketplace for illegal drugs (like it or not.) Think of it this way: Bitcoin City has legalized drugs, and anyone across the world can order otherwise illegal drugs from Bitcoin City. And the only currency this market accepts is Bitcoin. Bitcoin City has just expanded its economy through this export work. This isn’t the end point of this development work, either. I imagine next up will be money transmittal services, much like Hawala, which can settle cross border transactions for a fraction of the price of other services, and with a few keystrokes. Bitcoin City is the easiest and cheapest place through which to clear payments. Bitcoin City will further expanded its economy with this offering.

And this is just the beginning. There’s discussion of starting a physical onion routing courier system, lotteries, banks, escrow services; and all manner of goods and services. Some of these will succeed, many will fail. But what is important is the Bitcoin has provided all the necessary ingredients to encourage explosive growth. If not Bitcoin, then the next crypto currency will. Watch out, we’re not finished yet!

6.30.11 UPDATEMt Gox apologizes for data breaches.

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