currency

Marc Andreessen on the Future of Bitcoin

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Marc Andreessen, writing in The New York Times, has a very good piece titled “Why Bitcoin Matters” explaining Bitcoin and its potential. You have to remember that Mr. Andreessen has skin in the game (to quote Nassim Taleb), because he will do very well if Bitcoin succeeds. However, it is still worth the read.

What’s the future of Bitcoin?

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.

In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (2) merchants who accept Bitcoin, (3) “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (4) developers and entrepreneurs who are building new products and services with and on top of Bitcoin.

All four sides of the network effect are playing a valuable part in expanding the value of the overall system, but the fourth is particularly important.

All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. And at our venture capital firm, Andreessen Horowitz, we are seeing a rapidly increasing number of outstanding entrepreneurs – not a few with highly respected track records in the financial industry – building companies on top of Bitcoin.

For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.

One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. Every day, hundreds of millions of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries – over $400 billion in total annually, according to the World Bank. Every day, banks and payment companies extract mind-boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. In fact, it is hard to think of any one thing that would have a faster and more positive effect on so many people in the world’s poorest countries.

Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what we would consider to be fully modern banking and payment systems; the other roughly 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.

And even here in the United States, a long-recognized problem is the extremely high fees that the “unbanked” — people without conventional bank accounts – pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system.

A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments. Micropayments have never been feasible, despite 20 years of attempts, because it is not cost effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems makes that nonviable.

All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free.

I think this is the most interesting/compelling use of Bitcoin to me:

Think about content monetization, for example. One reason media businesses such as newspapers struggle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then results in all those terrible banner ads everywhere on the web). All of a sudden, with Bitcoin, there is an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert.

For example, I don’t want to pay the monthly subscription to The New York Times, because while I read a lot on the site, I don’t see the benefit of paying for a subscription when I can get to the articles for free via social media channels. But if the cost was something small, say $0.05 per article, then I would be more inclined to browse from the homepage directly.

On The Hunt for Fancy Serial Numbers on Dollar Bills

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Boston Globe has an interesting piece on collectors of dollar bills that have “fancy” serial numbers. Think ordered sequences, palindromes, and serials that are the first few digits of pi:

The simplest fancy numbers are the early ones: The redesigned $100 note with serial number 00000001 is likely to fetch $10,000 to $15,000, according to Dustin Johnston, director of currency for Heritage Auctions in Dallas. A $20 bill that was first off the press in a 2009 run sold in April for $5,581. A $2 bill numbered 0000001 with a star—the star means it replaced a misprinted note with the same number—sold in May 2009 for $29,900.

The print runs don’t always start with 00000001—in the first six months of this year, only 11 “00000001” notes have been printed in any denomination, because the Bureau of Engraving and Printing has decided for technical reasons to start the print runs with a higher number. The low digits are therefore exceptionally rare this year. Notes numbering 00000002 and on up are worth less, but all the way through 00000100 they can sell for hundreds of dollars (with only a small premium for a $100 bill over a $20 note—since for collectors, the numbers that really count are the tiny ones).

What else qualifies a bill as “fancy” is an unpredictable set of qualities limited only by the imagination of digit-heads. One collector, a Nashville songwriter named Dave Undis, has cataloged fancy notes and presented a taxonomy on a website, coolserialnumbers.com.

In addition to the “low numbers,” which stop at 100, there are “ladders,” which have numbers in sequence, such as 12345678 or 54321098. These sell for as much as $1,300. A “radar” (selling for $20 to $40) is a palindrome, such as 35299253, and “repeaters” are notes with two blocks of the same four digits, like 41884188. Undis observes subcategories of each of these, such as “super radars” ($75 to $100) that have all internal digits the same, like 46666664.

The New $100 Bill Coming October 2013

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The new $100 bill is coming October 2013. Per USA today, this is what it will look like:

new_100-front

new_100-back

Not so impressive, considering the delay:

The revamped bill had been expected to go into circulation in February 2011. But in December 2010, officials announced an indefinite delay. They said they needed more time to fix production issues that left unwanted creases in many of the notes.

What are your thoughts on the design? Here are a few comparisons.

Bitcoin: The Currency of Mistrust

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Felix Salmon has a very good post on Bitcoin (and the potential bubble associated with it). The gist of his argument is in these two paragraphs:

If you hold dollars, you’re trusting the US government not to destroy your wealth. Bitcoin, by contrast, is based on mistrust — it’s specifically designed so that it’s every man for himself. All in Vain was blamed by many in the bitcoin community for his stupidity: what was he thinking, keeping his wallet on a Windows computer attached to the open internet?

But even with bitcoin, people nearly always end up trusting someone – and the entity they’re trusting often turns out to be unreliable. MyBitcoin, turned out to be a fraud; Mt Gox was hacked. The latest hot new bitcoin company is Coinlab, but given how much money can be made by hacking into these companies, and given that law enforcement authorities are unlikely to make any attempt to go after the perpetrators, there will always be a pretty substantial risk that clients will lose their money.

In related news: Henry Blodget didn’t publish his take on April Fools’ Day.

Readings: Counterfeiters, The Virtual University, NASA

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Here are some interesting articles I’ve read over the weekend…

(1) “Outfoxing the Counterfeiters” [Wall Street Journal] – a really interesting piece on the redesign of the $100 bill, as well as a brief history of the evolution of currency in the United States. The article is written by Stephen Mihm, an associate professor of history at the University of Georgia and the author of A Nation of Counterfeiters (I haven’t read this book, but after reading this thoughtful article, I have put the book on my to-read list). The two most interesting tidbits below.

On private currency that circulated in the United States during the Civil War era:

Santa Claus, sea serpents and rampaging polar bears, to name a few—showed up on these private currencies.

What’s the new redesign of the $100 bill?

The centerpiece of the redesign is a purple strip that runs from top to bottom of the bill. The strip is coated with hundreds of thousands of microscopic lenses in the shape of the number “100” and what seems to be the Liberty Bell. Thanks to some complex optics, these thousands of lenses combine to create a single, larger image. When the bill is angled one way or another, the strip comes alive, making it seem as if the images can move.

(2) “The Virtual University” [The American Prospect] – a thought-provoking piece by Anya Kamenetz on why cash-strapped colleges should embrace the online classroom. What are your thoughts on this topic?

(3) “Reinventing NASA” [The Washington Times] – an excellent op-ed piece, written by the president of Georgia Institute of Technology, Dr. George “Bud” Peterson, about the current state of NASA, and its future potential. [via]

The key takeaway, I think:

A commitment to working with start-up companies to develop the technologies and hardware necessary for success will inspire and create a new generation of businesses and technology-focused jobs and will nurture and strengthen our top research institutions. With this new emphasis, NASA will return to its roots as an important catalyst for innovation and economic expansion for the U.S. economy.