About two weeks ago now, I spoke at Refresh Miami as a panelist on Mobile payments. You can watch the video below, if you’re interested.

During the event, they asked people to Tweet questions to the panel. We only got to three questions (I think), and I know there were a lot of people in the audience who could have benefited from another Bitcoin rant a la me. So… I went through Twitter’s very very bad search function, did what I could, and pulled out every question I could find from people who asked. I wanted to do this immediately after the event, but I didn’t get a chance, so forgive my lateness. Hopefully you enjoy the answers and they aren’t to screed-y for you.

Is Bitcoin an investment medium or a payment system? #refreshmiami — Bill Hanifin (@billhanifin) October 8, 2014

This might have been my favorite question of the night. So, thanks for asking it @billhanifin. Let me do my best to answer reasonably. So, to be pedantic, I have to do my best to disambiguate here. It’s a little bit disingenuous to say that Bitcoin is anything. Up to now, Bitcoin has been used as a way to easily move value from one digital location to another. Those locations are articulated by a set of random numbers that we often call wallets. Those wallets are controlled by another set of random numbers that are called private keys. The one who controls the private key controls the Bitcoins in the associated wallet (the digital location). So the question you’re asking is whether Bitcoin is a payment system or an investment…. Well… it’s neither. There are a lot of analogies that we can draw about what Bitcoin is. But none of them are adequate. Some call it fuel, some say it’s currency, some call it a general commodity like gold. In some ways these are all pretty good analogies. But, the simple question is this, when has there ever been anything about which someone could say comparing it to both gold and fuel are good analogies? Bitcoin might be the first. It’s unlike anything that has every come before. So, let me pose a few related questions as correctly as possible, and then answer them: 1) If there is no CEO of Bitcoin or central authority that keeps files, how does everyone know that this private key that I have has control of the Bitcoin? 2) when I hold a private key that is tied to some Bitcoin, what am I actually holding (might be called the intrinsic value question)? 3) What are the implications of the answers to those question?

1) If there is no CEO of Bitcoin or central authority that keeps files, how does everyone know that this private key that I have has control of the Bitcoin?

Bitcoin begins with miners. Mining is really hard to explain, but I’ve done my best to chop it down to the essentials so anyone can understand what it is. Miners are individuals (sometimes corporations), who have invested significant amounts of money in computer power. These miners work to solve what’s called an asymmetric problem - a problem that’s hard to solve but easy to verify. It’s sort of it as a computer’s version of a Rubik’s Cube - hard to solve, but it takes only a few seconds to know whether it was done correctly.

When a miner solves this problem, it submits it to the network. All the other miners look at this digital Rubik’s Cube, verify that it’s been solved, something called a block is added by the miner who solved it to the end of the previous block, and then everyone in the world begins to work on the next problem. My explanation here is simple and maybe about 60% accurate, but it’s good enough.

The reason that these miners are racing to solve that puzzle is that the first miner to solve the problem is awarded some amount of Bitcoins by the protocol itself - basically a robot writes them a paycheck. So what’s important here isn’t the problem - it’s the block part. What is in that block? Well, very simply, the block that is added to the end of the last block when the miner solves the problem is an ordered list of most transactions that occurred since the last time a block was solved. Simply put, the miners do the work of clearing houses. They settle transactions - and with Bitcoin they do it every 10 minutes. So, when one of the panelists talked about the great innovation of instantaneous clearinghouses, I wasn’t kidding when I said Bitcoin solved that. It really does. The miners settle the question of which coins are where, when.

This is the genius of Bitcoin. The ledger, which is the part that needs to be 100% accurate, is maintained by people you’ve never met, who are voting on the truthfulness of the other actors. They are incentivized to tell the truth for a whole host of reasons. So Bitcoin uses economics, greed, and big numbers to basically validate truth with (so far) 100% accuracy. My bank isn’t even that accurate - and they are supposedly trustworthy.

2) when I hold a private key that is tied to some Bitcoin, what am I actually holding?

Well, the really simple answer is, you are holding an opportunity to write something on Bitcoin’s backbone. Remember those blocks? Well, when you hold a Bitcoin, you are holding the opportunity to move it from one digital location to another. When you move it, a small piece of that Bitcoin will disappear. This small piece of disappearing coin is a tip to the miners. Basically you pay a teeny tiny amount to have your transaction included in that next block. The smaller tip you give, the longer it will take to have your transaction included in a block. When that transaction is put on the blockchain, however, you have the opportunity to include some text on that transaction - information. Right now, each transaction has a 40 byte limit on text. That’s not very big. There has been some talk of increasing it to 80 bytes. This is a controversial little thing, and you can easily read more on it in if you’d like. The most salient point of that article is the following IMHO:

“ OP_RETURN and its 40-byte limit represent a compromise between two opposing visions of Bitcoin’s future. One camp sees the block chain as a secure, decentralized data store on which numerous financial and social applications can be built. Promoting the growth of these new applications helps ensure Bitcoin’s long-term relevance. Allowing transactions to carry application-specific data in a standard way advances this goal. The other camp views the Bitcoin block chain exclusively as a medium for recording electronic cash payments. Even so, important scalability issues will need to be addressed sooner or later. Trying to accommodate the data requirements of arbitrary application layers only raises the cost of maintaining the network today, while pushing forward the eventual day of reckoning.”

That said, at least as it is now, since the OP_RETURN does exist, a holder of a private key with Bitcoin associated with it has the opportunity to use this OP_RETURN for whatever they would like. In the early days, one of Bitcoin’s early adopters started putting prayers on the blockchain. What’s remarkable about Bitcoin is the early debates are viewable, public, and interesting. The reason that this sort of thing is often considered a problem is because it contributes to a bloated blockchain - which is another controversial topic that you can decide to engage with or not. That said, I think you get the idea.

3) What are the implications of the answers to those question?

Well, if you can write things on this massive, unchangeable, distributed, global, 100% accurate, non-duplicatable, digital ledger, you can change the world… or something like that.

Counterparty is one of the most interesting projects right now utilizing the ability to write on the blockchain. Counterparty is using the Blockchain to develop an distributed, decentralized company that, if successful, would compete with the NASDAQ. Will it work? I don’t know… but you have to admit that’s interesting. A NASDAQ without a boss? A trading floor that is 100% transparent, requires everyone to play by the same rules, eliminates high frequency trading, doesn’t close, has no center, no employees, no way to go bankrupt or collapse, and no trading floors… that’s pretty interesting. And before you poo poo the idea, let me tell you that Overstock.com’s CEO Patrick Byrne is now working with the team to develop it and plans on releasing actual shares on the platform if he can get SEC approval. Will he get it? I’m not an oracle. But I would suggest that if you can decentralize something like a market, we’re moving toward a future in which the answer to that question is it doesn’t matter if it’s approved. It will exist regardless. This is just one project that uses Bitcoin. Just off the top of my head I can think of other, still untapped probable uses for the blockchain: DRM (music, video games, movies, and more could be verified as playable using the blockchain), art provenance, encrypted geo-coded messages indicating drop points could be publicly displayed, bitcoin storage (Counterwallet actually stores Bitcoin ON the blockchain itself… yes, using Bitcoin to store your Bitcoin is weird).

So back to your question? Is it a payment network? Well, if you are VISA or Mastercard, you will have to start thinking long and hard about that question. Because for the first time in history, we have a large, distributed network that is accessible from anywhere, and will allow users to pass any (even encrypted) information seamlessly from one location to another. That sounds a lot like what a payment network does. The blockchain is agnostic. It doesn’t care what you do with it.

So is Bitcoin a payment network? No.

Is the Blockchain a payment network? Hell no.

But could it be? Hell to the yes.

And once someone develops a platform that uses it as such, we will have a global, distributed network, that allows merchants to accept anything anywhere without regard to the currency that they are transacting in, at a cost of $0 - especially if Bitcoin (rather than the local fiat) is being used as currency.

Is Bitcoin an investment vehicle? I mean, I don’t know. I’m not a financial advisor. But I see the opportunity of the Blockchain and I can’t help but think that we’re only at the beginning of something super remarkable. If you disagree, that’s fine. But if I’m right, then I suppose that makes Bitcoin sound like it’s the sort of thing a person might want to invest in. I would assert that the Blockchain (and Bitcoin as the fuel of this Blockchain) are the most important inventions since [insert most important invention in your opinion here]. And, of course, you can say what you want about speculators holding up the value of Bitcoin itself. That’s a fair criticism. But if it is as useful as I think it is, then I think the value and the speculation itself is completely justified.

#refreshmiami what’s stopping banks from using the #bitcoin network when @MasterCard is costly and inefficient? — Shaun Appelbaum (@T3ch_Hunt3r) October 8, 2014

Full disclosure, Shaun is a great friend, one of the co-organizers of the South Florida Bitcoin meetup, and his question is a bit of a plant. I’m sure he knows the answer to this. But it’s a good question, so I’ll answer it.

Banks are incumbents. They don’t move quickly, and there is no reason for them to. Bitcoin, as it is, is a bad “investment” because it’s unpredictable. If you want to get a pretty decent understanding of my personal investment beliefs, you can read my last post. But for those who don’t want to read the wall of text that I write: if you don’t have information that the market doesn’t already know, then you shouldn’t invest.

Bitcoin is new, unpredictable, and it’s not obvious. Banks aren’t interested in it because how they make their money is not by investing in things they don’t understand. Also, banks don’t really care what Mastercard costs. Mastercard isn’t inefficient. The reason Mastercard, VISA, and AMEX took off is because of the incredible efficiencies they offered. All banks do is underwrite the transactions. Banks make money when they underwrite transactions. If banks can underwrite Bitcoin transactions, they’ll care about Bitcoin.

Apart from the political history tying the bank to the state that Libertarians like to get so up in arms about, people need to understand that banks have not always been the behemoth, p-o-s companies that we know them as today. While the government often will incentivize banks to act stupidly, banks exist to make money by facilitating transactions. They will turn their attention to the place that will make them the most money. For the last hundred years, since the centralization of banking, banks have found that facilitating transactions is not necessarily where their efforts are best spent. In a world where governments are not the sole controllers of money supply, suddenly banks are going to have a role again in facilitating transactions.

A good example of this is Coinbase. Right now, they are acting as a bank. They are not doing fractional reserve lending (the merits of which are completely debatable despite what libertarians and anarchists would have people believe), but, rather, Coinbase is facilitating people by managing the security of their money. It’s not that different than what might have happened in a pre-FICA. The bank goes bankrupt, you’re money goes with it. In a world where that’s the case, a company like Coinbase is going to do a lot better by making sure your money is secure than they will by making it difficult for you to spend it. Their management of your security is making it easier to spend your BTC because it makes it easier for you and the average Joe.

TL;DR: Banks will ignore BTC until there is an obvious way for them to make money using it. It’s as simple as that.

Bitcoin credit cards… Could everyone contribute to lending and earn interest? #refreshmiami — Jason Ibarra (@jasonibarra) October 8, 2014

There is a company that does this called BTCJam. I am not a big believer in blind P2P lending. Asymmetric information makes it a sort of ridiculous proposition. Banks have all sorts of ways to decide whether they will give you their money. You and I do not have those models. Since we do not have that sort of actuarial know-how, the interest that would be earned here would be stupid low. P2P anything is inherently less efficient than centralized anything. That’s just the case. Bitcoiners need to understand that a decentralized world is one that is inefficient. The instant you interject a trusted third party into the equation, everything becomes more efficient - lending returns will pale in comparison to broad, aggregate risk investments you can make in more traditional markets (I think). So the answer is yes, someone could make a P2P underwriting service. But the chances of it having no trusted intermediaries and being efficient is essentially 0 - at least as the world exists today.

Do you think there is no room for intermediaries in bitcoin payments, given the difficulty of payments for common people? #refreshmiami — Auston Bunsen (@bunsen) October 8, 2014

Intermediaries are not a problem. Intermediaries will always exist. I’m not an advocate of a world run by robots. That would be an interesting world, but as the singularity is not yet upon us, I’m a big fan of trusted, vetted intermediaries. Banks have served that function for a long time. For all the complaining we do about banks, they do a good job of only stealing your money when you sign a document that tells you exactly how they are going to steal your money (To be honest, it’s not really stealing if you agree to it, albeit infuriating). For the most part, banks do a pretty decent job of holding onto your money. That said, as Bitcoin’s economy matures, that may stop being the functions of banks. Banks may move toward simply being facilitators of transactions, making transactions as frictionless as possible, rather than holders of money. But we’ll see. I might have just said the most ridiculous thing a person could say. We’ll see what the future holds.

#refreshmiami how many people understand Bitcoin? — Karl Goodhew (@atlkarl) October 7, 2014

The answer is that no one understands Bitcoin. It’s potential is completely locked away. It’s so new that not even Satoshi Nakamoto himself could have foreseen the ways in which Bitcoin will change the world. That’s my opinion; check back in a few years to see how things pan out.