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Silicon Valley's Bitcoin Infatuation, Explained
 

Marc Andreessen explains why investors, hackers, and founders are brimming with enthusiasm for all-things Bitcoin.

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While Wall Street is bearish on Bitcoin, Silicon Valley's romance with the crypto currency rages on. Venture capitalist and startup sage Marc Andreessen has taken it upon himself to explain the existence of--and his own excitement for--Bitcoin, and the companies popping up to facilitate its use.

Writing in the New York Times Tuesday, Andreessen seeks to narrow the "gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is." The gulf, Andreessen writes, is "enormous."

The co-founder of the Silicon Valley VC firm Andreessen Horowitz has more than a little something at stake here: his firm has invested nearly $50 million in Bitcoin-related startups, and is actively seeking others in which to invest. He also owns bitcoins. And he is unabashedly a believer in their future. Here's why.

Bitcoin is based on a breakthrough in computer science.

Technologists and those who invest in their work are impressed, Andreessen says, in the fact that the Bitcoin system is the result of "20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world." What's the breakthrough? Trust amidst anonymity. That's powered by a distributed network without a central figure, like a bank or broker. And its ledger is constantly being checked, re-checked, and updated. Andreesseen writes: "The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer."

Bitcoin dramatically reduces payments fees.

"Bitcoin is the first Internetwide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies)," Andreessen writes. That's a significant contrast from the two or three percent it costs a merchant to charge a credit card. That's a big deal to merchants large and small, and anyone who transfers money internationally. 

Bitcoin doesn't allow for credit or chargebacks.

Either you have bitcoins and can pay with bitcoins, or you don't and you can't. It's not like a credit card. It's more like cold, hard, cash--that doesn't exist in a physical form. It eliminates bounced checks or chargebacks.

Bitcoin eliminates certain fraud.

Merchants might just love Bitcoin, because it knock out some credit card fraud risk. This is simply because it doesn't involve customer information and credit-card numbers to be involved in a transaction. "Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant," Andreessen writes.

Bitcoin could spur innovation, in part due to micropayments.

In our current U.S. banking system it's not cost-effective to run small payments (this is why many merchants have a, say, $10 minimum for use of a credit card. But with Bitcoin, it's possible. Andreessen notes that Bitcoins have "the nifty property of infinite divisibility--which currently only goes down to eight decimal places after the dot, but should extend further in the future." He proposes it be used to monetize online content, say, a micro-micro-payment for a page view or video play. Or, it could empower a spam filter--like the kind Esther Dyson has proposed for some time: "Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin--tiny enough to not matter to the sender, but large enough to deter spammers," Andreessen says.

There's something Andreessen is leaving out. Another great thing about Bitcoin--what really makes it fun to read about, hypothesize about, and create thought experiments around--is that its wild growth in value over the past year is all based on speculation. Speculation by a lot of people creates network effect, and that in turn creates any and all value bitcoin has. And that's just kind of incredible. I don't own any Bitcoin, but I imagine it's kind of exciting to "get all lathered up" about it, as Andreessen says. Only, where it gets un-fun is that having money in the game necessitates putting your mouth where your money is. And that makes Andreessen a bit less credible here.

So, let me ask you, readers: Are you sold? Is Bitcoin truly a small merchant's best new tool that will usher us painlessly into the fee-free future? Or is this just the voice of the Silicon Valley hype machine trying dearly to blow air into a really shiny, lovely bubble?

IMAGE: Antanacoins/Flickr
Last updated: Jan 22, 2014




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