Bitcoin

I've mentioned Bitcoin a number of times on this blog. It is something our firm is watching closely. We thought briefly about making a Bitcoin specific investment earlier this year but ended up deciding to sit on the sidelines for now.

We are quite taken with the idea of a currency that is not controlled by governments and central bankers and that is based on faith in an algorithm and a network instead of the "full faith and credit" of a country.

Wired has a good post on the history of Bitcoin. It's a quick read. If you are at all interested in this topic, I suggest you check it out.

The Wired post has this chart in it:

Bitcoin

You could take that as a sign that Bitcoin has failed. Or if you put that chart in the context of the Gartner "hype cycle" chart, you could say that we just went through inflated expectations and now we are into the real work.

Hype cycle

The hype cycle model rings so true to me because it maps out what has happened with the commercial Internet over the past fifteen years. In 2002/2003, so many people thought the Internet was "over" as an investment opportunity. And they were wrong.

So it seems to me and my colleagues at USV that an alternative currency with roots in peer to peer networks and based on an algorithm that is transparent to everyone is an idea whose time has come. The question remains if the Bitcoin algorithm or some other algorithm (possibly a derivative of the Bitcoin algorithm that deals with some of Bitcoin's weaknesses?) will ultimately win out. That's an important issue that has a lot to do with when this space becomes investable.

But Bitcoin or something else, I'm confident we'll see the emergence of currencies that are not controlled by nation states in my lifetime. Whether that is a good thing or not remains to be seen. I think it is, but there are significant ramifications that will result from the decoupling of currencies from governments. And one of them is an interesting investment opportunity that we hope to participate in.

#Web/Tech

Comments (Archived):

  1. timothysykes

    The cycle and Wired chart look eerily similar to that of the many penny stock pump and dumps I track….this is the true pattern that dude in Pi was searching for

    1. ShanaC

      we’re stuck in a pump and dump scheme?

      1. Gary Rowe

        No. Use bitcoins when you need them, cash out to the currency of your choice when you don’t. Keep a float if you use them regularly. That way you don’t expose yourself to a currency risk.

  2. gregorylent

    it is indeed in the future .. along with gov 2.0 but gov 1.0 will oppose both, unto death.

    1. fredwilson

      and a lot of other stuff too

  3. howardlindzon

    With the MF nightmare for account holders, s small string of further bank problems here and abroad would really cause a panic.  Hard to say how people react in a panic.  It’s never a panic until you can;t get at your money.

    1. andyidsinga

      bartering + know how to make beer / wine / spirits 🙂

  4. Colin Pape

    Glad to hear you’re thinking about this and ready to put your FRNs where your mouth is.Pretty much every other problem can be tied to the Federal Reserve and its ‘dysfunctional’ ways.The fact that some people have the ability to print money, while the rest of us must chase it, and that their policies, and agenda are so secretive and unfair are what leads to this feeling of inequality that the OWS folks are so upset about.Have you read The Creature from Jekyll Island (http://www.google.com/searc… by G. Edward Griffin? It’s a must-read for everyone. Anyone who thinks they understand economics, but who hasn’t read that book is sadly mistaken.KidMercury deserves some credit for constantly pushing this agenda to the forefront and has been the leading proponent of alternative currencies within the AVC community. Love that guy. 🙂

    1. kidmercury

      thanks for the plug! and i do want to echo the support for g. edward griffin’s book……i agree it is a must-read, extremely well-written and contains all the important background info

    2. fredwilson

      kid has had an impact on my thinking. not as far as he’d like. but he speaks the truth.

  5. Jon Matonis

    Fred, thanks for recognizing bitcoin. As a potential future investor, you may be interested in this: Air Guitars and Bitcoin Regulationhttp://themonetaryfuture.bl…

    1. kidmercury

      ^2 for the monetary future blog…..i’m not as bullish on bitcoin as you are but i read it to keep me on my toes and get challenging viewpoints….great stuff, thanks and keep it up…..

    2. fredwilson

      i saw that. great blog.

  6. Roch

    Bitcoin isn’t going to fail, I just hope it will be able to scale.

  7. Steve Hallock

    In order to really become viable, they are going to have to figure out a way to explain it that makes sense to laymen.  Right now it is way too complicated.  As screwed up as our government is, most people would prefer that backing to some guy in a garage somewhere.  I know that’s not what Bitcoin is, but unless they can successfully explain it, it may as well be.Frankly I see things like this (i.e. major governmental disruption) as the only way out of this mess we’re in, in the long run.  I love that Bitcoin exists at all, but am not very bullish in the short.

    1. Ryan Tanaka

      Explanations are for engineers — I don’t think it would be too difficult to sell it to the general public if there’s enough interest.  (Especially with all the distrust in the banking system right now.) Say, the car and driver example: most people don’t know the physics behind its principals, but they use it anyway.  The main thing is that it has to work.

      1. Steve Hallock

        Yes, but money is built on trust. In order to build trust, the system needs to be much more accessible intellectually.Explain it to your parents right now and I bet they get a mental picture of some nerds in their garages “making money”

        1. Ryan Tanaka

          I see what you’re saying, although you’ll be surprised how many people still don’t have any clue as to how money works even now.  For most people it’s just green-colored magic that lets them get the stuff they need.Refine the technology, get some early adopters, then push it hard into the public sphere using an aggressive media campaign.  If it works, it’ll stick.

          1. Steve Hallock

            Not particularly important to know how it works when it’s like every other money and backed by US government. Much more important for Bitcoin.I would imagine knowledge of the monetary system was much greater when the first fiat currencies were floated.

          2. Ryan Tanaka

            Or was the fiat system implemented by a minority of people who happened to be in the position to do something about it?  Maybe we could look into the history of it, but I don’t think it was ever enabled through popular vote.I agree that better explanations are needed, although for the average person “alternative money with a transparent system” might be enough.  The gritty details of it will probably be handled mostly by the specialists.

        2. awaldstein

          Well said.Understanding has little to do with trust in most instances.Any disruption that requires either mass education or the creation of a new globally trusted entity, could be an idea in search of market not pent up behavior waiting for a platform to play on.I like the idea of bitcoin. Visualizing a mass market implementation  is a challenge.

          1. JamesHRH

            however, seeing TheKidMercury vision is a snap.the answer is not one, but many.

    2. Gary Rowe

      You might want to take a look at this recent video on YouTube by BitPay (http://www.youtube.com/watc…. It helps to explain the utility of Bitcoin without going into the underlying technicalities. 

    3. kidmercury

      i agree, lack of simplicity is a huge obstacle to bitcoin

      1. stevenwagner

        thats why the price is so cheap right now.

    4. fredwilson

      for some reason Kazaa didn’t have to explain how it worked for people to want to use it. but i agree that bitcoin does.

    5. Jon Matonis

      Most people are barely aware of the workings of the Fed or the ECB. If they knew how the sausage was really made, they would be even more frightened.Just as SSL is used on websites today, the seamless client apps and mobile apps for bitcoin will make the process as simple as email for even the most basic user. How bitcoin’s exchange rate is determined will have to be explained but all currencies have that issue since money is basically a “mass illusion” anyway.  At the crux of the matter however, is do we want it to be governmental mass illusion or our own free market mass illusion.

  8. Vineeth Kariappa

    “full faith and credit” of a country, being the problem…

  9. Chris Rossini

    Money always emerged in the marketplace as a commodity. And the most marketable commodity (i.e., the one most generally sought) would become money. This was not done by dictate, but was an organic process that occurred in the market.Governments merely hijacked the process afterwards…and then figured out a way to separate money from the underlying commodity so that it could create as much of it as it wants.Governments can now pay for as much welfare & warfare as they want…with the only thing stopping them being the economic laws of supply & demand. The problem that I have with bitcoin is that it did not originate in the marketplace. An arbitrary amount of bitcoins have been created (which helps greatly in halting inflation), but there is no prior use for bitcoins that people (in general) used them for. These are big problems.I support what Ron Paul has proposed in letting the market decide what currency (or currencies) should be used. To make this happen, legal tender laws, that force us to accept dollars, must be abolished as well. The market will most likely decide on gold & silver, as it always has, but maybe not. Whatever the currency ends up as, the market must decide.Governments resist this because they know that people will choose the commodities over the fiat dollars which lose value every second.Fortunately, I agree with you Fred, that we’ll see the emergence of new currencies. It’s apparent that the current fiat system is a total disaster. It’s like a dam with a million leaky holes…and every time the authorities patch one up, another thousand are created.Governments will fight tooth & nail till the bitter end…and we’ll all feel the pain, but sound money is approaching.

    1. scott_mcleod

      I Agree Chris-Great words of inspiration for our populus… “And the most marketable commodity (i.e., the one most generally sought) would become money. This was not done by dictate, but was an organic process that occurred in the market.”

    2. ShanaC

      with this comment I have to ask – in your opinion, how is money supposed to work

      1. andyswan

        Money is simply a claim against the future productivity or assets of another man.  It has nothing to do with an algorithm or the full faith and credit of a welfare/warfare state.  Those are simply two ways that currency creators attempt to add credibility to their offering.But in the end, money is simply a tool, and its value is 100% reliant upon it being accepted in the future by another man for his productivity or assets.If bitcoin was truly money, there would be no investment in its creator, only a decision of weather or not to use it as the tool for future transactions.

        1. fredwilson

          i am not suggesting the investment opportunity would be in its creator. i think the investment opportunities are in services around the new currency.

          1. andyswan

            Thats cool. I misunderstood then

          2. kidmercury

            i disagree, i think monetary policy is the profit center, and creating a government filled with tons of free services is the mousetrap that gets people buying into your currency. free education, free healthcare, and only merchants that can meet high quality regulatory measures in place can use the currency…..

          3. Jon Matonis

            kidmercury, monetary policy can only be the profit center via seigniorage. A true bitcoin does not offer seigniorage opportunities hence ancilliary services become the profit center in DE-central banking.

        2. ShanaC

          so how does money work as a store of value and a purchasing intermediary?

          1. andyswan

            Exactly as I stated….it is a claim on the future producticity or assets of other people (so long as they will accept it)

    3. kidmercury

      yup….nailed it here…….^2

    4. Erik

      Ron Paul specifically is a supporter of H.R. 1098 the “Free Competition in Currency Act of 2011”:http://paul.house.gov/index…A statement by Lawrence H. White, Professor of Economics, George Mason University, on H.R. 1098 directly mentions Bitcoin:http://financialservices.ho

    5. Druce

      Fiat currencies have been pretty stable the last 25 or so years. Certainly more so than gold, which has fluctuated quite a lot.The problem is an unstable financial system. Leverage, moral hazard, opacity, lack of effective regulation, rent-seeking, vulnerability to cascading failures.With gold, you can (and did) also have a highly unstable financial system. The debatable, if any, merit is that leverage etc. can’t get as far out of hand, since the crises happen quicker and you can’t paper them over with a flexible monetary policy.Would be nice to think we are capable of coming up with a reasonably stable and resilient financial system.We could go back to gold, or wampum, or barter, but it doesn’t reflect too well on us that this is the best we can do.(At some point, someone dug up some yellow metal and made it into a bracelet, which it turned out there was demand for. That ‘originated’ in the marketplace through innovation in mining and refining and metalwork, the same way Bitcoin did. The main difference is, there was demand for the yellow metal, the problem with Bitcoin is it’s failing in the marketplace.)

      1. andyswan

        Bitcoin chart looks fairly similar to the fiat currencies of the world over the last 25 years when priced in terms of gold.I’m unclear why you decided that it was gold that was unstable and not the fiat currency you’re using to “price” it.

        1. Druce

          vs CPI or a GDP price index.if the price of gold is up 500%, it doesn’t mean real GDP is down 80%.it’s unclear (to put it mildly) why someone would decide their income or GDP is what’s unstable, as opposed to the price of gold.

          1. VarmintReaper

            Simple. If I can buy less with the same the value of the same is different.The value of something is what you can do with it, not what you have.Relativism is the cause of many brain ulcers. Choosing to use the abstraction as the reference point is as delusional as geocentrism and epicycles.

      2. Ade

        The Price of Gold has fluctuated because the purchasing power of fiat money is slowly being destroyed.

    6. Davinci Jeremie

      Chris Said:”Money always emerged in the marketplace as a commodity. And the most marketable commodity (i.e., the one most generally sought) would become money. This was not done by dictate, but was an organic process that occurred in the market.Governments merely hijacked the process afterwards…and then figured out a way to separate money from the underlying commodity so that it could create as much of it as it wants.”This is true, however there is a difference between MONEY and CURRENCY.Money is first and for most a store of value then it must also be durable, portable, divisible, consistent, and have intrinsic value this is why gold and silver are money and NOTHING ELSE!However those items are very inconvenient for transacting with large and micro amounts of wealth both locally and around the world. Enter currency, they exist as very portable, divisible, consistent and it value comes from the BELIEF that it will be limited based on some set of rules.So the difference between money and currency is one has a value based on knowledge and the other has a value based on belief. The currency could exist as a promise to pay gold or not, in both cases the reason you use it is you BELIEVE you can get something for it. While the gold and silver IS the something.Now that we have established the difference between money and currency lets look at the difference between a bitcoin currency and government issued currency backed by gold or full faith and credit.Bitcoins value is based do you believe that the rules will not change and that the mining process will keep the database functional? Second part of it’s value is that it accomplishes everything the current currency does but at a lower cost. It costs me $30 to $60 to send money to another person in the world with bitcoins It cost me nothing.Dollars value is based on the FALSE belief that it has intrinsic value and is NOT created without limit.”The federal reserve stands ready to create money without limit. Without limit!” Alen Greenspand speaking to derivative holders wondering if they will get paid.It’s value also comes from a point of a gun as you need it to pay taxes and legally bound to accept it as payment in a financial dispute. Also most people have the false belief that governments have their best interest in mind thus would not destroy the value of the money.So bitcoins has one small problem… You can’t make a contract that is enforceable by law to have someone pay you in bitcoins.

      1. runeks

        “While the gold and silver IS the something.”Gold and silver are only harder to counterfeit than paper money. That’s about the only difference.Intrinsic value is an oxymoron.

        1. Davinci Jeremie

          Define a dollar.

      2. VarmintReaper

        Actually a simple agreement that you will be paid in Bitcoins is sufficient.

      3. Rok

        “So bitcoins has one small problem… You can’t make a contract that is enforceable by law to have someone pay you in bitcoins.”Look what made contracts so far. 🙂 A total systematic fuckup.If we just left “evolution” make its way, we gave and we are still giving power to some people with really bizarre agendas.I rather see exciting evolving black market, than world economic enslavment.

  10. Dale Allyn

    Trust is the big problem in this area. It’s an interesting concept, but some of the early growing pains will have residual effects for a while. 

  11. Thomas Vladeck

    But this type of currency has a real legitimacy problem. Namely, when it becomes legitimate, it will be taxed, and governments have the power to demand that the tax be paid in the local currency.

  12. WA

    Just curious if one would already consider we use non nation state currencies from reward programs to corporate expense accounts…a currency backed by loyalty in the former case and productivity in the latter…

  13. The Heasman

    Man am I glad you mentioned the Gartner “hype cycle” chart. Never come across it, but it rings so true with what I thought was happening with Bitcoin after I initially read that wired article

  14. Rohan

    Love love the Gartner hype cycle.Applicable to everything, really..

    1. JamesHRH

      It is likely the apex of describing adoption, but the basic concept borders on ancient, just to be clear.

      1. Rohan

        Yup agree. And reminders and re-learning are, in many ways, the essence of learning..

  15. Eyal Hertzog

    Take a look at the attached Chart – especially on the volume. Bitcoin is a victim to a manipulation by a great force (not hard to guess who). It is so obvious that a blind man can see it. It involves two main components:1. Mainstream Media bashing (“Bitcoin hacked” when it was MtGox etc.., or even the doomish title of this very wired article)2. Selling huge amounts on the weekends to take down the price and create hysteria in the marketplace.They can only slow it’s progress. At some point – they will run out of bitcoins (I actually think they just did) – and will not be able to further manipulate the market.The last 10 days were actually good for bitcoin.Also it is important to mention that the value of bitcoin has nothing to do with it’s usability, and that it would be killed maybe on the day that bittorrent would be killed (hint: Never).Now is the time to take a very serious look at bitcoin.

    1. Erik Voorhees

      Who manipulated the price?

  16. matthughes

    Bitcoin is super interesting.This post reminded me anecdotally of a recent article in the WSJ about local Brazilian communities creating their own currency: http://online.wsj.com/artic…

    1. Shawn Cohen

      This also reminds me of an interview on NPR w/ an author a few years back who was promoting microfinancing of local businesses. He pointed back to the Papacy in the 16th century instituting a central currency to finance its wars w/ all the profits that Italian traders had racked up from shipping their wares to the rest of Europe.I wish I could remember the name of the book now…

  17. Pete Griffiths

    If you are right, Fred, this could have profound implications.  There are already large sectors of some national economies that are ‘black economies’ that are off the national income accounting grid.  Such sectors in the EEC distort resource allocation because EU grants are allocated on the basis of such accounting and some countries have large invisible economies.  Virtual currencies could create other such invisible pockets with (to me at least) very hard to calculate consequences.  How will national authorities be able to control the money supply and fiscal policy if the money supply of large sectors of the economy is beyond the reach of the authorities?  I have no idea what this could mean, but It’s intriguing.

    1. Erik Voorhees

      The supply of money should be controlled by the marketplace, just like the supply of any good or service. Central planners are doomed to fail, because they can never be wise enough to obtain proper pricing information. Money is the most important commodity in an economy, and thus it should be the furthest from central planning and diktat.

      1. Pete Griffiths

        You may be right, Erik.  But this conclusion cannot be arrived at by some ideological conviction about the nature of free markets.  This is a subject of serious academic debate and monetarists – strongly represented by scholars from the university of chicago – were strong believers in the importance of control of the money supply as a policy lever.”Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view withinmonetary economics that variation in the money supply has major influences onnational output in the short run and the price level over longer periods and that objectives of monetary policy are best met by targeting the growth rate of the money supply.[1]”http://en.wikipedia.org/wik…You may agree or disagree with them but reaching conclusions in this matter is a non-trivial affair.

      2. ShanaC

        Isn’t that effectively what is happening now?  Our yield curve is subject to whether people buy bonds of various time lengths coming to term.

        1. Pete Griffiths

          I don’t think so ShanaC.  The yield curve is determined by supply as well as demand.  And right now the supply is controlled by the Fed.

          1. ShanaC

            both buyers and/or sellers could walk from the market.

          2. Pete Griffiths

            Then you don’t have a market.

    2. fredwilson

      it’s a real issue. but i think it should be possible to require merchants and employers to report transactions that are done in alternative currencies

  18. Seth Godin

    Interesting that the media/government enjoys associating BitCoin with all the bad actors who have used it (drug deals, scam artists, etc.)Every new communication/transaction technology is used by fringe actors early on, and the authorities love to highlight this, as if the technology causes the bad actions.They rarely mention the current status quo as a similar threat to civil society–“American currency is the medium of choice for organized crime. In fact, drug deals use a lot of cash, we should ban it…”

    1. William Mougayar

      True, after reading the Wired article I got a sense that BC had a murky history that needed to be addressed before it can go further. That’s because fundamentally- digital and virtual currencies make a lot of sense in today’s online world. It’s definitely an idea whose time has come, with the right implementation.

      1. BitcoinStarter

        You can say the same thing about Cash. Cash has had a “murky” past also, right?

    2. sean

      You’re missing the point Seth. Bitcoin is untraceable! That makes it ideal for criminals, so in this case the technology is enabling bad actions (or at least making them a whole lot easier)!

    3. LE

      “Interesting that the media/government enjoys associating BitCoin with all the bad actors who have used it (drug deals, scam artists, etc.)”Ultimately though any association is better than not being mentioned at all. What I call “dead body parts selling on ebay”. Any publicity you can get for a nascent thing is good. Well behaved things simply aren’t as interesting.

    4. fredwilson

      yup. i think that use by the “bad guys” is a good signal that something is useful

  19. Yifu Guo

    Unfortunately the wired article took too long to come out and most of it’s information is outdated. Personally I feel the New Yorker article does a better job covering history and offers some interesting insight and sources to Bitcoin. check it out if you haven’t.Yifu Guohttp://bitsyn.com

      1. fredwilson

        thanks

  20. andyidsinga

    i think these currencies already exist – here’s one here in oregon http://riverhoursalternate….im not sure exactly how they are controlled / regulated by the federal government. ( update: wow a whole list here on wikipedia http://en.wikipedia.org/wik… )

    1. Ryan Tanaka

      It’s not that much different than getting “stamp cards” from your local coffee shop — you’re basically trading U.S. currency with a localized one that lets you get certain services.I think BitCoin or whatever the future comes up with will probably get regulated by the government, but it does have serious potential to decentralize the banking system as it is now.  And the transparency of it seems pretty nice.

      1. andyidsinga

        ah – yes ofcourse.I suppose the more local currency is used, the less the fed currency is required until your want to buy outside the local area.just thinking out loud here : maybe that decentralized exchange of local currencies will become possible with each local currency using bitcoin’ish technology and listing products / services that can be purchased with that currency.

  21. EmilSt

    Carlota Perez would agree with this chart for sure. I really believe in the patterns she described. So, I’m happy to believe that the golden era is coming.While I truly believe that every industry can be disrupted, I’m not so sure about the currencies. At least not for now.With all this printing lately (QE1, QE2…) I’ve been thinking a lot about the meaning of money and the whole monetary system. Essentially, money is a promise that some other people will spend their time to do something for you in the future. For example, having 20$ is a promise that some chef in NY will spend 1 hour to cook for you. And so on…So when receiving money, you actualy receive a promise from the “cloud” that some unknown person from the cloud will return you the favor you made to some unknown person from the cloud. And all that according to some algorithm.So who is here the cloud and which one is the algorithm?There is no single algorithm. It is the ever-changing market that defines the nominal values of each participants favors. So trying to make fixed algorithm is equal to communism. And the cloud is the state, the government, the currency and the whole monetary system. So you are doing favors to the cloud in exchange of promises ($) that the cloud will return the favors you made. All that based on your faith in the cloud. The faith in that cloud is based and proportional to the clouds authority (based on history data) and on it’s ability to enforce it’s authority. Is it coincidence that US is the biggest power in the world and in the same time the $ is The reserve currency in the world, as well as ultimate safe heaven in recessions?While my idealistic side loves the idea of new niche currencies, exchanges, clouds of common faith, my realistic side tells me that clouds (currencies, states, monetary systems) will merge in bigger clouds and eventually in one world wide monetary system. Probably then, new niche marketplaces will emerge with some sort of arbitrary currencies based on peers faith. But that should be at least 20 years away. This world is still not transparent enough for such faith.

    1. BitcoinStarter

      Is there any better time then now to disrupt currency? I mean you have to have your head in the sand not to see what is going on out there. (:

      1. EmilSt

        Would you take your VC funding in Bitcoins Today?Whatever the answer, I wish you good luck!

  22. StreetEYE (@streeteye)

    I think without a central authority to evolve Bitcoin, transparent governance, strong legal backing, concepts like this will remain in an experimental / black / illicit economy ghetto.Currency is a medium of exchange, store of value, unit of account – Bitcoin has performed quite poorly so far on all of those counts.Legitimate guys who work on this run the risk of getting hauled in front of Congress as child porn and Al Qaeda enablers.I thought these were interesting enablers of financial disruptionhttp://www.marketwatch.com/…http://www.businessinsider….Currencies are just bits, blessed by a government with an army, or by the bank the govt delegates to… if you allow free flow of bits within and across borders, financial (and other) repression is impossible. (Hence a strong interest in limiting free flow of bits)

    1. Gary Rowe

      Yes, the four Horsemen of the Infocalypse crop up a lot: http://en.wikipedia.org/wik…

      1. StreetEYE (@streeteye)

        Of course, from the government’s standpoint, they only regulate bad stuff, and use taxes for good stuff.If something like Bitcoin took off, and governments couldn’t print money, tax stuff, regulate stuff through the financial system, it would basically break their business model. So it’s anathema.But anyway, until Bitcoin has the features that people demand money for, ability to reliably transact, store value, report… it’s kind of moot.

    2. Prokofy

      And child porn and Al Qaeda enablers indeed they will be.So few people want to pay attention to the experiences of Second Life. They take it superficially as some Gartner Hype Cycle business phenom externally that peaked in 2006-2007 and then dwindled to a haven for furry porn and manginas.But if you understand that this is in fact a brilliant little prototyper of the Internet and web 3.0, then you can value it more.It passed through the stages of child porn enablement and then a crackdown and then banning of child porn simulation (inevitably linked to RL child porn); it passed through the phase of enabling online gambling (which became illegal); it of course is used for all kinds of 4chan/Anonymous kind of prototyping which links it to hacking crimes; even the terrorism thing is invoked as the FBI has Second Life on its list of suspected Internet entities. It passed through all these things and dealt with them, but not by constantly telling the FBI, German prosecutors and Congressional committees that they were innocent geeks who could do no harm and law-enforcement and legislation were all FUDdites. Instead, they grew up, made policies, enforced them, convinced the skeptics, etc.There are no “legitimate guys who work on this”. That itself is a fiction. There are only naive, gullible and sinister geeks in various configurations who think they can operate outside the rule of law of countries and multilateral institutions, etc.Your friend Facebook with its 600 plus million “citizens” outside of countries in the Wired State is going to IPO today and doesn’t even have a valid currency of its own (unlike Second Life, with only a million people). Fraud is a big reason. Governance expenses due to fraud is why.

  23. davidkpark

    Planet Money’s podcast on bitcoins is worth a listen – http://j.mp/oWjmTj. BTW, when is your review of Yocai’s new book coming out? It’s such a wonderful read.

    1. fredwilson

      i haven’t read yochai’s book yet. it’s on the list. reading yochai is work for me. very insightful, but hard.

      1. davidkpark

        This one is geared a bit toward the masses so a little less work. I use Audible + 2x playback on iTunes on my iPhone and it feels much less like work : ) 

    2. Lucas Dailey

      Planet Money is one of my favorite podcasts, and that episode is a great explanation of Bitcoins.

  24. Mccormick Evan

    Two thoughts: 1) We’ve let algorithms take over Wall Street with High Frequency Trading  — and that has been a disaster.  2) If governments are so weakened by a financial crisis that enables Bitcoin, or something similar, to take a dominant roll in the currency markets, all asset classes will likely have suffered unprecedented price declines.  Meaning that all types of asset classes will be absurdly cheap and I would rather invest in those than Bitcoin.

  25. andrewdeandrade

    We won’t see it happen in the US. Given the brinkmanship going on in Europe, parts of Europe are a possibility if the Euro collapses in a spectacularly messy way. Bitcoin will succeed in places where people lose faith in the fiat currency of that nation. Bitcoin’s biggest problem is usability. The situation in Europe could be a perfect storm if the usability was there already. However I except it will be a lost opportunity because of usability. My bet is that we see Bitcoin adopted in parts of Africa first. They have the least baggage and trust insofar as financial systems and currencies are concerned and in many parts people are used to using their cell phones for transactions (trading minutes for example).The missing piece in Bitcoin is a simple way to carry around a “wallet” sized amount of money (enough for a couple of days of purchases) on your mobile phone that is a breeze to use to pay those near you. The only other piece necessary mass real world usage would be the equivalent of a safe place to store the money you don’t want to have access to at all times for security reasons.

    1. Gary Rowe

      Personally, I use Andreas Schildbach’s Bitcoin wallet for Android (https://market.android.com/…. I carry a few days worth of bitcoins around and regularly transfer in others from my main (offline) wallet. I buy bitcoins on an exchange in my local currency and then use them online.

      1. Erik Voorhees

        Yep Gary is correct. There is already a Bitcoin wallet to carry coins on your mobile device, it works great and I love it! You can also just use instawallet.org as a mobile-based wallet because it’s just a web page – so you can spend coins from your phone without having to carry the coins on the device itself. Both options work well.

  26. hubert

    The only really good thing about BitCoin is it’s traction. (And, compared to local alternative currencies, its scalability).But BitCoin’s principle of converting lots of energy in tiny bits of currency would make it an ecological nightmare, it’s value is purely speculative, and it’s meant to be deflationary, which might make it potentially a good value store, but rather useless as a “working” currency.So: nice proof of traction. But I’m sure we can deliver better.

    1. scott_mcleod

      Exactly-Its going to show us new light in creating / adapting / implementing global currency via technology, but its value has to be tied to something else from the beginning.

    2. Gary Rowe

      You may want to take a look at some of the myths that surround Bitcoin, particularly the one about electricity being wasted to make bitcoins: https://en.bitcoin.it/wiki/….

      1. andyidsinga

        Gary – very cool link – thanks

      2. andyidsinga

        my fav. entry on the bitcoin myths page:Myth: The Bitcoin community consists of anarchist/conspiracy theorist/gold standard ‘weenies’Rssponse: The members of the community vary in their ideological stances.

      3. hubrt

        BitCoin’s value is of course not based on the energy consumption during mining. This would be utterly crazy.But: the BitCoin mining process itself has a highly irresponsible carbon footprint, due to the underlying proof-of-work concept. The more miners join, the higher the “difficulty” of the crypto problem, the worse it will get …So probably you wanted to point me to this part of the myth FAQ: https://en.bitcoin.it/wiki/… – which says in a nutshell: – gold’s eco balance might be even worse (most likely true, but rather irrelevant since Nixon killed the gold standard in 1971), – you could move all rigs to Iceland (100% green energy rigs, to be run by the world’s most reliable bankers …), – put CPUs into heaters, instead of resistance coils ($1.500 rice cookers, or what?), – and then “any environmental argument of this type is dishonest”, as even the ecobalance of a wind turbine would be negative (which is a dishonest argument, as science tells otherwise).BitCoin’s traction tells, that time is ripe for new types of complimentary currencies, which are more scalable than those concepts working pretty well on local levels.But I’m still sure we can deliver better.

  27. scott_mcleod

    A new currency system has to be had without governments or institutions. 100% Transparency for all of population.What do you tie currency systems to that do not allow for man to alter its value? Can we really afford tying our Currency 2.0 system to material goods again? Why would we allow the old system to buy into the new system? Wouldn’t this just funnel problems?Just wait…For all you know people are working on a solution. And It’s not Bitcoin, because a bunch of VC’s sure as hell shouldn’t be able to funnel their cash, because the big bankers and assholes are right behind.

    1. Erik Voorhees

      The best currencies are not “tied” to anything. Gold is not tied to anything. Bitcoin is not tied to anything. They are commodities used as money due to their excellent properties for that specific use. Bitcoin is like gold in many respects, but it can be sent instantly across the world, and hidden very easily in any quantity.

      1. ShanaC

        Gold is tied to the fact that there is a limited amount on the planet.

        1. Erik Voorhees

          No, “tied” means redeemable at a fixed rate in the world of currencies and assets. USD used to be “tied” to gold because it was redeemable for gold at a fixed rate. Gold is not tied to anything, nor is bitcoin. They are both commodities valued for their usefulness. USD is no longer tied to anything, and is only valuable because US citizens are forced to pay taxes with it and forced to accept it under legal tender mandates.

  28. Julien

    What’s even more important to me about bitcoin is not so much about the currency aspect, but the P2P aspect. Yes, the financial system is broken, and it’s what makes BTC interesting. But what people seem to “miss” (and why BTC will struggle) is that BTC is not an alternative system. It’s no system. It’s not even decentralized (which would imply that there are many centers), it’s ‘no center’. I wonder if this is ‘economically’ viable. It definetely is something that I would want to see, but I have also noticed that “market” forces never lead to “no market” 🙂

    1. Erik Voorhees

      “Decentralized” simply means there is no single clearing house or record-keeper. Markets will naturally coagulate bitcoin resources around certain nodes, such as the exchanges, but this is altogether different than a centralized system like Paypal, or e-gold.

  29. William Mougayar

    Bitcoin specifically is an open-source project, and its status is that there will never be more than the 21 million token that the software generates. So, I’m curious to know:What is considered a “Bitcoin specific investment”? What sort of ecosystem is building around Bitcoin? Aren’t the wide variations in its exchange rate a big weakness in itself (and it’s a release valve into the real world which is still subject to government regulation), etc..?

    1. Gary Rowe

      There are many products being created in the Bitcoin world. I’m just travelling back from the European Bitcoin Conference 2011 held in Prague. A very interesting couple of days where a large group of people interested in Bitcoin from different backgrounds (technical, product marketing, entrepreneurs and so on) had the chance to meet face to face and talk over the issues. A huge amount of positive feedback and enthusiasm for Bitcoin was the overall feeling. I personally am working on several Bitcoin-related projects (see http://multibit.org) in collaboration with other developers. Out objective is to make it trivial to obtain and use bitcoins (small “b” for the unit of currency) and for people to use them very day. Personally, I use them to make donations to causes I believe in, and for paying bloggers small amounts in recognition of their efforts. Shame this site hasn’t got a Bitcoin swatch in place…

  30. Andrew Badr

    Here’s a blog post I wrote three months ago. It talks about the potential of Bitcoin and threats to its success. The price has fallen since then, but my thinking hasn’t changed.  One thing I would add is that the Bitcoin community has a severe lack of product people.

    1. William Mougayar

      You seem to know about Bitcoin, along with @garyrowe:disqus . What’s the total value of the 21 million tokens? And if the value is tied to its demand, it appears more like an investment instrument as opposed to a currency, no? 

      1. Andrew Badr

        The value is determined by supply and demand. I don’t know what the official difference between a currency and investment instrument is. Is that even a useful distinction? Currencies and investment instruments can each act like the other in some circumstances, so it seems more valuable to talk about specific properties of a given financial tool. If you have any questions about Bitcoin’s properties I could probably help.

        1. Lucas Dailey

          Convertibility is the main distinction between a currency and an asset.Bitcoin is an asset that some people hope will become a currency.The distinction between asset and currency is hugely important, mainly because of the difference in liquidity and market strength.

          1. William Mougayar

            That’s a very important consideration for Bitcoin’s potential evolution, especially that currencies are used as an investment instrument today, mostly speculative though, and hedging related.

          2. Andrew Badr

            Thanks. Sounds like the distinction is not intrinsic to the instrument, but rather a subjective transition.

          3. Lucas Dailey

            True, but the intrinsic characteristics of the instrument directly influence it’s ability to make the transition.For example, for Bitcoins to be widely convertible many (ideally almost all) financial institutions would need to hold some for the purpose of exchange. Because of the inherent deflationary characteristic of a fixed quantity of Bitcoins in a growing world economy, banks would likely have a much greater exchange spread (their cost of buying vs. selling) than typical currencies to hedge against deflation.Which would give them a higher transaction cost than typical currencies. Which hurts its chances of widespread adoption and hurts the “no transaction fee” marketing concept.

          4. William Mougayar

            Still, it’s a worthy one for understanding Bitcoin’s future.

    2. fredwilson

      yes to that last point! maybe that is an opportunity for a product person.

  31. ShanaC

    So beyond the fact that right now bitcoin isn’t working very as money…Could it ever work well as money when we need a tiny bit of inflation?  It was built on austrian principles, and as much as I want to say the Austrians are right, I fear that btcoins are too similar to gold in that we’ve been through periods where there has been not enough gold in our economy that caused booms and busts and major heartache (more than now).Further, with the state of technology as it is, it still is missing a sense of decentralized banks and trading to safeguard it.  Alongside the fact that I am curious if 10, 20 years out the cryptography being the currency can’t be broken, making counterfeiting a really good hobby. 

    1. Erik Voorhees

      Gold doesn’t cause “booms and busts”… it prevents them. The booms and busts to which you are referring were caused by credit expansions that occurred despite gold – primarily enabled by A) a central bank that periodically inflates the currency and B) fractional reserve banking (which is itself enabled by FDIC insurance).An economy which operates on a true gold  (or bitcoin) standard would not have booms and busts in any large way, because money is then finite and floating interest rates curtail lending when money becomes a scarce commodity (this is a natural market feedback mechanism discussed at length by Austrian economists).

      1. ShanaC

        Most economists agree that going on and off the gold standard in the interwar period destroyed parts of the Western European economy.Gold creates problems as much as gets rid of problems :http://www.federalreserve.g…And bitcoin suffers these problems as well.  There are times because of how the velocity of money works that you want to create money.  Without the ability to deal with inflation that is happening irrespective of currency, you cause major problems (that bitcoin doesn’t deal with)

        1. Erik Voorhees

          You’re using the Federal Reserve Chairman to support your argument against gold? Of course the world’s head counterfeiter will be opposed to a monetary system which prevents counterfeiting. The gold standard didn’t destroy western europe. It was western europe’s profligate spending and currency issuance which caused a gold drain from central banks. People blamed the gold, foolishly, and gold has a long history of taking the blame for the errs of central planners who think they can “manage” the money supply of a market economy.

          1. ShanaC

            Why not, he is an expert on the Great Depression.

  32. kidmercury

    Gold is the ticket, Way better than bitcoin. Perhaps both. Curiously i’m at the hard assets conference in san francisco as I type this on my mobile, commenting noww to book a spot in this thread.

    1. Gary Rowe

      Gold works very well, but at some point you must spend it. Then it lacks utility for day to day transactions. And try to send 2kg of gold to a friend on the other side of the world securely in 10 minutes.

      1. kidmercury

        You will send it electronically, just like with how the banking system is supposed to be. You have your gold with some bank/vault, they give you a debit card, gold becomes infinitely divisble that way throug digital technology. This makes gold even better and is part of the whole disrputive angle of gold. Virtual currencies, relational to gold in some way, is how we rebuild the money supply and build the governments of the future.

        1. Gary Rowe

          OK. So you have a gold-backed payment card structure. In order to get the infinite divisibility you maintain a notional account with your bank – just like the current system. How are your assets protected when the bank collapses after excessive fractional reserve loans? Will merchants be charged a fee for using the system? What about chargebacks? If you’re really interested in seeing how an arbitrary asset class (e.g. gold, silver, rare stamps etc) could be used as part of a payment system you may want to research Open Transactions.

          1. kidmercury

            Different systems will have different approaches, some may not allow fractional reserves, will allow redemption. Also, the debit card will likely be pegged to a basket of assets, of which gold is some percentage. Perhaps bitcoin is too depending on the system. But in general, the centerpiece/keystone is gold in my opinion.

          2. Howard Yeh

            Do you think inflation is ever useful? For example, during WW1 when everybody was on gold standard, there was a deflation in non-government sectors because of contracted money supply.Could it make sense to use inflation as a tool? Trade-off in moral hazard.

          3. kidmercury

            Generally I don’t think inflationary monetary policy is good, even in WW II I don’t think it was good and think the problem was an attempt to avoid the necssary liquidation of assets purchased at too high prices during the roaring 20s.

          4. Value Indexer

            The problem is always those pesky people who end up having to use the monetary system. There’s a widely-documented resistance to lowering prices especially regarding labour, which makes inflation a practical solution to certain issues because it has the same effect while only requiring a few people to enact it.As others have pointed out, bitcoin (like any physically limited currency) is currently highly vulnerable to pricing changes. The supply and demand for the currency itself changes the value of the currency faster than the value of products and services priced in it changes. Which means that people would have to be constantly adjusting their prices. Even in a much larger system the same effect would likely still exist, it would just squash people you’ve never heard about so you could pretend for a while that everything was ok.As soon as you involve something with a volatile value in otherwise productive transactions, people will start to forget what the transactions were all about and spend their time analyzing and speculating on the new element. Witness the people who start out by saving for their retirement in the stock market and end up gambling on penny stocks and becoming a day trader because the constant movement just drives them crazy. Inflation is one manifestation of volatility but we haven’t seen solutions to inflation that don’t involve much worse problems.If you want a really hard asset, a unit that’s closely tied to using up one hour of one person’s time would assign everyone an equal value rather than rewarding those who have the right hole in the ground.

    2. kidmercury

      this is my favorite topic…..a few points i wanted to add:1. i’m skeptical of unmoderated algorithms being what determines the future money supply. i favor a government being officially in charge with the right to alter monetary policy as needed. 2. government and money are deeply interconnected; new money should be created by new governments. bitcoin is a little too close to anarcho-capitalism for me, and while i am sympathetic to that ideology and am interested in hearing from its proponents, i remain skeptical. i favor the creation of new governments rather than simply no governments. 3. when considering new money it is vital to consider the current debt situation and how it is going to get resolved. ultimately the US owes a whole bunch of money that it will never repay, $15 trillion in public debt not all of that can be paid. so the US is going to need to devalue the USD relative to gold, and pay off the debt by giving lots of gold out. do the math on outstanding debt vs US gold supply, and you see that gold has to get stabilized at a much, much higher price. this is important because as gold goes much higher it will become increasingly appealing relative to other monetary options. the loyalty lots of rich people, including central banks and governments, have to gold is something bitcoin doesnt have anywhere near of. this is a huge point. #fs

      1. VarmintReaper

        1. The source code is moderated by all the users.2. So we must die in a war to have money so that we don’t starve?3. The debt is a scam. Austerity is genocide. I won’t sweat for it.

        1. kidmercury

          i think a coordinated attack could bring down bitcoin. i don’t know for sure, but i’m not going to put a significant amount of capital in that idea. would you?i don’t think anyone has to die, and i don’t think a terrible austerity is needed. gold is a much better store, i’m already storing in gold and judging by the 10 year trend that is becoming increasingly popular. perhaps the tipping point is near.

  33. Jessica Darko

    I have to chime in with a second to Colin’s endorsement of The Creature from Jekyll Island by G. Edward Griffen.  It is very revealing of the way the world really works, and I would think would be a must read for anyone involved in big money.   I’ve personally improved my net worth dramatically simply because I avoided some common pitfalls that people who don’t understand the nature of money often make, as a result of reading that book (and studying Austrian economics.) My concern about bitcoin is that there’s nothing to stop someone from making another currency using the same source code and calling it something else…. I think people have done this already.  So, the question is, what is the differentiator that will make bit coins the viable currency vs. the comparable ones.And what is the scaling limit to bitcoin.  I don’t think it is capable of running a global economy… thugh not because there aren’t’ enough bit coins (this is a mistake people make about gold… the limited supply of gold makes it good money, and if you need tiny amounts of gold, you can make coins that are 1/1000th of an ounce of gold, in an alloy, etc.)  So, bit coins could be divided up similarly.Its just the clearing mechanism… I’m not sure that’s really scalable in a distributed fashion.

    1. Gary Rowe

      Network effect is what reduces other crypo-currencies based on the Bitcoin protocol from gaining traction. It would take another crypto-currency with much improved characteristics to win out over the well-established blockchain of the current version, started 2 years and running continuously ever since.That’s not to stop people from trying them out – there is some considerable academic research going on in this area.

  34. RichardF

    Putting faith in a virtual currency that isn’t linked to a nation state (that can back up it’s currency with bombs and bullets)  is like leaving a balance of over $100 with Paypal. Anyone who has experienced the vagaries of a Paypal dispute knows what a great fucking powerless black hole you’ll find yourself in.

    1. awaldstein

      Agreed.Although paypal had a monster Black Friday increase in usage, the game will go to those marketplaces who address this directly with their customers.Not a Paypal fan. I use it but never as a first choice.

      1. fredwilson

        i think that’s where most people are. and many of the marketplaces we are invested in are slowly but surely developing other options for their users, both sellers and buyers

    2. Erik Voorhees

      Paypal is just US dollars, it’s just an online bank.  It is nothing like Bitcoin at all – with Bitcoin you do not “leave a balance” with anyone. You hold the coins on your computer, phone, usb key, etc.

      1. Druce

        in which case if your computer storage crashes, your Bitcoin is gone. Or you can get a virus which uploads your money to Russia.And, if you use an exchange to trade to/from dollars, it’s basically the same as a bank, and if it fails, you’re SOL – no FDIC to turn to, no pesky auditors/regulators to make sure all the Bitcoin is actually sitting there.http://www.btcnn.com/2011/0

        1. fredwilson

          that is where i see the opportunity Druce. if a digital currency takes off, there will be all sorts of value added services that will be required. custody is one of them.

          1. Druce

            Business plan would be a fun read.Competitive analysis : picture of the FedMarket analysis: all the people that want to stay under the radar. Major growth potential! As an investment, it’s could be the best financial Armageddon hedge ever. Sure beats the TED spread when the banks all shut down. Still, seems like a sketchy niche market in a non-End-Of-The-World scenario. Laughs in the face of a top investing rule – “Don’t fight the Fed.” OTOH, it does have potential for a strong community of committed users. Even if many of them should be committed.

          2. fredwilson

            great analysis. i still like the idea.

        2. Erik Voorhees

          You can backup your bitcoins, Druce – and viruses are a danger to everything, not unique to Bitcoin.

          1. Druce

            Not to the cash in my bank account LOL

    3. LE

      As your tag line used to say “Monstra mihi pecuniam”

    4. fredwilson

      well bitcoin isn’t controlled by any company. 

      1. RichardF

        I appreciate that Fred, the point I was really trying to make is that when bitcoin has a problem who will you turn to sort it out.I used paypal as an example because they are a law unto themselves. If they decide to freeze your account for whatever reason you are in the proverbial until they can be bothered to assist you.

        1. kidmercury

          i agree. there are many problems with bitcoin IMHO, but one big one is that it comes with no goverment. some will be okay with this, others will not be. i think models that offer a new governance/dispute system are better, at least for my preferences. an alternative to bitcoin that i like more is liberty reserve. 

          1. RichardF

            I think the majority will not be ok with no government involvementAnecdotally, I had a few hundred euros sitting in a draw, which I had left there because it’s sometimes useful to have them for a quick trip over the channel.  Last week I walked into Amex and changed them back to sterling, I didn’t see the point in risking losing even a few hundred dollars on the failure of the euro as a currency.I’ve never heard of Liberty Reserve but I will check it out.

          2. stevenwagner

            Liberty reserve is a digital gold currency issued by the Liberty reserve company. A liberty reserve note is completely dependent on the company to honor their notes. If a government was to come in and shut them down, or the company defaulted on payments, everyone holding liberty reserve notes would be SOL.  Bitcoin does not have this issue. Bitcoin is digital gold, and is fungible.

          3. kidmercury

            Yes, but liberty reserve is more convenient and has the architecture for dispute resolution. I believe this approach will win out in time.

          4. Jon Matonis

            Bitcoin can support dispute resolution through the use of escrow services.

      2. Prokofy

        So control devolves to whatever group of geek gangsters can control the system for their own interests. Bolshevism. Again, no thanks. Gah, you and your notions that things outside governments or corporations or nonprofits are somehow pure and frictionless and clean. Insanity!

    5. runeks

      Faith develops slowly. All the people who are telling you to get in on Bitcoin now haven’t understood that Bitcoin is at a pre-alpha development stage. It’s in its infancy. Faith in Bitcoin will slowly develop if it deserves it. Just like anything else. We will see if it deserves it. The mere concept of Internet banking 20 years ago would have made most people laugh.

      1. Gary Rowe

        Good observation. It will take years before Bitcoin becomes as commonplace as email is today. However, the infrastructure is being built, and the useability of the tools is improving continuously.

  35. Jeff Cliff

    Ignores the technical reason why bitcoin decreased in value – the fact that it has very high *short term* inflation built right into the system.   Post 2013 once we hit the inflection point, assuming it’s still around the rate of inflation decreases by half, and then continues to do so thereafter.   If you took this factor out the hype-cycle analysis might or might not be reasonable, but you really should take this into account.

  36. Mordy Kaplinsky

    The concept of an alternate currency for the purposes you discussed was attempted by the great libertarian @peterthiel:twitter when they were creating PayPal.  The market issues as well as dealing with government push-back are both great barriers to entry and forced them to modify their plans.  With today’s distrust of global currencies the market issue may have eased a bit but the government push-back is probably even greater.

    1. Erik Voorhees

      Paypal was centralized and thus could be raided and shut down if it didnt’ comply with government diktats. Bitcoin is decentralized – there is no server nor office to raid.

      1. Mordy Kaplinsky

        At some point it has to interact with the real world and at that point the governments always have the opportunity to bounce.  Take taxes, how do you define the value of this “fake”money?

        1. Erik Voorhees

          In an open marketplace, “value” is determine by supply and demand.

          1. Mordy Kaplinsky

            In theory 😉

    2. fredwilson

      yup. when we were considering our bitcoin investment, i reached out to peter. he was fairly dismissive of the idea given his previous experience.

      1. Mordy Kaplinsky

        Although he is no longer at Paypal being that it was his passion i’m sure he still thinks about it, and being that he has the real world experience to match his passion I would have to agree with him.

      2. ZekeV

        Tools the federal gov’t and state authorities have to squash distributed currency (reasons not to be [overly] pessimistic):US Treasury- federal anti-money-laundering laws, rules & regs(this is more a problem for centralized currencies than for distributed, esp. if as with bitcoin transaction histories are explicitly traceable, which is a desirable feature for combating illicit uses)IRS- will get involved where distributed currency payments used to avoid reporting income(no different from any other payment method; problem is with the user, not the technology, absent some overarching conspiracy)SEC- possibility that a fundraising scheme involving distributed currency would be deemed a “security” subject to federal securities laws, rules & regs(think bonds and capital markets — some regulation may be desirable, particularly if currencies are backed by issuer promises)State authorities- many states regulate gift cards and tokens alike under a “stored value” regime- 50 states = 50 regulatory regimes(this is a known problem and one that many prepaid issuers have overcome successfully, both by structuring their programs appropriately and by availing themselves of federal preemption; still, no way to guaranty that a currency initiative will not run afoul of some random state finance dept or AG)Overall, the opportunity is huge but requires elegant technical solution as well as legal and gov’t affairs work. It has to be done right, and perhaps the economics and risk are such that the opportunity does not fit with a standard VC model. So I can see where it would be attractive as a VC to wait for a winning currency to emerge and then back ecosystem rather than the platform. That said, it would be really awesome to be a part of the winning platform. Talk about network effects!

    3. kidmercury

      peter’s vision with paypal was ahead of its time. with game play such a force now, the re-construction of the world’s money supply via virtual currencies is well on its way. the political barriers are still huge, but now with a robust infrastructure and social media culture enabling widespread game mechanics, and a ton of micro startups, i think the odds are much, much better. 

      1. Mordy Kaplinsky

        One can hope but I fear you are looking at it with an optimists bias, though I will be the first to applaud if i’m wrong.

        1. kidmercury

          Fair enough…..though in my evangelical quest to spread the word I wanted to note that peter also did not have the global currency crisis at his doorstep when paypal was launched…..the system is coming to some type of transformation, which may give us the window we need to make the virtual currency dream come true.

          1. Mordy Kaplinsky

            never let reality get in the way of idealism 🙂

  37. Eunice Apia

    Have you heard of the “Brooklyn Torch”? http://brooklyntorch.org.Also in Union Square you can buy “coins” that are made out of wood at the green markets. These wooden coins can be exchange for food and other items sold at the market. I have about 4 to 5 dollars worth that I will either collect, use for a rainy day or give to a person in need. A lot of people don’t know about them, so I don’t want to give away a $1 and the person throws it away because they don’t know it can be used to purchase food at the green markets.I’ve thought of buying some and handing them out instead of actual money that can be used for drugs or alcohol.

    1. JamesHRH

      In the same way, two stay at home mother told me of the currency they used in their SW Calgary neighbourhood, in the mid-90’s.Their were 60+ kids under 10 on their crescent (hello suburbs:-O ). So they bought 5 sets of poker chips. They split them evenly amongst the ~20 households.Everytime you needed a favour – watch my kids for an hour, etc. – you had to pony up a ‘favour chip’. When you ran out of chips, there was only one way to get them back – be a good neighbour.Currency is hard to create. Digital currency – now that bit coin has shown a viable model I assume (and I have not dug into the crypto issues)[email protected]:disqus  & @howardlindzon:disqus  are on the right track: trust & access are the real issues.And, IMHO, the bit coin backstory is a total nonstarter, when it comes to mainstream adoption.Trust = transparency, unless you overcome that with awesome access (i.e., I get awesome access to my friends, so Zuck can mess with stuff on the transparency side, which he knows full well).

  38. BitcoinStarter

    It’s so much more then just about money.  Bitcoins introduces whole new paradigm for businesses. Some old  and some new but the point being it lowers the barrier of entry for new ideas to be monetized in the most efficient way. The 21st century is going to be about “real world” commerce like we’ve never seen before.  You’ll be left behind if you don’t follow or get involved in bitcoins sooner rather then later.My 2 cents!

    1. fredwilson

      i agree 

  39. pleppik

    Fred:Bitcoin is an interesting experiment, but it gets an automatic disqualification as a viable currency because of exactly the graph you show.For most people (currency traders aside), the second-most important attribute of money is a relatively stable value. Real currencies aren’t perfect in this regard, but any real-world currency which round-tripped by an order of magnitude in just a few months would be quickly abandoned by real-world consumers. In the real world, exchange rate volatility is a serious bug, not a feature.The important attribute of money is that you can spend it directly (if you have to convert it to something else first then it isn’t money, it’s something else–maybe a security). Bitcoin doesn’t pass this test either. In most places, gold doesn’t pass this test either, which is why most of us don’t take gold bars to the gas station.If you’re going to create Money 2.0, it has to at least mostly deliver on what our current money does and offer at least one practical and compelling advantage. “Not controlled by a central authority” is only compelling to a tiny (albeit highly educated and forward-thinking) minority.

    1. Gary Rowe

      Remember that currency risk only applies during a buy and hold operation. If your intention is to only use bitcoins at the precise moment you need them, and then cash out to a fiat currency then there is very little risk. Therefore the price is irrelevant. Merchants can easily cash out bitcoins by any of the main exchanges online automated processes – there are even payment cards that accept deposits in bitcoins (see OKPay: https://www.okpay.com/en/co….One compelling advantage? Hmm:* send any amount of money anywhere in the world in ten minutes* tiny transaction fees (<0.001 USD)* available to anyone anywhere for free (no age limits, location limits)* a fixed and predictable money supplyand on…

    2. andyidsinga

      you dont always have to be able to spend it directy, right?if i have canadian dollars in my pocket, i cant spend them here in portland without first converting them unless someone other than a bank similarly values them. So at the end of the day its really all about conversion right?

      1. pleppik

        You could make the same argument about shares in Google, but I wouldn’t call them “money.” Many things can be converted into the local currency. I would argue that in order to be a “medium of exchange” something has to be directly spendable somewhere; otherwise, as best, it can be a store of value.

        1. andyidsinga

          good points 🙂

    3. Erik Voorhees

      Both of your concerns solve themselves with time. One should not expect Bitcoin to be universally accepted and price-stable at the dawn of its creation. 

  40. LE

    Similarities to a barter exchange from my understanding of bitcoin (which is limited so feel free to correct me). If you’ve ever been on a barter exchange you’ll find that it’s a great place to get perishable and/or high margin products like hotel rooms and restaurants, consultants etc. The quality stuff (that might be low profit margin, like, say electronics if even available) gets snapped up immediately because of supply and demand disequilibrium.For these reasons I think this would never hit a tipping point or even come close.  As an investment idea though I think there would be many years of greater fools so who knows, maybe.

    1. Erik Voorhees

      Bitcoin is not like a “barter exchange” where one unique good is traded directly for another. Bitcoin is a money, it’s a currency,… exchanging goods and services for it is no different than other forms of money (USD, EUR, etc). 

      1. LE

        Ok then it is actually very similar. In a barter exchange there is what is known as “trade credits”.  Barter is not only between two parties.You provide a good or service and get trade credits which are then good for any other thing on the exchange which is produced by anyone on the exchange.It’s not a one to one transaction although it could be with the credits.It’s not “shoemaker fixes shoes of lawyer in exchange for legal work”. It’s “shoemaker fixes someones shoes and gets trade credits and then spends those credits on anything else that is on the exchange”.http://en.wikipedia.org/wik…I participated in an exchange many years ago. We did printing for our credits. In exchange we received numerous restaurants, overseas  and domestic travel, accounting, printing supplies and equipment, newspaper advertising and many other items. Oh yeah, also three apartment rentals. When the printing supplies became available on the exchange we bought up all the available supplies that the vendor was willing to offer at the time locking everyone else out. 

  41. Howard Yeh

    In my mind, Bitcoin is just like gold. Its supply is inflexible, so it is relatively immune to government manipulation. This is the best case scenario for Bitcoin, if/when it becomes a widely accepted currency.But that inflexibility can sometimes be problematic. In light of the Euro crisis, I wish Greece could just inflate the problem away. It doesn’t solve the underlying trade inbalance, but it wouldn’t cause the dominoes toppling of the whole EU financial systems.Sometimes inflation is necessary. During WWI, there was a dramatic increase in government spendings. Money supply couldn’t expand because of the gold standard. As a result, there was a deflation in the economy of non-government sectors.Sometimes inflation is useful. Fiat money is great for that. At the macroeconomic level, it seems to me that the advantages of Bitcoins are precisely its disadvantages.One way to deal with US debt may well be inflation…

    1. Erik Voorhees

      Inflating the money supply is immoral – it is nothing less than theft of the wealth earned by individuals who worked for it. Beyond the immorality of it, it’s terribly destructive to an economy, as it falsifies and perverts pricing signals and diverts further wealth from the private productive sector to the consumptive government sector.Gold’s ability to prevent government inflation of currency is its highest virtue.

    2. Julian Noble

      A revolutionary aspect of Bitcoin is that it’s so divisible. I suspect this would give Bitcoin a much greater ability to keep flowing even in a highly deflationary environment, whereas with ordinary currencies – you run into the problem of not being able to easily trade fractions of a cent etc.  Prices for many grocery items were down in the low cent range during the Great Depression. Now for some items you could just offer more weight for 1c – but what about a nondivisible item? Merchant needs to lower price – but doesn’t want to jump down to 2 for 1c. Reprices at say 5 units for 4c  –  but most customers only want to buy 1 at a time?This problem wouldn’t exist with bitcoin.In a sense, because of this extreme divisibility – you could consider Bitcoin deflation as increasing the money supply by automatically allocating more value to everyone in proportion to their current holdings.

      1. Howard Yeh

        I didn’t think of the possibilities of infinite divisibility, which is practical with an electronic currency. Bitcoin is continuous, not discrete!So it could theoretically adjust to any market equilibrium. Super interesting point.

  42. Reykjavik

    Currencies are one of the few tools that governments have to control economic health. While the emergence of a supra-national currency has a lot of appeal, widespread adoption would wreak havoc on the economic order of things. Of course, one could argue that nationalized currencies are already doing that.

    1. Erik Voorhees

      “Currencies are one of the many tools that governments use to cause economic disease.”  Fixed that for ya 😉

  43. pj

    I applied to Startup Chile with a Bitcoin related idea, got in, and am now changing my idea to focus on private law.I hoped to be the first company to offer a first and second market for managed Bitcoin mining contracts, which would create much more Bitcoin liquidity and allow investors to speculate on the best next mining technologies (we would offer virtual mining contracts as well).I pivoted because the price crashed 90% from $30 to $3, and the reason is permanent; Dwolla, the one firm who claimed it could economically manage the scam potential that is inherent in selling cash-like money (Bitcoins) using chargeback-money (bank deposits, credit cards, paypal, …), turned out to be charing the chargebacks to its customers.A Botcoin alternative that would somehow allow for chargebacks will see much better adoption and win in the marketplace of digital currencies, not because it is inherently better but because pf the path dependency starting from our current monetary system.

    1. fredwilson

      i’d love to email with you pj. if you are up for that, you can email me at fred at usv dot com

    2. Paul

      Chargebacks would need people to preside over disputes and add cost to the system, and also undermine one of the main benefits of Bitcoin.

  44. Tom Labus

    I think you want to be real careful about what you unleash here.The battle over the control of currency and national banks has been front and center of American politics/finance since Hamilton created the first Bank of the United States in 1791.  Part of that charter was to control and eliminate the proliferation of currencies in the Colonies.  Also, to control the scams and cons that came with having lots of “different money” floating around.

    1. Erik Voorhees

      Some think a central bank offers protections from economic turmoil and monetary scams. Others, who have studied the history of money dating back to the Romans and Greeks, tend to discover that central banks are in fact the cause of economic turmoil and are themselves scams.A free market can never exist when its most important commodity – its very money supply – is centrally planned and controlled by the state. A central bank with monopoly privilege over money is the antithesis of a free and moral market.

      1. kidmercury

        no doubt….truth right here people……^2

      2. Pete Griffiths

        “A free market can never exist when its most important commodity – its very money supply – is centrally planned and controlled by the state. A central bank with monopoly privilege over money is the antithesis of a free and moral market.”I think this is an ideological statement with consequences so profound that it warrants more than a little justification.  Money is indeed an ‘important commodity’ but it is importantly different from other commodities in that it is the medium of exchange for all such others.  Hence the price of all other goods is related to the price of money.  Periods of hyperinflation in countries around the world have convinced most people that an unstable money supply of this kind is economically destructive – it wipes out savings, promotes hoarding, distorts resource allocation…  So the question should not be about whether stability is important but rather how can it best be achieved.  An ideological commitment to free markets must be supported by argument and evidence that a ‘free and moral (!) market’ will promote such stability.  But it is of course prima facia hard to understand why it should.  It the supply of money is not centrally ‘planned and controlled’ and is therefore presumably a distributed unplanned function of the decisions of some set of actors (I am not even clear who they would be) then supply is bound to be unstable.  We can be entirely confident that people would speculate in this market as in any other and with distributed control of supply such speculation would be rife.  Hence the price of everything would be unstable.  But if the price of everything is unstable then price is no longer fulfilling its key economic purpose of efficient resource allocation.  So on the face of it you have just undermined the very free markets you value so highly.  I confess – I don’t get it.

        1. Tom Labus

          Nicely said.

      3. Tom Labus

        Part of the reason for a national currency was to be able to pay the off the money borrowed to gain our independence and freedom.

  45. Value Indexer

    From an economic perspective I don’t see any value in bitcoin. It’s applying new technology to outdated ideas, like trying to make a motorized horse instead of a car. There are probably thousands of people who will argue the finer details, but if we really wanted to “mine” a limited commodity we could just go back to gold. This empowers whoever owns the best land, so you could suspect this being designed by a google engineer :)What we really want in the economy is to remove constraints to the productive exchange of wealth. Unlike gold and bitcoin, one person’s gain in wealth doesn’t need to be taken from anyone else since everyone can contribute something new and get something in return. Ideally it seems a currency based on that model would enable more economic activity. Doug Rushkoff mentions agriculture-based currencies of the past that degraded over time just like grain in a storehouse. That might approximate the real economy a bit better, but it still smells like it’s past its time since most people don’t spend the majority of their time trying to secure food.Energy-based currencies are a popular theme in science-fiction and we might be nowhere near the technology needed to support them but that seems like something that could drive the economy. A lot of things are limited by the energy we can buy. Anyone can find new ways to capture practically limitless quantities that are out there without having to take it from others, and if they do they are enhancing the productive wealth of the world along with their own wealth.You could say that energy can be converted to bitcoin but it seems a bit like an overly destructive one-way conversion, like using 7 cents of metal to make a nickel. It’s not a good store of value if it destroys the value. Not to mention that brilliant new cryptography has a way of being cracked/having backdoors revealed over time.

    1. Erik Voorhees

      “What we really want in the economy is to remove constraints to the productive exchange of wealth. “That’s exactly what Bitcoin does. That is its value. Don’t get distracted by the “mining” aspect – it’s simply a short-term way to allocate the initial coins and simultaneously compensate people for securing the network in the boot-strapping phase. 

      1. ShanaC

        How does Bitcoin do that without getting into the problems that the gold standard caused in the 1930s.  Its premise is austian – it is effectively digital gold, and much like real gold, there is a limit of how much bitcoin there can be. This creates serious problems when there isn’t enough money in the system to pay people/buy stuff.  And labour is pretty inelastic about going down in pay.So what is the new brilliant ploy?

        1. Tom Labus

          Going off the Gold Standard was the first thing that worked for western Europe and then the US in 1930-2.

        2. AgeOfSophizm

          “And labour is pretty inelastic about going down in pay”Shana, this is psycological, not based in economics.  As productivity rises, a fixed labor supply should be able to buy more things or work less.  However, TPTB has co-opted this type of argument as an excuse for printing more money.  Of course you can have a fixed money supply, everything just becomes cheaper!  We need to retrain people in their method of thinking.  i.e. its ok if your wage went down 3% this year, all goods became 5% cheaper!

          1. ShanaC

            psychology has to be priced into the market.  As much as I <3 chicago people (actually, this is a not, its become too much of an empirist/math program losing the base of political philosophy that adam smith et al stood for.  from experience of arguing with econ majors there), very hardcore Chicago and Austrian often misses that you can’t retrain mass amounts of people to think that.  How do you go about convincing someone who feels poorer, and is ACTUALLY in fact poorer in the short term, that they aren’t poorer(prices for stuff need time to adjust)?  They behave poorer and that affects the market.  Stuff itself doesn’t get cheaper in the short-medium term.  And Keynes is right about one thing – in the long run we’re all dead.  I prefer people to enjoy the fruits of their labor.

          2. Value Indexer

            As much as I would like to retrain the mindset of the majority of the world, that’s not actually a good thing. The real economy depends on having currency with a stable value so we can get on with our lives instead of speculating in forex. Like bandwidth and banking it should be a utility for most people that just works without having to question its fundamental meaning constantly. The value of things does change but having to re-evaluate everything every year is too short a cycle. More volatility means more people and time getting sucked into a relatively unproductive financial industry based on zero-sum trading.

          3. AgeOfSophizm

            Exactly, we need more transparency in money as a commodity and you’re absolutely right about money as a utility like electricity, etc.  Fractional reserve banking has led us to the current system and it is up to us, as a society, to right past wrongs because the current people in power simply want the status quo.

    2. ShanaC

      I’m honestly not sure how an energy based currency would work – I keep thinking about how every time you recharge a battery you lose a little bit of its recharge power.  How would we go about storing energy currency without some of the currency being lost to entropy?

      1. Value Indexer

        Any currency has transaction costs. Maybe a little friction is better than building an industry actively trying to increase (and live off of) those costs as much as possible 🙂 But this is really just a basis for a currency. You can still have electronic banking based on that currency. The gold standard involved keeping a lot of the gold in government vaults, but you might not want to do that with energy since it’s far more valuable than gold.

    3. fredwilson

      it sounds like you’ve thought a lot about this stuff. i appreciate your comment here. and i find it very useful.

  46. Derek

    Seems to me that that between the EU currency meltdown, quantitative easing, gold at all-time highs and the undervalued yuan, there must be some kind of opportunity. I’m not smart enough to figure it out, though.

  47. CliffElam

    Postulate: BitCoin = EuroDiscuss.-XC

    1. kidmercury

      i’ll bite….the equation has some merit IMHO because both are flawed currencies….but i’ll take the euro over bitcoin, because it has more support from big players — and that is what will ultimately determine the viability of a currency, whether seriously wealthy people and institutions feel comfortable holding it and committing to it. flawed as it is, the euro has LOTS of political support; bitcoin has virtually none. this is also where gold blows away bitcoin; central banks are net accumulators of gold since 2009. china is particularly the “smart money” with the muscle and intent to drive gold prices higher. there is no equivalent in bitcoin, and euro has WAY more muscle behind it than bitcoin does. 

      1. CliffElam

        Good points.  I was being somewhat facetious, but my personal “twitter-net” would have been: both doomed because of fundamental flaws related to wishful thinking.Doomed? Yep. Congress could, in ten minutes, make it a felony to use bitcoin.  Or the IRS could internally rule that any use of bitcoin was, ipso facto (five years of Latin, useful twice a year for the rest of your life), evidence of tax fraud.  And the list goes on.States are jealous of their prerogatives. Money is perhaps bigger than the free parking at the airport.-XC

      2. stevenwagner

        Gold and national currencies already have global sized market caps. So of course it takes the support of big institution players to move their price. Bitcoins on the other hand has a market cap of less then a hundred million dollars. Any one or group with a couple million dollars (pocket change to a institution) could substantially move the price of bitcoin right now.

        1. kidmercury

          Yes, that is the problem I think is insurmountable for bitcoin in my opinion. I don’t think it can get enough of gold’s market share, which is what the new virtual currency will need to do.

      3. Prokofy

        I guess that’s why a lot of the wealthier West European countries had to take a 50 percent haircut on their bonds when they decided to help Greece, because of, um, the strength of the euro.Do you read about the eurozone problems very much? Or study the countries outside it?

        1. kidmercury

          look at central bank balance sheets, they are the “smart money” that ultimately drives exchange rate fluctuations (for now, that is….), they are still holding euros. and gold. they’re not holding bitcoin. i wouldnt be surprised if they dropped euros (although i’m not trading it), so i’m not defending the euro. only saying that bitcoin is weaker. way weaker. which it is. 

  48. bramcohen

    Ignore the price, look at the volume. Liquidity is drying up.

    1. fredwilson

      great advice Bram.

    2. zooko

      So two weeks on since Bram said liquidity is drying up, my interpretation of the Mtgox volume graph — http://bitcoincharts.com/ch… — is that volume is stable since about October, at around USD 1M/week.Tradehill is the second-largest Bitcoin exchange and it is run more professionally than Mtgox is. Its volume is about USD 125K/week and that has been about the same since August: http://bitcoincharts.com/ch… .In short, while the liquidity isn’t great, it isn’t currently getting worse. The big declines in both price and volume were all part of the bubble popping and the string of “Death Of Bitcoin” stories. That era seems to be over.

      1. zooko

        Oh hey, I wonder if this “+ Image” button works…

  49. Trend Guardian

    What about services that are aiming to make cash disappear completely like Jumio? I think they are also a part of the revolution: http://trendguardian.blogsp…

    1. fredwilson

      yup. those may come sooner because they don’t require as much trust.

  50. Roy Lawson

    I think we need to do more experimental models and BitCoin sets a good example for that.  Their is much to like about the motives behind BitCoin and much to learn from the results.  I think we should keep trying and see what works.Agree with Bram Cohen.  Price is just one measure – look at liquidity also.

  51. cfrerebeau

    Thank you for talking about bitcoin. Never heard of it before but the concept is really interesting. One of the reason why I like reading this blog is that I never know in advance what I am going to read about  but most likely going to learn something, or start looking at things from a new angle.

  52. Dave Pinsen

    More evidence of Neal Stephenson’s influence here, this time his novel Cryptonomicon, in which the protagonists attempt to set up a virtual currency independent of governments. 

    1. fredwilson

      shh. that’s our playbook. 😉

      1. Morgan Warstler

        If you haven’t read REAMDE make that your holiday fun.Also, as a lifelong reader, I’m fascinated that I prefer reading kindle books on the Nexus S.Being able to have my book anywhere, in line at the grocery, on the elliptical – over the past year I’ve grown to like the finger swipe on every paragraph.I find I never have one of those book moments where your mind wanders and you’ve suddenly read 4 pages and have no idea what you’ve read.

  53. Bill Barhydt

    Fred, I started writing a comment but it became too long so I posted it here…http://billbar.posterous.co

    1. fredwilson

      that’s great. i wish more blog comments turned into blog posts

      1. William Mougayar

        What if you could do both at the same time 🙂 as Grimlock would say.

        1. fredwilson

          i’ve often suggested that feature to disqus, one button post to the various cms via their apis

          1. William Mougayar

            You can do that now to Tumblr, Twitter or Facebook with our new tool. Just click on Share under any comment.

  54. Anonymous

    Currency is just a shadow of what bitcoin could be – what about a full blown distributed peer-to-peer market, built on bitcoin technology, where the right to vote/participate in decisions controlling some set of assets (or other instrument) is sold?

  55. Randyayn

    Now is the perfect time for bitcoin OWS

  56. JamesHRH

    I spent all of 30 minutes boning up on the topic, so, these opinions are carved in granite!Currency by nature is intangible. Connecting currency to another intangible (an algorithm), likely does not work. Human nature is likely unable to accept that many levels of abstraction.I don’t think the likely counter argument – the web gen of kids will accept it – is valid. For all their fluency in digital tools, that generation is more connected to fungible issues like status / quality of life / personal choice option than any other generation before them.They will adopt alternate currencies if they see that it provide them options for improving their status or quality of life. But, they will not trust an algorithm because and only because it is digital, as they know that algorithms (like governments) are only as good as the institution & people that operate them.Or exactly the opposite 😉 

  57. bruno

    Dont stress the little Bitcoin plant to mutch, it will develop by it self. The thing that Bitcoin keeps alive is that you never know what will happen next.But if Bitcoin fail there will be is allready the next Bitcoin-Plant whats ready to grow like Geistgeld or Namecoint …Its not Bitcoin its the whole idea behind this, and this idea is the Atomic Bombof the 21 Century, there is no way to stop it anymore.

  58. Ciaran

    Whilst the giant cluster-f*** happening around us as I type is hardly a resounding endorsement of the current system, personally I find this statement rather worrying.”We are quite taken with the idea of a currency that is not controlled by governments and central bankers and that is based on faith in an algorithm and a network instead of the “full faith and credit” of a country.”I tend to think that there are already far too many companies, many of them Silicon Valley based tech start-ups that operate as if the idea of the nation state is already extinct, and that this means that they have no obligations to a wider society other than to generate value for their share-holders. And that’s not a good thing.

    1. fredwilson

      it is not just to generate value to shareholders. it is to imagine the future and make the future, ideally a better future. there is a utopian notion in all of this too.

      1. Ciaran

        Yes, but, IMHO (and it really is only that), too many of these are futures where the start-ups/their founders get to decide which bits of society they want to remake or fund through taxes.I’m sure that Peter Thiel sees himself as a utopian, but I’d rather that his version of it didn’t come into existence.Again, this is nothing more than a personal point of view, but I think that we need more things that tie all of us, citizens & corporations alike, into society, rather than thing which loosen those bonds.

      2. Prokofy

        It’s good when you play your ideological hand like this, Fred. Then we can see what you’re up to. However, that future of yours is not “better”.

        1. fredwilson

          we will have to see about that. my utopia is clearly not yours.

    2. Davinci Jeremie

      Who should corporations generate wealth for?  People who did not invest?You want companies to exist to make stuff for you but not turn a profit?How about they make stuff you get for free?Lets see how that works out is there examples in history…. MMMUSSR?  I like Russian cars everything you needed except what you wanted.  But that’s Russia they just did not do it right.OK.  Lets look a linux developed in a free country and is free to use and has everything you need and things you didn’t know you needed in an OS but it’s missing one tiny tiny thing… What the public wants.Bitcoin has the same problem as linux it’s open source it’s free and has everything you need but nothing you want.At the end of the day the giant cluster-f is cause by socialism and handouts from the government to the rich (mostly) and the poor.  We need to stop both because government has no money it must take it from someone at a point of a gun and if one person has right to someone’s wealth then EVERYONE has a right to someone else’s wealth.I can’t stop our destiny I can only survive it, capitalism works we should try it. Cronyizm and socialism that we currently live under does not.

      1. Ciaran

        Wow. And this is the problem with getting anywhere near discussing politics. I never said, and don’t believe, that communism is a working system, or that corporations should give stuff away for free or not create wealth for those who invested.However, I also believe that most corporations in developed economies did well off of the back of years, if not centuries, of investment in things like infrastructure (roads, electricity, education) etc…, all of which cost something. And that, therefore, they should respect that by continuing to contribute their bit. But when you’re busy inventing the future, doing things like paying tax to ensure that the country that you’ve founded/based your company in can create more budding entrepreneurs, often seems to be seen as a little outdated.

        1. Davinci Jeremie

          So I use linux I should pay homage to the producer via a tax?Elizabeth Warren type of talk is what is taking us down.http://www.youtube.com/watc…Peter Schiff best explains how this way of thinking is incorrect.The roads, electricity came from extracting wealth from the business to produce roads and electricity. And businesses need to RE-educate people when the got into the work force.Crazy.Look if we go down this path, I will not sit hear and work my a– off when I can just go to government and be the one robbing instead of the one being robbed.This is how it worked in Russia and if we want that system fine.  I know exactly where to get paid and it’s not from working my butt off to produce the best product for you to buy.Make a choice dude.

          1. Ciaran

            And so we’ll agree to disagree.Without listening to all of it (I’m at work, earning money to pay for all those products) I think he’s oversimplifying. Of course the government gets the money to pay from the roads from taxes, on both businesses and the workers. But if a whole section of society (mainly the super-wealthy and multi-national corporations) decide to opt-out (a decision the majority of us don’t have the luxury of making) then the whole house of cards comes down.And, with the greatest respect, this need to compare anything that doesn’t match some sort of extreme free-market model to communist Russia just makes the argument sound ridiculous. How about the Scandinavian countries? They seem to do OK for a lot of the time, yet have the sort of policies that many in the US would mark down as communist. Despite that, they seem to manage to create things & have elections.

          2. Davinci Jeremie

            That is that then.  I can point out how wrong you are but you will not change and I you vote in socialist dictator I will play the cards I am dealt.It’s all I can do, it’s all anyone can do.  I can stand up for what’s right but getting cut down by what’s wrong how does that help my family survive.I was a socialist before 2007 but like all socialist I want to do the right thing and when I realized that taking from people was wrong I wanted to stop it, but legalized theft from others is the desire of the majority. Thus logically anyone seeing this must conclude that to survive you must steal in such away that it’s made legal by the force of law and perceived for the “greater good”.It sucks but what can I do them’s the rules you and people like you want.It’s depressing,  the system is control of the government (might) makes right, instead of rights to our life and property.

          3. Ciaran

            God bless the Internet; its development and creation paid for by organisations funded by taxes, happily used by people who see them as morally wrong.

          4. ShanaC

            What about the breakdown of civil society part?  By people hating taxes and government, we sort of admit that we don’t think they represent us.  Why should I trust anyone in that environment.

          5. Ciaran

            I agree that many in power have done their best to destroy their side of the implicit civil contract that should exist between state & citizens, but think that this is much more extreme in the US than many other countries. I may dislike the government, and wish I didn’t pay taxes (in the same way I wish I looked like Brad Pitt), but that doesn’t mean I hate them.

          6. Davinci Jeremie

            If I break into your house and steal money to build a system that creates free energy then my act of stealing was justified?Thank god for that cuz I believe I can do things that are positive if I just steal enough money to do it.:)

          7. Ciaran

            And that’s the problem. I’m going to get flamed here, and possibly with reason, but I think a fundamental problem is that Americans see taxation as theft, and probably because of the revolution (‘no taxation without representation’ has been shortened by many to ‘no taxation’), rather than part of a civil contract between the state and its citizens. I’m not saying that the state is perfect, but I’d argue it’s a lot better than the reality of the sort of Davy Crockett free-for-all a lack of state would create.

          8. Davinci Jeremie

            Did you know in this week of thanks giving in the US is to celibate the fact that the pilgrims did not starve and got a bounty full harvest?I am sure you do.What is left out in the socialistic schools you attend is the fact that before that the pilgrims where starving because they where socialist and worked each to according to his need.  So that if you worked hard you got as much as the person that did nothing.It’s only when they gave up that mentality did create so much food that they started exporting back to England.You are advocating we go back to socialism or dictatorship where the government decides what’s best.  Hey man, no problem it’s your funeral.

          9. ShanaC

            I tend to take comments like this as the breakdown of the social contract.  You don’t pay taxes, or hire people, just because you need to.  We’re supposed to be past the “nasty, brutish and short” part of life as society.You need to help people because you are dependent on them, through their labors(they buy stuff, they save money that is invested into you), their taxes(see, that there is rule of law here for contracts to be enforced), their charity in a community, and when you take away lots of those people’s ability to be helpful to you, you just shoot yourself in the foot.

          10. Davinci Jeremie

            Not sure what you are talking about but assuming you are a tax supporter.May I ask who knows the best way to spend your money you or someone you don’t know thousands of miles away?Taxes are a crime legalized by criminals.

  59. Ciaran

    Any of you guys interested in some South Sea Company stock? Or maybe some tulips? I’ve got some really lovely tulips.

    1. Gary Rowe

      Oooh yes please! Do you take bitcoins?;-)

      1. Ciaran

        No, but my man in Nigeria will.

    2. Tom Labus

      A synthetic CDO too

  60. Mark Essel

    Enjoyed the heck outta the Wired article. Suspect the future will give rise to competing bitcoin implementations with exchanges between them.

  61. gbattle

    So many great discussions here on the topic of Bitcoin and alternative currencies, I have no idea where to start.Many previous commenters has spoken about the inherent need for trust when developing financial instruments, especially cash equivalents like credit/debit cards, checks, digital payments, and now, Bitcoin.  Liquidity trumps stability in terms of trust, as access to one’s capital when one wants it feel more like a right in a free market economy whereas low volatility is an un-promised goal.Given this, imagine companies, most likely a techs companies at first, doing an IPO in Bitcoin currency trading on a Bitcoin exchange utilizing GAAP-like reporting in Bitcoin dollars.  Imagine further Bitcoin exchange traded securities issuing FDRs for legacy exchanges in local currencies.  What type of exogenous shocks might affect such a currency, especially when you pull it away from national monetary policy to control trade imbalances & debt, the effects of war & terrorism, acts of God, the giving and receiving of foreign aid, etc.?I’d imagine one goal of a Bitcoin exchange would involve the push for multinational companies with locations globally to mitigate the largest exogenous shock factor, acts of God.  Namely, if a high concentration of these companies are in Silicon Valley, a singular earthquake could potentially wipe out the currency.Apologize for the rambling, but it’s a fascinating space to think about.  Scenarios like the above will happen as companies mitigate national and regulatory risk via operating in “free” currencies.

    1. Gary Rowe

      Exchanges are an interesting point for Bitcoin because they form the interface between the traditional fiat currencies, and the cryptocurrencies. At present there is considerable effort be put in by developers to create a number of geographically spread exchanges, fully regulated by their local laws, to make transfer of wealth into and out of bitcoins as seamless as possible for consumers and merchants alike.Many of these exchanges are built on free and open source code so that anyone wishing to set one up is able to do so. Again, subject to the local laws of their country. As new features are made available then the source code to support these can be shared with the other exchanges so that the overall Bitcoin economy can grow.Out of interest, here is a list of the current operating exchanges: https://en.bitcoin.it/wiki/

  62. JoeFeldman

    The Gartner Hype Cycle provides a good framework for thinking about the challenges in a firm’s early fund-raising cycles.  Funds raised near the “peak of inflated expectations” may result in subsequent down-rounds, unhappy investors (if no down-round protection), and frustrated management… notwithstanding that this may be a time of easier “selling” of the investment.  Funds raised closer to “technology trigger” are more likely priced right and set the stage for subsequent raises as the company demonstrates its value in the marketplace.

    1. fredwilson

      so true

  63. Lucas Dailey

    This Quora question and top answer I think best get at the heart of the fatal flaws of Bitcoin.Is the cryptocurrency Bitcoin a good idea?http://www.quora.com/Bitcoi…tldr summary of fatal flaws:1. Seeding initial and periodic wealth. (How BC “mining” is worse than Fed “printing”)2. Deflation deflation deflation.3. It’s not a currency, it’s an asset (and a poor one).4. No backing, no safety-net = complete collapse likely.

    1. Gary Rowe

      You’re right. That Quora question does get right to it, particularly the refutations of Adam Cohen’s analysis by Brandon Smietana, Founder of Symbolic Analytics.

      1. Lucas Dailey

        I think the Quora community got it right. That question has gotten a lot of attention and the top two answers agree with each other.The 3rd answer, Brandon’s, is generally off-base and in some instances either intentionally misconstruing an issue or grossly inaccurate, imo.He seems to be preaching a pretty fundamentalist view of Austrian School economics, which, despite it’s increase in popularity during recessions is still well outside of the economic mainstream. There are definitely valuable concepts that are highly applicable to many situations, but orthodox Austrian School in general doesn’t stand up well to scrutiny of modern behavioral economics research, imo.

  64. Christian Brucculeri

    This is such a classic venture investment if you can find the right play. Small probability of success, but a truly transformative idea.As odd as it sounds in the current environment, I like that currencies are tied to the actions of our governments. The FIAT currency system plays out in a messy but effective system with trust at the core.   Thinking about untying that relationship scares me, honestly.

    1. fredwilson

      we like to have at least 1/3 chance of success

      1. Christian Brucculeri

        I would love to read a post on your process for calculating that probability.

  65. William Mougayar

    Bitcoin or not, I think we are in dire straits need for a real cyber currency. Remember CyberCash and DigiCash? Right idea, wrong time. Not sure if Bitcoin will evolve into an online payment currency as its sweet spot, but I have a feeling that PayPal could use some competition with a light weight cyber cash currency especially focused on micro- or small transactions where the cost of using PayPal or credit cards makes it absurd from a financial perspective. Someone said a long time ago “Micro-transactions are like bar coding at the financial level”. Where are we in this regard? 

    1. runeks

      PayPal has fees to compensate for chargebacks. Nothing will change that. If a payment processor offers payments in Bitcoins and they offer chargebacks too, they will have to take non-trivial fees as well to make up for the money they lose when someone defrauds them.

      1. William Mougayar

        PayPal fees don’t make sense for small or micro-transactions. I think there’s an opportunity there.

    2. Gary Rowe

      You might want to watch this YouTube video (2mins): http://youtube.com/user/Mul… demonstrates how a customer can make a payment in bitcoins using a simple drag and drop operation. The QR code presented could also be used by a mobile wallet which is fairly commonplace in the Bitcoin community these days.

  66. kidmercury

    lots of pepole talk about volatility being a concern in the new digital currency. i think the only solution for this is for the currency’s value to be relational to other assets in some way (mainly gold, but not always, and in varying amounts depending upon what else is going on). basically, i think some form of active central banking, and the corresponding authority to take actions to re-price currencies, is needed.   

    1. mrtortoise

      yeah but most of that is because people like to be paranoid sceptics that echo other paranoid sceptics fears with little basis in evidence – ie purley theory crafting which while a useful exercise rarely stacks up with the real world. Most ofo the rational stuff i have read on bitcoin failing really doesn’t pan out imo. Also people try and draw conclusions from very small time periods.

  67. Lucas Dailey

    Re: your statement “I’m confident we’ll see the emergence of currencies that are not controlled by nation states in my lifetime.” After chewing on it for a few minutes I think I disagree. I love the brave new world sentiment, but I think the factors that drove us to state-based currencies are actually increasing, not decreasing.Why State-Based Currencies are the Norm1. Enduring Institutions – States (still) rarely default, are sold, collapse, cease issuing their currency. Long-term stability is huge.2. Size – States are the biggest things out there. You want to buy into something large from a market cap and quantitative sense.3. Public Process – A large public administrative process is generally more stable, and certainly more predictable (long term) than private processes.4. Market Strength – The USA demands all taxes and fees be paid in dollars, as are all government (and contracted) salaries. That is peerless market shaping power.5. Regulation, Law – Ultimately, we still live in a world of near-absolute state sovereignty. Just or unjust that means laws and regulations will always favor the state currencies, if not outright banning other currencies (could still happen with Bitcoin in the US, though unlikely).In general, I believe states are becoming stronger institutions – Gov 2.0 will continue the charge -, which will help state-backed currencies. That said, I do think pseudo-off-balance-sheet “currencies” like Time Banks have a future because they so well exploit inefficiencies/regulations in many current systems.Fleshed this out further on my blog http://happyemergency.tumbl

    1. Luke Chamberlin

      In Brave New World there is one consolidated government that controls everything. A currency not backed by any one government is very different.

      1. Lucas Dailey

        I actually didn’t mean it in the sense of the book, I meant it in the sense of the original quote from shakespeare’s Tempest. I think I caps’ed it reflexively. Or maybe I should have put O at the front for clarity.

  68. YoniAssia

    bitcoin, just like the sound of it, is not a currency it is a technology infrastructure.It’s value represents the value of that technology infrastructure, that currently has very limited use, but very high disruptive potential in the minds of all the top fintech (much of them here).The key will be the killer apps on top of that infrastructure.It has done one thing amazingly well, start a discussion among the people who can actually change the world, on a brave new world where “currencies are not controlled by nation states” . Digitizing the financial industry, probably bigger than digitizing communication and advertising. I’m excited just to see this conversation !

    1. Gary Rowe

      If the conversations in the recent European Bitcoin conference are anything to go by, Bitcoin is merely the start.

  69. ZekeV

    What if a group of hosting companies issued a distributed currency backed by a group pledge to redeem coins for server space / bandwidth upon request. Advantages: (1) inflationary information economics discourage hording and overcome Krugman’s objections to bitcoin, due to Moore’s Law-like downward-sloping curve of storage and bandwidth cost; (2) coins have real and predictable value ind’t of hype or dollar; (3) use of coins as financing technique by hosting companies b/c not all purchasers will choose to redeem; (4) incentive for hosting companies to devote resources to verify transaction blocks / chains. The same principle would work for any commodity that behaves according to similar growth principles, e.g., photovoltaics producers, distributed computing nets, mechanical turks operations. 

    1. fredwilson

      hmm

  70. ZekeV

    Also cell phone airtime

  71. Alex Shartsis

    Has anyone considered that non-government backed currencies are already thriving and have been for decades in the form of airline miles? Airlines (e.g., United) have complete control over all aspects of their miles, and they are a currency that can be exchanged into others, e.g. USD. (just search craigslist). As planes filled up, they devalued their miles (adding additional fees, restricting redemption, etc.) but a black market is still a market – and in fact shows that demand is significant for this particular currency.More recently, Activision essentially issues non-government backed currency in their multiplayer online games like World of Warcraft and Diablo, and Zynga’s points have become a currency in online advertising. The question for bitcoin is not existential; it’s one of degree: will it succeed like these currencies or will it go the path of Second Life, of speculation followed by collapse? Can it succeed without an equivalent of the Fed, actually in charge of managing it?

    1. kidmercury

      yes, that is why group buying is also a potential technology that could enable the virtual currency revolution…..indeed i think group buying and game mechanics are the enabling technologies of the virtual currency disruption. #fs

    2. Jaisgossman

      Second Life to me seems to be the direct inverse of this process.  That is, people taking legal tender into the virtual world for transaction involving virtual goods and virtual bodies (some even managed to make a profit), while this has a potential to bring people very much back into their bodies, by going way of deserting a “legal” route of transaction.”  Just a thought, I hope for this process to take shape in a way that we can model it towards our behaviors, as opposed to the other way around.

  72. AgeOfSophizm

    Steve Jobs never did and he managed to do some pretty cool stuff!

  73. stevenwagner

    fred, my 2 bitcents. The gartner hype cycle is not going to be a preditor of bitcoin future value. Bitcoins audience and accessibility is growing. Bitcoins price is mathematically based on the market size. And its not going to a be a derivative of bitcoin that will be successful. It will be bitcoin. Its called the Network Effect. The idea that some other derivative will come along ignores that bitcoin is open source, can evolve, and any improvements can be added into the existing network. Saying another bitcoin network, is like saying another Internet. 

    1. fredwilson

      thanks. that is useful.

    2. Prokofy

      Ah, the “network effect,” a fairy pixel dust sprinkled in the path of gullible users while the cadres steal everything.Thanks for hilariously once again proving my point about how open source=closed society.”We can only have one open source thingie, thank you very much, it can evolve and improve all by itself and needs no other open source thingie in competition.”

      1. Gary Rowe

        Of course you are entirely free to create any number of cryptocurrencies. If yours is demonstrably superior to Bitcoin then there is a strong chance that people will migrate to yours. However, you may find that people stick with what they know and trust. Sometimes, even when you try to give something away (see another post of mine) you just can’t make headway.

  74. Gary Rowe

    Free Money! Seriously.There’s a lot of discussion here about the utility of Bitcoin. So, here is my proposal: I will personally give the first 10 people who can perform the following actions 1 bitcoin each (currently worth about 2 USD).To allow anyone, anywhere to verify that I made these payments I will edit this response after I’ve made them to show which addresses I sent the bitcoins to. Then people can look up the transaction using the blockexplorer (http://blockexplorer.com) by typing in it’s address. They will see the credits to those addresses. The owners of those addresses may choose to confirm payment publically, or not. They will remain forever anonymous because I won’t broadcast or use their details without their explicit permission.So what do you have to do to get this free money?1) Go to http://multibit.org and download the free and open source application which will handle your bitcoins. For techies, the source code is available to view here (https://github.com/jim618/m…. There is an FAQ section on the MultiBit site which is useful for those new to Bitcoin. Download time on cable: 3 minutes.2) Create a Bitcoin swatch (a QR code with a Bitcoin address in it) by requesting 1 BTC from the “Receive bitcoin” screen. Creation time: 30 seconds.3) Copy the swatch (drag and drop usually) into an email and send it to me at this email address (encoded slighty to try to limit spammers)g dot rowe at froot dot co dot uk4) If you can’t manage the swatch, that’s ok, just email me the big long address instead5) Mark the email subject “Where’s my bitcoin?” so I can find it quickly in the masses of emails I get every day. Email send time: 30 seconds6) I will send 1 bitcoin to the address you give me until I’ve spent 10 bitcoins overall.I don’t care where in world you are. I just want to give you money, for 4 minutes work.Oh, I should point out that I’m based in the UK so this is likely to be an international transfer of money of approximately 2 USD. Can you tell me any other way I could make this offer without undue cost to myself?Also, you may think there isn’t much point holding on to the bitcoin so why not find a blogger, whose work you like, and ask them to accept it as a donation? Perhaps they’ll put a Bitcoin swatch on their site for others to use.Now – will you try it?So far these people have (check the date – owners are free to dispute):15Ve1is2eWmYPbWXNCn7TbRkYWUSbRaiBN1MniSuncDY8d3Qq6pE5XKaJ4eWHDDwfZup1dJ5qFPC3b8yVKxtTWF2pAKd3S5ZizDRN1FJ6JToiiNuCdLuKX7SL46QUdjDzdmqYiv1K1uo3rt2CLgjD8b739YD2QTP1cxKa5s2c1DRPcMvbd7zvvPVyED7rNfcbUP1tGiMsMG19v41f5nGQXyELSmNFH6T2MLmUL6CKpUHP17VUWD6qoW4yJXTnZSrK3P5VqmhdftradN

    1. fredwilson

      way too much work for $2

      1. Gary Rowe

        Fair enough, $2 is not a lot of reward for someone based in the USA. It simply shows that it is viable for international micropayments.However, I wonder if anyone in Africa where $2 is worth considerably more would like to take advantage of this offer? 

        1. Joe

          I’m playing with Multibit now and its very user friendly. I’d recommend it to new users instead of the official client.

          1. Gary Rowe

            That was the reason for creating it. To provide a lightweight, easily accessible, multi-language front end. 

    2. Bertl from Austria

      I got my BitCoin … thx a lot ;-)Albert

  75. jeremylichtman

    I’ve written a few articles on BTC’s weaknesses (one for a Polish magazine).The biggest issue is the need to remove bottlenecks. Right now the primary way that one obtains BitCoins is through an exchange – and these are the inverse of transparency.From a VC’s perspective, I can see why you would sit on the sidelines. There’s a lot of obstacles to monetizing such an investment.Some of what I’ve written can be found here:http://lichtman.ca/businesshttp://lichtman.ca/business…(hint: lots of ideas for business models)

  76. jeremylichtman

    Just to add to my previous post:BitCoins actually have a serious built-in scalability issue that prevents them from becoming a dominant currency for transactions.Once the overall BTC economy reaches around $1 billion, there are insufficient decimal places for it to be used for a number of kinds of financial transactions.As Fred said – it will probably be the digital currency that comes after BTC that will take over.

    1. Gary Rowe

      There are as many decimal places as you need. It is infinitely divisible. It only requires a trivial update to the software to implement. The current implementation allows for 2 quadrillion units of currency which should be enough for now.See here for more details:  https://en.bitcoin.it/wiki/

      1. jeremylichtman

        I’ve been through the source code in detail.Changing the number of Satoshi per BitCoin would cause incompatibility with anyone using an older client.At a certain value per BTC (a couple of orders of magnitude higher than today, but only 10x at the peak value of BTC), it becomes hard to make an exchange for a dollar denominated value of $10^-6 or lower. Those are common transactions in financial markets.Assuming that BTC is actually as deflationary as expected, we’r egoing to push up against that limit soon.Lastly – for a currency to be used as a global reserve, it needs to scale to roughly order of magnitude 100 quadrillion dollars (approximal size of the value of everything in the world). Give or take an order of magnitude. That excludes gold, by the way. Actually we should add orders of magnitude on, because the economy grows (and we don’t want to leave our descendants something worse than Y2K).

        1. Gary Rowe

           Interesting comments – glad you’ve been through the source code to the main client. There has been a considerable amount of discussion about this issue in the main Bitcoin forum: https://bitcointalk.org/ind….It might be worth posting your concerns there so that the developers can take action earlier, rather than later.Mind you, if Bitcoin ever became considered as a global currency reserve with that much value moving through it then there would be a huge amount of willing resources to make those changes.

          1. jeremylichtman

            Thanks Gary.I’ve had some conversations with people contributing code. :)It wouldn’t surprise me if Satoshi had deliberately put in some scalability limitations, to force BTC to be viewed more as an experiment than a serious threat to fiat currencies. He didn’t anticipate some of the sneakier sibyl attacks, but its pretty clear that he was way ahead of everybody else in many areas.

        2. kidmercury

          if you make gold infinitely divisible you have the liquidity you need without compromising long-term value. that is why digital gold beats bitcoin. that and bitcoin is ultimately dependent upon electricity.  

          1. jeremylichtman

            The BTC-electricity thing is an issue. There’s people working on reusability of BitCoins – among other things, the hashcode chain process is great for ensuring that something happened at an exact point in time. That may help, as will more efficient processors. There’s still a side issue of wasting CPU cycles though. Those could be better used for [email protected]e or other worthy projects.Any time you link a currency to some form of asset (be it electricity, gold – or wampum), you’re creating an incentivation process with results that aren’t always predictable (although I totally called the BTC mining malware).Personally, I’d rather see gold used for electrical circuitry and jewellery, rather than being horded in vaults. That’s aside from the nasty supply issues in a connected currency that will inevitably happen whenever there’s a big gold find (and I don’t want to think about what happens when we start mining asteroids – there’s a LOT of gold there).

    2. Amin Khadempour

      There are 8 decimal places, which means there will be 2.1 quadrillion atomic units of bitcoin.As a point of reference, there are about two trillion US dollars, and each one is divisible to two decimal places, meaning there are 200 trillion atomic units in dollar form, or ten times less than bitcoin’s eventual number of units. As a reserve currency, this is plenty of resolution. And not every bitcoin related transaction has to be done through the bitcoin block-chain. Credit redeemable in bitcoin can use as many decimal places as you need. Currently, most US dollar transactions involve credit, not actual US dollars, and the same could be expected in a bitcoin economy.

      1. jeremylichtman

        Good point re credit redeemable. Any kind of derivative transaction will have the same properties.Bear in mind that USD is only divisible to two decimals if you’re talking about cash. Many types of transactions are denominated in much smaller increments. Even paying for gas at the pump is initially to 4 decimal places, which is then rounded up at the end. There are a number of transactions (currency exchanges are a good example) that need 6 or more decimals (this makes a big difference when dealing with large sums of money).The issue (when talking about block-chain transactions) is best illustrated thusly:Assuming an exchange rate of more than $100 to one BTC, that means that 0.01 BTC = $1. This means that the smallest granular unit of exchange is $1×10^-6 – which is right at the limit.If BTC is actually highly inflationary (its supposed to be, but who knows), the exchange rate should be much, much larger than 100 to 1.I’m still maintaining that they really need to add decimal places. 🙂

        1. Amin Khadempour

          I agree, more decimal places would be nice.Digital USD only exists in accounts at the Federal Reserve. All other digital money is credit redeemable in USD, as opposed to actual US currency.

          1. jeremylichtman

            Sounds like you know more than I do about the specifics.

  77. timwatt2020

    Just to add to the chatter, the title of Weird’s article is designed specifically to keep sheep following speculators out and allow Bitcoin ecosystem to grow in its organic form.  So there is no “Fall” in the title if your are familiar with the Bitcoin ecosystem. But what I see, and I will read some more comments later, is, Bitcoin appears to derive its value from the demand created by thinking of it as a finite commodity.The problem of mass adoption is well discussed, it is not an actual commodity, but rather a belief in ownership in part of the equivalent of a mathematical hairball in cyberspace.In history we have seen this phenomenon starting with tulip bulbs. I predict it will go through another bubble, and only after the second or third bubble will it stabilise and the price will stabilise rather low as to allow R&D and experimentation to mature a uses naturally.  so for a VC I wouldn’t advise to invest in bit Bitcoin’s, but rather Bitcoin infrastructure / applications.The only threat I see is Douglas Addams’s quantum computing ideas (ie. I don’t think real world quantum computing will be a problem) and the system, from my understanding is perfect for our time.It’s deflationary design coincidentally happens to have the ability to curb our consumer culture and indirectly bring decentralised self regulating climate control mechanisms in place. Count me in.

  78. Morgan Warstler

    Love bitcoin.  There needs to be an easy way to do DWOLLA + BITCOIN, such that firms, people sellers, can easily request payment in DWOLLA and that means 5%+ is paid in Bitcoin as well.Some kind of fraction purchase, that more easily seeds the market with bitcoin acceptance ans is seemless.

    1. fredwilson

      what do you think of dwolla?

      1. Morgan Warstler

        I think if they have really cracked ACH / Credit card fees that alone might be enough. I still think the interface is clunky, but it is nearly impossible to become a bank / enter their market, and the powers that be aren’t going to change their model out of fear any time soon.Personally, I’d like to see Newt of whoever wins the Presidency make it far easier for startups to become banks, with FDIC around nothing should be this hard.

        1. fredwilson

          thanks

  79. Prokofy

    Everything about Bitcoin I would advise staying far, far, FAR away from. Any monetary system stripped out of governments or governance, communities and actual values for commerce will fail.Oh, I guess that’s you signal to invest then, Fred!Why do I oppose this latest technocommunist fad? Because I have a lot of familiarity with virtual currencies from Second Life, which does in fact have a virtual currency not based on a government, but on an identified community of creativity and commerce with governance backing it nonetheless. And that community has been at various times linked to other game or virtual world currencies. The old Gaming Open Market based in Canada, now closed, used to trade Linden dollars for $4.00/1000 — today the value has gone down to $3.67 or so (and there’s a whole interesting story about why that happened, and how the corporation forced the independent trader out of business.)GOM also traded Sims Online simoleons, so that you could leave TSO and emigrate to SL with your game loot intact, essentially. These currencies and markets weren’t based on algorithms but valuation by real people in a real community, even if virtual, backed by TOS-controlled governance of a corporation.There’s also Virox, which is the best-value most popular Linden/dollar/euro currency exchange now related to Second Life which is valued precisely because it instantly sells and converts and forwards to Paypal, and doesn’t hold your money for 5 or 7 or more days as it exchanges it to PayPal, as Linden Lab itself does.I look at what Virox is doing, and I see they started with BitCoin, and there was a lot of enthusiasm about Bitcoin coming from the opensource (technocommunist) sims which are knock-offs of the original SL software (the browser was open sourced, and the entire Open Sim world is based on reverse-engineered server software with the open source browser on top). But then they suspended BitCoin.The Open Sim people, like good technocommunists, began with a theory of having no economy, no currency, no commerce, no permissions or “for sale” toggles on prims (items), etc. etc. But they quickly found that this made for a real stale and boring atmosphere. People like to shop! They also simply had to have a way to make certain transactions. So they started tacking on Bitcoin, because they wanted to stay away from the LindEx — some used PayPal, but PayPal with its fees and waiting periods and such isn’t suitable for microtransactions. As far as I know, the use of Bitcoin flopped due to fraud. Some Open Sim worlds like Inworldz which in fact do believe in permissions, IP, and linking content and commerce went to their own currency pegged to the Lindex (and hence dollar) — they stayed away from BitCoin which meant involving anonymous fracktards on the Internet not backed even by an avatar and his reputation as in virtual worlds.So eventually Virox stopped the Bitcoin transactions — too much fraud. Because communism always leads to crime. It does not lead to virtuous and selfless peer-to-peer “sharing” except superficially, or in certain like-minded groups. As you go beyond the initial closed and charmed circle of true believers, you merely encounter crime.And I find this myself with my small business in SL — there is a balance to be struck between identity and nymity, between openness and closedness. I run sims open to the public and open groups on the Mainland (I’m probably the only Mainlander devoted to this much openness). I do this in the interests of *commerce* because I find if you put up ban lines, or block “no payment on file” accounts, or accounts less than 30 days, or people from Brazil, or whatever the category is, you simply harm shopping and stop sales — not to mention give in to racist stereotypes. So accordingly, I do have to suffer some griefing and theft (copybotting) but it is actually a very small percentage of incidents.Even so, with something like Bitcoin you always have people who take an open and free system and sink to the bottom ethically. Like today I had a guy from Prague who I caught opening a store and putting out his vendors after joining the open group who didn’t pay first. I can be casual about this and say “could you pay now?” or just evict him on sight. I see he has “no payment on file” which means he is selling stuff without a means to cash it out, not always a good sign (but many countries of the world don’t have a good credit card system or Paypal access). I do have to war with squatters now and then but by and large the overwhelming majority of people conduct business ethically. However, my openness is backed by an elaborate and sophisticated fraud control system on the Lindex. They have breakers installed and risk APIs for traders and all the rest.The idea that you can tie money and transactions only to ideologically-bound people is an absurdity and fallacy that belongs to communism and other utopian and destructive ideologies. You can’t. Human nature is not perfectable. So it needs to be constrained. That means the community has to be bound by a nationality, a geography, a location, a *something* under the rule of law. Online, you can’t just have this binding factor be “geeks whom we like” because they sink to the bottom of their ethics barrel, not particularly strong to start with.Fred, you have taken this utopianism to even greater lengths of absurdity by tying a currency/commerce system to “algorithms” and “networks” — that is, meta abstractions already unhinged and untethered from people and their human intelligence and discretion.One of the reasons we have the recession is because of the velocity of financial transactions on the Internet. I’ve always said this but of course I’m not taken seriously. But if you don’t want to hear it from me, hear it from George Packer in Foreign Affairs.Countries are good things when liberal and democratically elected. Full faith and credit of such countries are good things. The alternative is to have you and a bunch of your geek friends run stuff. No thanks!

    1. Amin Khadempour

      “Why do I oppose this latest technocommunist fad?”Bitcoin uses public key cryptography and proof-of-work to create non-reproducible digital property that can be owned. It’s the opposite of communism.”That means the community has to be bound by a nationality, a geography, a location, a *something* under the rule of law. “Bitcoin can be bound by the rule of law. It’s just a technology, and wholly agnostic in terms of the degree of authority it operates under.

      1. Prokofy

        Technology is never, never agnostic. Because it is merely a human artifact and coders are as ideological as they come! Code is concretized ideology! If you don’t want to hear it from me, hear it from our friend Disqus:Here’s what Daniel Ha told me the other day when I objected to him pontificating against SOPA — I said I didn’t want ideology baked into the software. He said:”Thanks for the thoughts. We don’t want to preach, but I will say that all of our software reflects the people behind it in big ways.User experience is the obvious point, but we’d like our values to permeate throughout too. Hopefully it didn’t affect the way you used the software.”Code-as-law is not the rule of law. That’s why Bitcoin is anarchy and not under the rule of law.Bitcoin isn’t “the opposite” of communism, but technically refined communism.

        1. Amin Khadempour

          Code is not law. Law is backed by the threat of force. Governments can arrest someone who breaks the law through running a software program. Code is a tool that can be used by any party to advance any degree of (de)centralization of authority.In a dystopian world, a party could make it illegal for any one but party loyalists to run the bitcoin software. That this won’t come to be is not because of any ideological quality of bitcoin, but the ideological inclinations of people, who choose liberty over authoritarianism when given the choice.Ha’s quote also doesn’t prove any thing. It’s just his personal opinion that is probably biased by what he intends to achieve with his software.

          1. Prokofy

            Code is force — it’s a weapon. It’s binary, clumsy, stupid, and often unchangeable. That can be dangerous. If you think law being backed up by armed force is somehow evil, well, try living in a place like Somalia.The idea that code is “only a tool” is a dodge and a strategem for greeks to take power without accountability.The idea that code can perform magic tricks like decentralize authority is one of the grave fallacies of Internetism. Code tends to do one thing: add power to coders.

  80. kidmercury

    in terms of disruptive theory, look for value networks capable of reaching those whom the nation-state system cannot reach. that is the birthplace of the new value network that will disrupt the incumbents of the money supply industry (central banks associated with the nation-state political system). game play is the enabling technology of this disruptive market. game play points us to the value network that will be a part of this disruptive trend. #fs 

    1. Gary Rowe

      You might want to do some research into Open Transactions. When used in conjunction with Bitcoin it could be a complete game-changer.At this moment it’s in a very early form so don’t expect much in terms of documentation, but here’s a starting point: http://cryptome.org/0002/op… and also https://github.com/FellowTr

  81. Matthew DeBord

    Echoing some other comments about Bitcoin and the liquidity problem, and referencing Fred’s thought-provoking post:http://www.scpr.org/blogs/e

  82. kidmercury

    to recap i wanted to list the official reasons why bitcoin cannot really work as the dominant form of money:1. ultimately based on electricity. this is a HUGE consideration. because of how huge it is, we should define the components of the term money, to so we understand how electricity fits in. there are two components to money: the “store of wealth” part (savings — makes you rich) and the “medium of exchange” part (buy anything you want, easily — even online!). we want the digital stuff to help us with the “medium of exchange” part of money, but we do not want to compromise the “store of wealth” part of money. the current monetary system is failing because of its complete failure on the “store of wealth” part of money. historically the resolution to debt-induced hyperinflation is with the re-monetization of gold. bitcoin means if we ever have a prolonged electricity outage we’ve lost the entire money system. dealbreaker.2. no market capitalization — meaning rich people aren’t storing their wealth in bitcoin. can this get adoption from all the poor people to add up to the tipping point where people start jumping in? try explaining it to your grandmother. then try explaining gold to your grandmother. just so we’re not dissed as being age-ist, try with little kids too.   gold has the market cap and has the store of wealth capabilities, as thousands of years of history in which gold has been periodically re-monetized can attest. digital gold makes it easier to spread gold around, improving gold on the liquidity dimension. it’s going to become easier than ever to own gold. and that’s what’s going to give all of us the additional purchasing power we need — i.e. money — to fix our economy and usher in the widely prophecied GOLDEN age. #fs

    1. Gary Rowe

      Does digital gold rely on electricity?

      1. kidmercury

        Yes, but if there is an outage, there is at least the possibility of reverting to an entirely non-electric system. Digital gold is like a digital certificate of ownership of gold; it is a digital representation of gold. Bitcoin, on the other hand, is inherently digital. There is no recourse if the electricity goes out.

        1. Gary Rowe

          That’s an interesting point, and one that has troubled me when I consider the utility of Bitcoin in countries where access to reliable electricity and Wifi is not common.There is a partial solution in place in the form of physical bitcoins – see https://www.casascius.com and also http://bitbills.com. In summary, a physical bitcoin contains the private key to access a bitcoin that has previously been generated through mining. The private key is hidden under a tamper-proof security seal so that the value of the coin can be guaranteed. In the absence of electricity then physical bitcoins could be used instead.This approach demonstrates the flexibility of the Bitcoin system, but is currently limited to transactions that contain integer units (1 and 25 BTC). So, it’s not perfect, but it might be good enough in a crisis.To gain better insight, I posted a question on the Bitcoin Stack Exchange (a question and answer site similar to Quora) and the link is here: http://bitcoin.stackexchang

  83. VarmintReaper

    Bitcoins can achieve infinite longevity if the concept is different at different scales. Alone a bitcoin is a token. You can exchange it for a piece of gum or a Mercedes. It’s a tool. Among 1000 other bitcoins it is a currency. If the Bitcoin community allows both to coexist in the same system, there will be shock waves.The former provides an escape valve for when the power brokers get greedy. The latter lets us go about our business. Reminds me of Anonymous during periods of high activity and lulls in the lulz.

  84. noone special

    Uhm… you timeline is wrong. Bitcoin went from 30 to 17.50 when MTgox was compromised. It happened in minutes.

    1. Amin Khadempour

      No, the ticker price on Mtgox went from 17.50 to 0.01 when Mt.gox got compromised. The price on other exchanges stayed above $15.00 so it wasn’t an actual price drop, just a case of the bids on Mtgox being wiped out by the attacker through bogus sales.

  85. Bill Phelan

    If you have not studied “QQ Coins” in China, it is pretty fascinating study in a non government sponsored currency:http://online.wsj.com/publi

  86. Kevin Carney

    I just laughed out loud upon reading “Trough of disillusionment” 

  87. Mark L Palmer

    OK FW, how about disclosing whether you hold any bitcoin yourself, and how much?PS apologies for scaring you out of holding GOOG last time it crashed.  I wuz wrong.

  88. Etienne Marcus

    100% dead on.

  89. Kevin Carney

    HHHWhoOaAOOOAOOaOooohhhh

  90. Sean

    No silly billy, we’ve just recently found out that time travel might well be possible!http://www.foxnews.com/scit

  91. Erik Voorhees

    For something to be a currency, there are a few prerequisites – such as the ability to save and accumulate it. Figure out how to store time, or what that even means, and then perhaps a currency can be created from it. 

  92. fredwilson

    i don’t want to invest in a new currency. i want to wait until we see one emerge and invest in the services that will be needed to support it.

  93. Bello

    what’s that movie where they time travel from their basement and it’s a pendulum and they get stuck in the middle?