A few thoughts - Wednesday, April 30, 2014

[Steve Sokolowski]

Today's thoughts focus on why bitcoin is best at being a store of value, not as a payment network:

1. Someone re-posted the post I made yesterday to the front page of /r/bitcoin (http://www.reddit.com/r/Bitcoin/comment ... rs_can_do/). In that thread, many of the comments seemed to misunderstand the idea. While bitcoin does receive publicity during bubbles, the publicity is not the major driving factor in encouraging adoption.

2. Consider 4K TVs. For the past three cycles, I have always bought a new TV in June, three years apart. The first time, I bought my first HDTV, a 1080i 42" tube TV. Then, I bought a 1080p TV. In 2011, I bought a 3D tv. I was very satisfied in each of these cases. Now, I want to continue the upgrade cycle and buy a 4K TV. But I'm not going to do it because, even though a 4K TV costs as much as a 3D TV did in 2011, merchants aren't producing any movies at that resolution. If I did buy a 4K TV next month, then I would be using it to upscale 1080p videos.

3. With bitcoins, however, this effect is the opposite. Here, the merchants that most people use can't just start accepting bitcoins because there isn't enough liquidity in the market (in other words, the price is too low). There also aren't enough people who own bitcoins to justify the expense of accepting them. So the merchants, in turn, are dependent upon a third party: people who use bitcoins as a store of value.

4. Of all the applications of bitcoins ready for use right now, the most developed is storing value. It's relatively easy to buy bitcoins, memorize eight random words, and have access to your money later when you need it (especially in the case of war, like in the Ukraine). Nobody needs to accept bitcoins directly for that to be useful, and there is no minimum or maximum price for that to be useful to a person of average income either.

5. It has become clear to me that the people who store value in bitcoins are the ones who will be driving the bitcoin innovation over the next year or two. The price needs to rise to $30-$50k before Google starts accepting bitcoins in really interesting applications. (How I arrived at that figure can be discussed another time.)

6. People say "if Wal-Mart just accepted bitcoins, there would be a bubble." That's not the way it works. If there is a bubble, then Wal-Mart will accept bitcoins. It's the other way around. These companies aren't going to invest valuable time in developing point of sale systems for a currency that is held by a few. But they would be fools to not accept bitcoins in an economy where everyone has bitcoins as part of their savings.

7. Therefore, at this point, efforts to widen bitcoin usage should be focused on driving up the price of bitcoins so that big companies can accept them without moving the market, and on getting more people to buy and hold bitcoins so that companies can't ignore all the money out there waiting to be spent. Attempting to develop and sell companies point of sale systems and merchant services is not the most efficient use of capital. If enough people hold bitcoins, the companies will pay for that themselves. The current investments should be focused on easy-to-use hardware wallets, exchanges, and ATMs, the goal of which is to get as much money into the system as possible.

8. Driving up the price of bitcoins requires the resolution of the 1MB transaction limit. Yet, if you look at the github pull requests, I don't see anything even in consideration to deal with the issue. Am I missing something? /u/gavenandersen posted several months back that he was delaying the resolution from version 0.9.0 to think about it more, but there is little news. Am I the only person who has difficulty understanding why people are wasting time on simple GUI enhancements and minor tweaks instead of addressing the one problem that affects every future scenario in which bitcoin is useful? It's not even an issue of a lack of developers, just that time is being wasted on the wrong tasks.

9. Finally, on an unrelated note, I find this May 10 date interesting. Why did someone choose Beijing as the location for that bitcoin conference, instead of any number of other countries? I suspect that the Chinese may try to make a statement by declaring the conference an unlawful gathering and cancelling it at the last minute. It would fit with their history of price manipulation of taking action every 7-10 days to cause continuous crashes. If the conference is cancelled, look for a price rise, as the Chinese will be done; the government won't be able to manipulate the price any longer after making it clear that bitcoins are banned.

Days until July 24: 85