A Key Misunderstanding About Bitcoin

| Originally published on TheBusinessofBitcoin.com on February 20, 2014 |

Irving Wladawsky-Berger, a well-known and very distinguished technologist, has a recent post in the Wall Street Journal that exemplifies the biggest misunderstanding yet remaining about Bitcoin. In his post, he cites different high-profile opinions on Bitcoin, from Marc Andreessen’s bullish “Why Bitcoin Matters”, to Charles Stross’ bearish (or worse) “Why I want Bitcoin to die in a fire”. In the end, Wladawsky-Berger, like others he cites, remains non-committal about the potential of Bitcoin. His conclusion for now seems to reflect the thinking in Glenn Fleishman’s response to Andreessen, in that he recognizes the technical importance of Bitcoin and its ability to implement de-centralized digital transactions, yet is skeptical of its future as a payment mechanism and currency.

So what is the misunderstanding?

It stems from the oft-repeated assertion that the bitcoin currency (with a lowercase “b”) is somehow separate from the Bitcoin protocol (uppercase “B”), or that “bitcoin is an ‘app’ of Bitcoin”.

But this is incorrect and the implications are very important.

Why is it incorrect? I’ve covered it in more detail in this post, but here it is in a nutshell: you cannot separate the work Bitcoin does (executing de-centralized transactions) from the value of the bitcoin currency. This is because the only way to get miners to execute transactions and expend resources is by compensating them with bitcoins. And when you have a system where bitcoins are the exclusive mechanism to compensate real, valuable work, those bitcoins have value and can therefore be used to transfer value, or indeed store value.

Put another way: the work done by the Bitcoin system is inseparable from the bitcoin currency. If you believe there is value in being able to execute global, de-centralized transactions (and almost everyone does), then you have to believe that bitcoins have value and can act as a currency.

What are the implications?

First: if the world wants a system for executing de-centralized, frictionless and global transactions, it will have to live with its associated, and emergent, currency. There is no way around it.

Second: unless governments globally restrict this system, its currency will have natural uses as a general-purpose store of value and medium of exchange.

Third: in geographies where it is allowed (and perhaps even in those where it isn’t), it will gradually find a role in industries that rely on transacting value since it will often (although perhaps not always) have characteristics that make it superior to the status quo. As a final point, the more this currency is used, the higher its value will be.

Note that I purposely did not use the word “Bitcoin” in the last three paragraphs because it’s possible that the specific system we know today as Bitcoin could be superseded by another crypto-currency. That could happen, for example, if a fatal bug were found in its source code. However, in that case it would be quickly superseded by a successor that implements the same type of system and currency, but fixes whatever deficiency killed Bitcoin.

In short: Bitcoin/bitcoin, or something very close to it, is here to stay. With enlightened regulation and the maturation of the ecosystem, we can all look forward to a future where we will transact in new, innovative and unforeseen ways.