Bitcoin the Currency vs. Bitcoin the Technology

I was at a dinner a few weeks ago with some fairly prominent Silicon Valley investors, and one of the things that quite a few attendees said was that they were believers in Bitcoin the technology, but not believers in Bitcoin the currency. It seems that many believe Bitcoin the currency is simply a tulip-like bubble. A related idea Ive heard is the belief that there will be many blockchains for many new applications, and that currency is just one application, and perhaps not even the most important one. There have been proposals to use new blockchains to manage payment for distributed bandwidth, payment for distributed storage, PKI certificate infrastructure, etc. Still others think the fact that Bitcoin enables cheap, fast transactions is transformative and important, while the underlying currency is not.

On the contrary, I believe that in the near-term, with the cryptographic technology were likely to have in the next two to five years, there will be only one widely used blockchain, and currency will be the only widely used blockchain application. Further, the only widely used currency application will be the store of value application, rather than payment network or medium of exchange applications. In fact, in order for the benefits of cheap, fast cryptocurrency transactions to be realized, Bitcoin the currency must first succeed as a mass market store of value in the same general category as precious metals or national currencies.

As I believe the currency application is the only viable blockchain application until a solution for time warp and 51% attacks is found, I also believe currency to be a network effect market. The ecosystem of merchants, developers, miners and entrepreneurs is a very powerful network currently working in Bitcoins favor. As with social networks, operating systems or online auctions, I believe that at any given time, there will likely be one predominant network ecosystem. There will certainly be many altcoins that will provide ways to try new innovations, and one of those could eventually be the Facebook to Bitcoins Myspace, but Bitcoin has a big lead (currently ~90% of cryptocurrency market value) and a large network that will be difficult to displace.

Finally, while I believe there will only be one widely-used blockchain and one widely-used blockchain application, I also believe cryptocurrency must first grow and succeed as a store of value before it will succeed as a payment network. The cost and hassle of exchanging a national currency for Bitcoin prior to executing a purchase is a nonstarter for virtually everyone. Unless you already have Bitcoin, its cheaper to transact in a national currency. This will change as the Bitcoin ecosystem grows and as more people are paid in Bitcoin or it becomes seamless and inexpensive to convert to Bitcoin. This time when the primary use for cryptocurrencies is simply as a store of value may last three to five years, until cryptocurrency ownership is much more widespread and volatility is much lower. (Note that the bar for stability relative to national currencies is much lower in developing countries or in shadow economies, so transactional use cases are likely to develop there first.)

I suspect that many find Bitcoin as a store of value to be uncompelling because its unintuitive that an electronic record with no independent value has such a seemingly high price. Bitcoins price volatility also makes it seem a poor choice for a store of value. Still others may find the Bitcoin currency concept distasteful because it conflicts with favored economic or political philosophies. I believe all of those objections will be overcome over time, and Ill address them in future posts. However, the point remains that other applications for blockchains have not yet been successful, and I believe they are unlikely to be successful at least until major technical breakthroughs are made. In the meantime, those who want to realize the potential of Bitcoins payment network and blockchain technology will have to first accept and embrace the idea of Bitcoin as a currency and as a store of value.