Bitcoin: The Network is the problem, the answer, and the value

Posted on April 18, 2013


Another FT link, Bitcoin-related this time. John Kay has a go at breaking apart “inherent” value from market value, in the context of Bitcoin.

He points to gold, diamonds and famous paintings as things which retain “value” despite speculative volatility, unlike Bitcoin – and then decides gold is actually like paper money, in that its “market” value persistently exceeds its fundamental value.

To be honest, it’s all a bit confusing by the time you get to the end. And Bitcoin really only ends up as a bit of an attention grab. It’s clear he doesn’t really get the “fundamental” value of Bitcoin, for instance:

Finally there are the nerds and quants, for whom the computational complexity behind the Bitcoin software is itself a virtue. The algorithms behind it are so elaborate that their implementation imposes a significant load on power supplies. Goodness knows the nature of the problem such effort is designed to solve.

Hint: it’s the same problem that DRM tries to solve, in an age of unlimited global replication. Towards the end he starts to get the idea that the WORLD HAS CHANGED:

Yet the Bitcoin enthusiasts who believe the internet changes everything have a point, even if they misunderstood that point. Today’s technology allows records to be dematerialised and transactions to take place instantaneously at distance. These developments potentially eliminate the need to carry stores of value in our pockets.

Anyone that says “today’s technology” is instantly out of place, to be honest. There is no “technology” of “today”. It’s a rapidly-shifting space of innovation, built on top of layers and layers of paradigms.

The problem Bitcoin is trying to solve is this: how do you digitise money?

I don’t mean “how do you keep track of money on-line?” – which is what online banking and Paypal are for. No, I mean how can we generate, maintain and distribute a store of value within the new network paradigm?

Getting your head round that is huge. It is a leap from the network being used as a medium, to the network being used as backing. The network is fundamental to Bitcoin because that is the problem it is trying to solve.

This is also why speculation on Bitcoin is a short-term bubble – the implications of the problem and the solution have yet to be absorbed by our collective imagination. The idea of hooking all of our networked code into value that itself depends on code is so … weird and so meta that it fits the 21st century perfectly. (And if you don’t “get” Github, it’s unlikely you’ll “get” Bitcoin either.)

Imagine code that swaps Bitcoins without human intervention.

Imagine services being able to set their “asking rate” based on current demand.

Imagine load balancers that juggle what you’re willing to pay for a 3D-print and how long you want to wait, and get the best price for it at the right time.

Imagine code that tips the authors of libraries it uses whenever the libraries get used.

Imagine music formats which automatically send to a tip jar while you play tunes.

Right now, the world is full of peopletrying to solve old problems with old solutions which still don’t work, and wondering why it’s not working while trying to hold on to their previous gains. People don’t get Bitcoin because they have no imagination – because they’ve stopped creating anything of value.