Bitcoin – the future of money?

I’ve been watching the progress of Bitcoin with increasing interest for a year or two now and I’m a bit surprised I haven’t written about it here before. I’m writing today because the number of mainstream use cases of Bitcoin seems to have been growing recently and this morning I got an email from the accelerator saying they were reserving five of 15 slots in their next programme for Bitcoin companies. (Disclosure: is affliated with the Draper family and invested in Bitcoin startup Coinlab last year.)

As this is my first post about Bitcoin I’m going to start with a definition. From Investopedia:

Definition of ‘Bitcoin’

A decentralized digital currency that enables low-cost payments without the need for central authorities and issuers. Bitcoin is a peer-to-peer (P2P) currency system created in open source C++ programming code. Bitcoins can be accessed from anywhere in the world with an internet connection. Once a user has Bitcoins, they are stored in a digital wallet. Bitcoins can then be sent to anyone else who has a Bitcoin address. Bitcoin was developed in 2009 and based on the works of an individual or group of individuals known as Satoshi Nakamoto.

Bitcoin is a massively disruptive innovation. The key is in the first sentence of the definition above – Bitcoin bypasses central authorities and issuers – meaning it replaces governments as the issuers of money. If it becomes widely used it will undermine the power of many of the economic policy instruments governments use today, including setting interest rates and quantitative easing.
By now you are probably wondering how it works. The short answer is that the inventors of Bitcoin developed an algorithm which determines how many Bitcoins are in circulation and put in safeguards to prevent third parties abusing the system by creating fake Bitcoins – there is more detail on Wikipedia.
I’m excited by Bitcoin because it has the potential to massively reduce the cost of transacting. Two examples:
  • fees to buy stuff over the web can be much less than the 2-3% taken by credit cards, and
  • it removes the need for foreign currency exchange altogether.
I think that unnecessary bureaucracy in our financial institutions is a major driver of these costs and Bitcoin could cut them out.
Security has to be good, of course, and we still need to prevent money laundering (the cost of which is the other driver of the fees above), and Bitcoin isn’t there yet. It may never get there, large vested interests (e.g. the US government) will be threatened by Bitcoin and have already been working to shut the fledgling currency down, and there have been problems with hackers, and with currency bubbles, but momentum seems to be building, not faltering:

I’m not ready to predict that Bitcoin will cross the chasm, in fact I still think that is a long odds bet, but if the current momentum continues I’m starting to think that it might become a bet worth taking.