In his January 2014 NY Times article, Marc Andreessen, co-founder of VC firm Andreessen-Horowitz and widely recognized as a key figure in Silicon Valley, stated that “Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and business alike”1. Andreessen backed his vision by making substantial investments (~$50 million) in Bitcoin related startups2.

Despite strong support by Industry experts like Andreessen and an almost linear growth in number of Bitcoins in circulation (~13.5m in November 2014)3, Bitcoin environment is struggling to overcome negative media and consumer perception, and has been unable to reach consumer and merchant adoption levels many expected when Satoshi Nakamoto published a  paper laying the underlying framework for Bitcoin infrastructure over 6 years ago.

So is Bitcoin just a fad, or is it truly the most exciting technical innovation since the Internet? I would argue it’s the latter, and my reasoning is based on the following overarching principles:

1. Greenfield technology adoption is never smooth

Technology adoption often involves a similar, repetitive pattern. A mysterious new technology emerges, seemingly out of nowhere. Early adopters and tech enthusiasts who see potential in it become completely obsessed and start painting a vision of a new world order where things are done differently. Establishment elites like media, government regulators, and incumbent players who are threatened by this potential disruption heap contempt and scorn on the technology.  Gradually, the technology evolves beyond its intended use case and starts to gain mainstream adoption. Eventually, it permeates into our day to day lives and we wonder why this wonderful potential wasn’t completely obvious from the start.

This cycle happened with Personal Computer in the 1970s, Internet in 1990s, digital content distribution in 2000s, and now Bitcoin in 2014. Remember the first time you logged into the Internet – did you truly envision the profound effect it would have in your life, or did you dismiss it as just another novel technology? Or the first time you sent an email – did you predict that the technology would fundamentally change the way people work and communicate all around the world?

For majority of the folks the answer is no – a revolutionary technology faces major barriers to adoption at the onset from consumers unwilling to change instilled behavior, and from incumbent companies with deep-rooted business models. Bitcoin is fighting the same uphill battle right now, but I compare this to users using dial-up for the first time who were not able to unravel Internet’s true potential.

2. New technology tends to emerge as an improved replacement, but what about the unknown use cases?

Thinking back to the early days of the Internet, the most common use cases were just replicating what happened in the offline world. For example, early Internet startups like Craigslist took the newspaper classified model and put it on online. It took a while for companies like Wikipedia to emerge, that enabled distributed collaboration – a use case made possible only by the Internet.

Similarly with Bitcoin, initial use-cases just involve using it as a replacement of existing currency, for example, enabling Bitcoin holders to buy products on using Bitcoins instead of dollars. However, the true revolution will come when innovative companies start exploiting Bitcoin to serve use cases previously impossible. Here’s a brief list of potential use cases of Bitcoin that go beyond what traditional infrastructure can do:

a.Micropayments: Allow vendors to charge micropayments to the 8th decimal point without any transaction cost. For example, an online publication can charge users 0.5 cents to read an article, instead of having to leave money on the table by having the cheapest subscription model be around $20/month, as enabled by the existing credit card infrastructure.

b. Verification: the major innovation Satoshi Nakamoto contributed to was the public distributed ledger (also known as the block chain) – not a virtual currency. In addition to currency exchange, the block chain can be used to implement online verification systems. Imagine having your passport be stored online4, or being able to vote online using your unique blockchain ID – now that’s truly a game changer.

c. B2B transactions: Businesses all across the world transfer huge sums on money to other businesses using existing banking infrastructure, and have to take on exchange rate risk and pay transaction fees. For a company operating in a low margin business, the positive ramifications on the bottom-line of saving on the 1-2% transaction fees are massive!

3. Strong network effects

Bitcoin is a classic example of an ecosystem with extremely strong network effects. The more consumers and merchants start using Bitcoin, the more attractive it is for a new user to join the system. The same property also extends to Bitcoin miners and entrepreneurs building add-on services for the ecosystem, further consolidating its position as the premier online, distributed currency system.

In fact, I would argue that the lead and market share that Bitcoin has gained over its competitors in the past 6 years makes it extremely tough for a new competitor to displace it. The strong network effects can easily carry Bitcoin to dominating the online P2P cryptocurrency exchange space.

4. Reduction in transaction costs

Going back to the comparison to Internet – before widespread adoption of the Internet, there was a huge cost of publishing data or information to a user; and there were large incumbent gatekeepers like newspaper, radio stations, TV channels etc. Advent of Internet brought this cost down by order of magnitudes, and democratized information publishing to the point that anyone could publish information instantaneously at almost no cost. Bitcoin is doing exactly the same to the world of payments – whereas before large proprietary payments network charged fees to move currency around, now there are thousands of Bitcoin startups that can move payments for no additional fees.

Only time will tell if Bitcoin will get uniquely integrated in our society and have the same profound effect on our lives that Personal Computers and Internet have previously had. I truly believe that all the signs are pointing in the right direction!


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The international money transfer industry is about to be re-disrupted but the jury as to which innovation will disrupt it is still out there. Not long ago (in the early 2000’s) Xoom disrupted the industry by creating a platform to send money online, removing the large costs of operation derived from having a network of physical locations to collect the money to be sent. In the past year we have seen two new types of startups emerge in the international money transfer industry that aim to disrupt this industry once again.

One of the models is peer to peer. This model is designed to avoid incurring one of the largest costs of money transfer which is sending money across international borders.  The way it works is that once a customer sets an order to send money abroad the company finds someone that wishes to send money the other way around. By doing this they can transfer the money without it actually moving across the border because they just do a local transfer (e.g. someone sending from the US to Europe and another one sending from Europe to the US get paired up so that the money sent doesn’t leave Europe nor the US). Another key advantage to this model is that since the company doesn’t hold foreign currency they don’t need to manage its risk and therefore are able to offer a better foreign exchange rate.

Of course, getting this model off the ground will not be easy since one big challenge with this model is building a large enough network so that every time a user wants to send money the company can find a counterparty to complete the transaction.  Some of the most important players using this model are TransferWise and CurrencyFair.

The second model that has been launched is the one that uses bitcoin as the tool to send remittances abroad. An example in this sector is Bitpesa which sends money to Kenya using Bitcoin and allows users to withdraw the money through mobile banking platforms already pretty popular in Kenya or the recipient’s bank account. The way it works is that customers buy bitcoin through one of the available bitcoin vendors, they send Bitcoin to Bitpesa and then Bitpesa delivers it in Kenyan Shillings. Since bitcoin is a virtual currency that can travel internationally without any additional charges there are large savings to be created in the remittance market. However bitcoin has not yet taken off and there are two key things holding back its adoption: first the regulation that will continue being imposed on it and second the large volatility that it still has which makes exchanging fiat money for bitcoin a highly risky activity by itself.

Because of this it would seem that the peer to peer model should be adopted much more quickly causing it to be the clear winner, right? Well in this case I think that the two innovations will coexist but eventually bitcoin will end up being the main technology to send remittances.

The reason is that while peer to peer is a great idea and the technology is already out there working there is one huge flaw in it which is that for it to work there needs to be a balance in the amount of money transferred between countries and unfortunately the majority of remittances are sent between countries that are not balanced. Take for example the US to Mexico market. Mexico is one of the largest recipients of remittances (about 25 billion USD are sent every year from the US to Mexico); however Mexican immigrants can’t use a peer to peer service because there are very few people sending money from Mexico to the US. This is the case for other key markets such as India and the Philippines.

For this reason I think that the peer to peer services will be interesting players for some markets but will not end up being the dominant technology and they will only survive until bitcoin takes off (by reducing its volatility and getting through regulatory hurdles). Once bitcoin takes off and uses its scale to provide even larger savings than the ones offered by peer to peer models maybe we’ll see bitcoin emerge as the winner. For now nothing is set in stone.

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Digital currencies, currently dominated by the Bitcoin format, have swiftly gained even more notoriety with the recent high-profile crack down on the online marketplace, Silk Road. The FBI shutdown Silk Road in October with charges ranging from drug trafficking to contract killing operations. (1) Presumably, the site benefited from the anonymity, safety and relative ease involved with using digital dollars for transactions. At one point, Silk Road owned roughly 5% of the total Bitcoin market. (2) Despite the bad press, the price of one Bitcoin has hit a record high of over $400, almost doubling since October and resulting in a total market size of around $4 billion. Bullish investors like the Winklevoss twins have invested close to $40 million in the currency and have submitted an S-1 filing with the SEC to develop a Bitcoin ETF (Exchange Traded Fund). (3) Digital cryptography-based currencies, such as Bitcoin, seem like they are here to stay, although their scalability in the longer term remains uncertain.

I think there is an interesting question around whether or not the digital currency market represents a winner-take-all scenario. If this is the case, we can expect Bitcoin, with a relatively entrenched position and a five year head start, to remain dominant in the future. Nonetheless, dozens of competitors have emerged with different digital currency formats; names like Ripple, Bitbar, Freicon and Cryptogenic Bullion. (4)

In order to assess digital currency as a winner-take-all market I looked at the presence of network effects, the degree of multi-homing costs and the demand for differentiated features. First, I think it is mostly clear that currencies exhibit strong network effects. The value of a currency system depends largely on the fact that it is recognized and accepted by everyone and for all transactions. The network effects for currencies are even stronger because they need to be used for numerous, varied and unpredictable transactions, often between strangers who are only able to transact because of a shared, fundamental trust in the value of the currency.

Second, in terms of multi-homing costs, it seems that currently there are high multi-homing costs between using different formats of digital currencies. I was not able to find an easy or efficient way of transferring value between different digital currency formats. At present, all formats are largely volatile in their valuations, thus trading in and out of them on a regular basis could be a dangerous proposition. It would seem that you would either need to keep a substantial amount of value in multiple digital currencies or risk selling one on an online marketplace like Mt.Gox and then purchasing another. There have been incidents of significant delays in carrying out transactions that add to the risk in values changing rapidly. (5) As such, at least until significant infrastructure and cross-platform compatibility improvements are made, there is substantial incentive to commit to using one digital currency format.

The differentiated features aspect is where I think the winner-take-all argument starts to fall apart. In terms of user preference, most people can agree that money should hold its value, be liquid (easy/timely to spend and collect) and be recognized by as many people as possible. However, outside of these fundamental characteristics, I would argue there is a lot of disagreement in preferences for money’s other features. This is arguably why Bitcoin and others were invented in the first place.

Just looking at the multitude of reasons that avid supporters provide for Bitcoin’s (and other digital currencies’) existence reveals a wide-range of preferences. For some, it is a play against governments controlling the money supply and exerting influence on taxation at different stages in transactions. For others, it is a desire for more anonymity and privacy in a world that is becoming increasingly transparent. The argument can also be made that transaction costs charged by financial institutions are too high and can drastically be reduced with digital currencies. On the more sinister side, there are those who blatantly want to use the unregulated and untracked nature of digital currencies to conduct illegal activities and/or money laundering for illegal activities. Supporters of digital currency will argue that this is a small percentage of the population, but platforms like Silk Market existed and thrived, and similar platforms continue to exist.

The variety of motivations for using digital currencies results in the demand for differentiated features. For example, some people may gladly put up with the volatility and sometimes slow transaction speeds in order to get the benefit of unregulated/unmonitored transactions. Others may not care about the privacy aspect, but want enough scale to be able to push out the transaction costs currently being charged by credit card companies. Others still, may have different views on digital currency as a deflationary/inflationary hedge (the gold 2.0 argument) and therefore desire a fixed currency base or a base that grows with inflation.

The fact that there are myriad motivations for using digital currencies leads me to believe that it will not be a winner-take-all market in the future. Bitcoin may grow to a size where governments and large corporations start to feel the need to exert more of an influence (we may already be at that stage), at which point many of the preferences above will no longer be satisfied and new entrants or competitors will grow to fill the void.


(1) Wired –

(2) The Economist –

(3) Forbes –

(4) Australian Financial Review –

(5) –

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Looks pretty good, right?  (See video)

Bitcoins are the equivalent of internet cash: an experimental peer-to-peercryptocurrency not issued by banks or governments but created and regulated by a network of other Bitcoin holders’ computers. They are untraceable, require no clearinghouse or central bank, and niftily increase the money supply according to a mathematical formula without a central mint or Federal Reserve banking system.

So why all the trouble?  Some leading indicators that things may be going to bits (!):

When your business, dependent on network effects, has a drop in usage:

 “The number of actual transactions conducted in Bitcoins, and the value of those transactions, has been shrinking.” (James Surowiecki, MIT Technology Review, September/October 2011)

When the most frequent users of your service are up to no good:

“Any anarchist cyberscheme like Bitcoin will rapidly attract the Four Horsemen of the Infocalypse: Mafia, drug dealers, terrorists, and child pornography.” (BusinessWeek, June 16, 2011)

When a key distributor fails:

“Popular Bitcoin exchange Mt. Gox hacked, prices drop to pennies” (VentureBeat, June 19, 2011)

When a leading economist cites your business as the counterfactual to an end of fiat currencies:

“So to the extent that the experiment tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.” (Paul Krugman, The New York Times, September 7, 2011)

On the other hand, the founder of Swedish’s Pirate Party stores all of his currency in Bitcoins, so things can’t be all bad.  Vote Pirate 2012 . . . Arrgh!

In all seriousness, despite Bitcoin’s current intrinsic flaws – most notable among them that current users of the network view Bitcoin investment as a digitalized bet more than an actual currency (see Bitcoin’s meteoric volatility in exchange rate this summer) – digital currency is exciting and inevitable.  The idea of digital decentralized money is attractive, revolutionary, structurally disruptive, and a logical response to persistent inefficiencies in the online space.  We download and listen to stored music, buy digital goods with real money, but still use shiny plastic cards with black stripes to laboriously complete transactions on a global network.

A massive shift in mentality is needed still: rather than have users acquiring Bitcoins for the hope of a return, they need to be acquiring them for value and then spend them, using them for (say) alpaca socks, one of the few products currently purchasable by Bitcoin.  In other words, as James Surowiecki suggests: “Goodbye, asset.  Hello currency.”  Is that possible?

Whether Bitcoin will be the product for the revolution is a separate question (and the answer is probably not).  Again, if the leader of the Swedish Pirate Party is your model early adopter, you may want to reconsider.  The answer to that question though will depend on funding, uptake, implementation, scale, security, and defense from political destruction.  Regardless, our children’s children will know paper money only in museums.  I’ll bet you a Bitcoin.




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