Friday, March 29, 2013
Selling out of the Bitcoin ledger
I'm starting to sell my position in bitcoin. I'll probably keep about 10% of my overall position but the rest will be repatriated back to the conventional fiat banking system.
Anyone who's been reading my bitcoin posts knows that I consider the fundamental value of bitcoin to be around zero. Consider what a bitcoin is. When you buy a bitcoin, you're basically securing a spot in a ledger. Bitcoin isn't actually a coin—it's just a key, a ticket, or an identifier, that indicates where in the ledger you sit. When people trade bitcoins among each other, what they're doing is swapping themselves into or out of that ledger. Space is limited. The amount of bitcoin in existence amounts to about 11 million, so there are only 11 million spots available.
Now there's nothing wrong with paying good money to secure a spot in a ledger. We've all done it before. When you buy an airline ticket you're basically buying room in an airline's ledger. The airline company carefully limits ledger space subject to its plane capacity. Your spot in the airline's records has a fundamental value. Come travel time, you can bring your ticket to the booth and redeem it for a real service—transportation. Would I buy a spot in an airline's ledger if I couldn't redeem my place in that ledger with air travel? Nope. It's not the spot in the airline's ledger that's valuable, it's the air time that the spot represents that's valuable.
Bitcoin is odd. Like an airline ticket, bitcoin is ledger space, but whereas a spot on an airline's ledger can be turned in for a real service, a spot on bitcoin's ledger can be turned in for, well, nothing. A bitcoin dangles in space, pointing at nothing. Despite its null value, bitcoin ledger space has been blessed by the market with a price of around ~$95, up from $11 just a few months ago. The market value of the entire ledger is moving in on $1 billion.
I would love to be able to create a ledger of my own and auction off space on it. Say I scratched out a 20x20 grid on a piece of paper and told the world that I had 400 spots to sell. A spot on my ledger would provide you, the potential owner, with no claim on my services whatsoever, but you'd be able to sell your spot in it to someone else whenever you wished. For me it would be free money, but I doubt any of you would bite. Why is it that people want to hold bitcoin space and not what I have to offer?
To begin with, bitcoin already has a positive value, giving it a huge advantage over spots in my grid, which don't. Second, the bitcoin ledger is an exceptionally cool ledger. Rather than my lame paper one, or an airline's centralized ledger, the bitcoin ledger is distributed. Hundreds of thousands of independent nodes all over the world store its data and work in a coordinated fashion to regularly update it. Bitcoin technology is fast and efficient. A user can instantaneously sell their spot in the ledger to someone on the other side of the world and, thanks to the architecture of the system, all parties to a transaction can be pretty sure that the spot being transferred isn't a fake or a counterfeit. Neat stuff, and people want to be part of it.
Despite these features, the fact remains that a bitcoin is little more than a spot on a ledger that points to nothing. It's dead-end, dangling ledger space. Without an anchor, bitcoin is free to rise 30% in two days, but likewise it can fall by more than that amount in an hour. Sure it's cool and edgy, but the waves of buyers who have moved into the bitcoin market because they like these attributes won't always be sufficient to prevent random shocks from knocking bitcoin's value down to nothing.
For instance, what happens when more ledger space enters the cryptocurrency market? This is already happening with the emergence of alt-chains like litecoin. But that's not the sort of ledger space I'm talking about. What happens when we bring in bitcoin-quality ledger space that has an anchor? I'm talking stable-value crypto-currency, not the sort that dangles and has a null value. These new alternatives will copy the best aspects of bitcoin, specifically its fast, efficient and safe record-keeping abilities. But rather than just providing blank tokens, they'll twin the ledger with some intrinsically valuable item.
Ripple, for instance, allows people to create and own IOUs, the transfer of which is recorded in the Ripple ledger. Or imagine if airline companies created standardized air time contracts and used a bitcoin-style record-keeping system to track trade in air time, leading to a new commodity money of sorts. In all cases—bitcoin, ripple, and air time—you get blazingly fast transaction speeds and low transactions costs. But with ripple and air time you're buying something real and stable, not just blank ledger space, whereas with bitcoin, you're still only buying a position in an empty ledger, with all the volatility that such emptiness entails.
A cascade-like process could ensue. As these stable-valued "ledgered" alternatives begin to steal cryptocurrency market share away from rudderless bitcoin, the price of bitcoin will deteriorate. This will only increase the rate at which people adopt alternatives, knocking bitcoin down further... and so on and so on to zero. Bitcoin could one day be like Friendster or Napster. These were the initial novelties that kick-started people's imaginations into creating new and ultimately superior versions of the original.
Of course, I could be dead wrong about all this. Bitcoin could rise to $1000 and will still be around in 10 years. If so, the tricky bit will be to re-conceive the the way I value assets and understand monetary phenomena. With that in mind, I'll keep a few bitcoins in my wallet. If I'm wrong, at least I'll be able to show some profits to balance things out.