Please find below the second part of text transcript regarding the economics of Bitcoin. We hope to expand this series with lots more articles based on how digital currency is being used and particularly the effect it will have on developing economies.
There’s little doubt that for less developed nations the possibilities (and arguably the risk) is much greater than those with solid international currencies. A proper validated and trusted digital currency could help significantly both in economic development and international trade.
It’s often forgotten that Bitcoin has more to it’s potential uses than simply anonymity. although this is probably the greatest driver currently and one of the reasons Governments and banks are reluctant to fully back any digital coin. Mind you if Governments continue to adopt draconian measure and filters across the internet like the upcoming UK Porn filter – the attraction of anonymous transactions and currencies will continue to grow.
Continuation from previous Post – http://www.jubileesouth.org/economics/economics-of-bitcoin-part-1.shtml
Text Transcript Continued – credit –
So it’s not that bitcoin is backed by dollars. Even if you can buy and sell easily, it will not make it redeemable. So bitcoin is not such a thing, it is not an alternative currency. This makes me use the elimination method It should be the commodity currency closest to it. It is close to the commodity currency because it behaves like a commodity It has no other significant use value other than being used as currency. However, I mean people choose to hold it You know, for speculation, or just think it’s cool stuff People choose to hold it at the beginning when it has no trading value. Just buy it and see what happens next. So it still has some use value, although not so obvious It is intangible value Not what we generally think of But the closest thing should be the commodity currency or the so-called external currency.
The special emphasis is that it is not endorsed and cannot be redeemed by anything. It also has no guarantee from any government. George. Sergey has published an interesting paper. He proposes a term “synthetic commodity currency” to classify bitcoin. I think this is a very useful term. Basically it is completely like a commodity currency but it is synthetic But it has most of the qualities of a commodity currency. The biggest problem is that this is the most interesting question I think. Why would anyone want to use and trust this thing? I mean, just like that… is that simple? I can easily start creating a currency tomorrow. Can I do this? you know It is a thing born out of thin air Then people start buying it and betting on the money, the price is constantly fluctuating, which looks like a bad investment.
Why do people believe in it? This is an important question worth answering. It’s so interesting because when we talk about the medium of trading, the question of trust is very important. If you think about trading media versus consumer goods Consumer goods means anything you would consume like a meal or car When you are driving, you are consuming a car. Your house, you live in the house, you are in the consumer house The trading medium is completely different Only when you know that others will accept it and give you merchandise will you buy it and hold it So think about how difficult it is for a new currency. No one has ever heard of this thing, right? Everyone already has the money they are using, right? Why is anyone going to hold it? If I want to hold it, I need to believe that others are willing to accept it, right? But everyone else has the same problem because it is the medium of trading If he wants to accept the media I give him, he needs to know that others will accept it to exchange goods and services.
Because this is the main function of money This is why we use money We never consume money, right? It’s not like ice cream, it’s not like a car It is not a consumer product The only reason to use it is as money So how does a new currency begin to flow? People need to believe that others will accept it. This is a huge problem So trust Maintaining or building trust and maintaining it is the key to any new currency The same for the old currency If tomorrow, for some reason, people lose trust in the dollar, there will be many people who lose patience and will no longer believe it. I mean, at this time, the dollar will have something violent. For money, trust is the key Consumer goods on the other hand It is important to believe in the credibility of the other party, but it is easy to verify You consume it If you like something, you enjoy it and you will buy it So created the demand for such things But the need for a new currency comes from knowing and believing that others accept that they can be used to trade goods and services.
And everyone has the same problem, right? So the question is why is there anyone who wants to believe it first? I think this is an important question worth considering its answer. I think there are three bitcoin features or features that make it trusted by people. I don’t think it was just created out of thin air. People are just on the rise, believe it today, and don’t believe it tomorrow. It is not produced like this I think people believe it based on some real reasons. There are real reasons behind using it as a currency These reasons will not change casually. The first point is of course the fact that it is a fully open and verifiable ledger.
The fact is that you don’t have to trust any third party Have the right to monopolize this currency No one has the right to monopolize this monopoly And the fact that everyone knows this creates trust Because you know, even if you never really verify it It’s like saying, you said, I’m going to check if this is true. When I send Bitcoin, is it really the actual operation like this? Even if you don’t really check it, you know it can be publicly verified.
right This can help build trust If you want, you can In fact, many people are verifying it This led to the establishment of trust in it. The other is of course that it is a completely open blockchain. That is open to everyone Because you know now Some people say that they want to create a private blockchain. Like a blockchain within a government or company But Bitcoin is based on a public blockchain that is completely open and free (free) Free (free) join, free (free) leave Anyone can join anyone can leave Again, this helps build trust Because it is completely decentralized, it is also geographically dispersed.
No country has a government that can monopolize it. Again, this helps build trust The third point is the fact that it is based on open source software code. I think this is the most important, so I want to explain it a bit. You know what is open source software Very short, open source software has a long history. Linux is the most famous example Let’s think about its (open source software) economic principle. How does open source software work in this part of the money? Economists have thought about open source software But never discussed it in terms of money benefits.
There are two types of software, one that is completely proprietary, such as a company like Microsoft or Apple. We are using these software They are proprietary software, obviously, right? These softwares are paid for, they are not free These companies have ownership of the code They also control and have the power to modify these codes These are proprietary software, imagine Microsoft Open source software is completely different on the other hand. It’s free for anything Anyone can download it Like bitcoin code, if you want to help improve it Or give suggestions to developers or fix code errors.
You can do these things. This is open source software. It relies on contributions that are mainly from the public. Continuously help it develop and help it modify the problem to make it better Of course, this question is what economists think is a free ride. Why do you want to invest in something that doesn’t have any money? You didn’t get anything but you still put it in So there is quite a lot of literature in economics discussing this issue. How do we explain the problem of free rides that open source software shows? Later, they found that although people did not get direct returns, they still invested in the development of open source software. Because these experiences can be converted into monetary value later. For example, you can write it in the resume. You can say that I solved this code error for this open source project when I interviewed with Google.
This proves that I am very talented. So some open source projects have always attracted many very talented people. From the individual’s spontaneous investment and time only to keep the open source software running This is the power that drives Bitcoin now. Let’s see if a proprietary software, such as Microsoft’s software, they try to create the currency that belongs to them. Try to put it on the market You all know that this currency was issued by me (Microsoft). This thing no matter what you call it Think about the question of trust Everyone knows that Microsoft is privately controlled by private companies. Meaning they have the private rights and control of the code, if they want, they can change it at any time. They told you in advance that we will not modify it if we issue a total of 21 million currencies.
You know, it is designed in the same way. But you know, they actually have the power to change the power they have to manipulate it, making it good for itself. right? Because it is based on proprietary software How many people do you think will believe it? Not too much Such a currency will not be too successful And Bitcoin is based on the facts based on open source software. At the same time, everyone knows that it is based on open source software. Make people believe it Because no one can modify it for their own benefit When the modification is proposed, it has to go through a complicated process and it needs to pass everyone’s consensus. Many complicated issues need to be agreed by everyone. In fact, there is a big debate now These are happening in the public, you know, Bitcoin is about to face a major fork. There is a lot of debate in the Bitcoin community that has a lot of debate among developers. Which method should we use? Should we increase the block capacity, or should we use other methods? This is part of open source software Open source system Interestingly..
I will come back and say this later. This way of making decisions requires everyone’s consent, but no one has absolute power. All depends on the public This seems very confusing Is there a central bank that is not more efficient? Someone (organization) has the power to have the power to make decisions completely. Everything he has said, just as Microsoft can have the power to decide what to do. Look at this crazy situation, what is happening now Look at these bitcoin people are quarreling with each other It seems confusing but it is actually very It provides the power of the entire Bitcoin system Because everything is transparent, which brings a lot of trust.
Because everything needs to be made public, even if it is for example Even core developers want to modify the code for their own benefit. They must also make public changes and everyone will immediately know that something is happening When this happens, most people will stop using it. This is like the game theory Developers know that other people know what they are doing so they won’t mess around Because you know that you will be discovered soon. Then you will lose everything you built hard That will be the end of Bitcoin Because if you lose trust If a currency loses people’s trust Especially something like this Completely from the market mechanism There is no central bank without federal savings insurance.
When you lose people’s trust, everything is over. Even cheating to manipulate code can bring you benefits. The loss caused by this will be even greater, which will become a disadvantage. From another perspective Its clever thing is The software itself is free and obvious. You can’t profit from the software itself. If you contribute software development and assist in modifying the error, you will not get a monetary return. What you can get money back is Develop applications on it using its open source code There are a lot of bitcoin entrepreneurs out there.
Develop apps, develop payment systems, make money and make a lot of money Entrepreneurs create their own proprietary software based on open source code The result is that entrepreneurs tend to participate in the development process themselves. Now make sure that it works well for them and has a substantial interest in them. Make sure it’s transparent, make sure it works smoothly for everyone to see that we are not manipulating it Because they will be the loser Because the premise of making money is that Bitcoin works very well.
Because the applications they develop depend on the good foundation of the open source code. Make sure the code works smoothly, making sure it’s transparent and building a niche for them Make sure that there are no cheating behaviors in progress All of this is an important factor in solving the trust problem. When it comes to money, this is a big deal. Think about this strange open consensus consensus decision Decisions made by the central bank with its discretion to close the door No central bank is bound by rules But they are given discretion, which is the majority of the situation now. When there are these unknown things, some people know something that others don’t know. What happened in the door, how do they make decisions They are given a lot of discretion This actually caused mistrust If you think about the Fed Most people, if you ask them for advice from the Fed You know, most people are, um, I don’t know them.
But they seem to have a lot of power Actually, in fact, they have a lot of power. They can make these decisions Because they have the power to monopolize these decisions If they decide in a discretionary way, this will lead to mistrust This is why many of the economists are pushing the rules to impose restrictions on the central bank. With open and transparent rules, I hope everyone knows how decisions are made. Then What are the benefits of using Bitcoin? What are the benefits for individuals? One obvious benefit is that it gives you more privacy protection.
You don’t need to provide a lot of information like your name, put your information publicly You only need one password, you need to protect it. At the same time you have a public address And these are all generated by cryptographic calculations. This is more private than the current credit card system or PayPal. These systems now contain a lot of personal information. This has led to a lot of fraud every year. The amount of fraudulent identity is very high through the amount of fraud in the international payment system. Bitcoin offers the benefit that you don’t need to provide any personal information. This is an obvious benefit This reduces the chance of fraud The biggest benefit of making Bitcoin so successful is Merchants can have lower transaction fees For businesses, shopkeepers, hotels, etc. like overstock.com Accept bitcoin why? Because of this they can get monetary benefits Because the store accepts credit or debit cards every time You have to pay 3% of the fee to the credit card company. If you are using bitcoin A lot of companies like Bitpay and Coinbase can do the same way for merchants to convert Bitcoin and USD instantly.
Or you can keep Bitcoin directly if you like. But the handling fee is much lower 1% or less Many times, it is free, it is 0% So if you are a business, you don’t have to think about it, right? I mean, why not increase the acceptance of bitcoin payments? I accept credit cards, debit cards, PayPay, VISA, everything is good and also accept bitcoin payments. Because if people really pay for each sale with bitcoin, I can save 2~3% of the handling fee. This is a large number This is actually a big part of your profit.
When you are the boss This is actually a key to current success. There are currently hundreds of thousands of stores around the world that accept bitcoin I read in the report that more than 250,000 stores in Japan will start accepting bitcoin payments. This can be said to be the key to success. Another cool thing is The convenience of transfer, the speed of transfer I can use the same time to send bitcoin to you sitting here and send bitcoin to someone on the other side of the world. This is really amazing. If you think about people in developing countries of the world They have no traditional financial system to use Those that we take for granted like debit cards, ATM machines Anything, you know, the app on your phone But in many parts of the world, there are not some of these places in Africa, in Asia.
For things like Bitcoin, you only need to have a phone, an app and an internet connection. Things like this you can send money to far away Still safe Because there is no fully developed financial system You can basically rely on cash Or you rely on expensive wire transfers or remittances to get the money back home Things like this are a big step forward. This is why you have heard something like M-Pesa in Africa (Mobile Money mobile cash, remitted by telecom operators) They become very important But mobile cash is just an alternative currency. It is not money itself Things like Bitcoin are more complicated It’s actually safer and faster Ok, these are the advantages and benefits. What challenges are there? Too many challenges, do you know? Bitcoin has achieved great success But it has not reached the level of universal acceptance that everyone will use it.
I have done very well since it started. No one thinks about such a thing. Anyone who studies monetary economics doesn’t think It’s amazing that you can use it to buy a bunch of things outside. Really amazing people use it to believe it But is it a currency that is already widely used? No, will it become popular? We still don’t know, maybe not This is the case, if you imagine that there is already a system in the United States or anywhere that has a good functioning of the legal currency issued by the central bank.
It’s really hard to overcome the network effect I’m going to discuss next. It is difficult to overcome the so-called network effect Imagine everyone has built a huge social network on Facebook. Now if there is a new social platform that wants to compete with it Or replace it to get people to move to a new platform I said this is really difficult because everyone has already established a connection on Facebook. The question is who wants to go to the new platform first, for what? Especially when there is a huge so-called migration cost Why should I take a platform that works well from what I already have? Switching to a platform I don’t know is unfamiliar. I don’t even know if there are people I know. Why do I have to change, right? It’s almost a similar situation Bitcoin needs to face the huge network effect of existing US dollars and other currencies that are already functioning well. This explains how Bitcoin can achieve such success. When there is a lot of inflation, malignant inflation.
Or political instability in some countries recently. Whenever these happens, the adoption rate of Bitcoin has risen sharply. This is a good thing For those people, this is a good thing. Because now they can have a choice They don’t have to lose all their savings or money just because of their currency inflation problem They hope to convert Bitcoin to save some of their assets Then convert to other currencies But this is different from being used by everyone in the usual situation. This is the real problem Do we see everyone turning the dollar away to bitcoin? Oh, I don’t know if this is a difficult question to answer. So the biggest challenge I think is At this moment, there is no monetary benefit for consumers like you and me.
For example, some of us have bitcoin but how many people use bitcoin to buy things, who used it to buy things. Ok Yes, that’s it, this is what I have to say. It’s like, we buy it just, oh, this stuff is cool. I want to take it to my friends. You know, show off, do you have bitcoin? You know How many of us have really used it? No, um, I mean this is part of the process It’s a bit confusing, how is it used? What should I do with it? Another part is that it lacks the money benefits like a business.
For merchants, it is very obvious that you save 2~3% of the handling fee per sale, you will start accepting it. If there is a similar monetary benefit to the consumer If you use Bitcoin to pay for a store such as Amazon or Dollar-Price, etc. If you pay with bitcoin you can pay a price 5% less. This is a discount on using Bitcoin I think more people will start using Bitcoin.
We will try How is this thing used? I can really get a 5% discount! I will use it, right? If you have 5% and 3% cash discount, you will choose 5% If there is some kind of monetary benefit, although it is not yet, it is possible Occasionally you know there is a so-called Bitcoin Black Friday (Black Friday, US Big Purchasing Day) If you pay with bitcoin, you can buy a bunch of things at a very cheap price. At those times you will see many people selling and paying with their bitcoin Because there is no obvious monetary benefit, the reason why consumers don’t really want to use it Of course, the truth is that this is a very high information burden. This is like a prejudice group It seems like you know in a prejudice group, maybe 20~30% of us have bitcoin But if you go outside like I asked the students in my class, they behave like, who cares about this I have my debit card I have my bank account and it has insurance for federal savings insurance.
I know that the money will not disappear, they are safe. Look at this thing, its price fluctuations are so powerful. I don’t want to buy it So this is a big information burden for consumers. First, you need to understand that it knows how it works. You need to keep up with what is happening at any time How is the price now? what happened? right? It’s like an age we’re used to. We are used to the convenience of things we have ATM, we have credit cards, debit cards Here is the story of what happened to my bitcoin. This is when I bought it when it was about $100, I bought a few bitcoins When you have bitcoin, you have this huge password and it’s super long And you have to protect it safely I lost my password. Really shameful, I know But this is also part of the story Why, you know when people think about investing in assets and investing money It is not convenient Now you have to protect your password because once you lose your password, your bitcoin will never be found.
It doesn’t look like you are logged into your bank account You lost your password, will they say that you forgot your password? You can reset it, right? The money will not go anywhere. You won’t lose them because you lost your password. The true story happened to me I tried not to think about how much they are now worth. Yes, I don’t think about that. However, it just has a lot of work to do I think this is a bias group for most people. But most of the population they are not willing to do those things When you have fiat currency, you have a federal savings insurance to protect your bank account. Forgot your password and won’t lose your money. This is what the Federal Savings Insurance is doing, right? Even if your bank goes bankrupt, they will protect your money. They will pay you all the money in the original bank account.
These have created a huge burden I think this is because most people tend to become satisfied after a while. You know that we don’t have a lot of choices about money products. You have fiat currency as the only currency I mean, you can choose a bank but what is the difference between them? I mean, if you go to any bank, the federal savings insurance will protect your bank account. Not that big difference, right? Do you really care? Are you really going to check how they use your money? This is a problem that has caused many lack of competition in history. Sometimes we don’t even think about currency goods competing with each other. This is like something that has never been possible Because this makes most people meet the status quo It seems difficult to change people’s habits This is indeed because it is a money relationship, which is even more difficult.
If you think about consumer goods A commodity that has no competition under control, such as a car produced in a socialist country You know, I am from India, once we only had one kind of car. But when we practice socialism, we only have one kind of car government to make this kind of car. Everyone has this kind of car. Guess what happened after the liberalization of this country At least ten cars have appeared Of course people feel hesitant You will hesitate to try new things and have many choices There are many competitions in the market, and a lot of new things have appeared. But you still try, right? You will be like this, ok, if I don’t like it, I will still choose my original car.
The results of it? Everyone starts with Chevrolet Honda, Hyundai, etc. This is the car that everyone is driving in India now. Because it is a consumer goods It’s easy to test if it provides its value in use. If it’s valuable, you’ll change the choice. But for money, testing is more difficult Because only you know that when other people will use it, you will use it. Others will use it when you are willing to use it. So it’s like something that locks each other Plus its high information cost With Bitcoin, you have to know that everything knows its situation.
When prices fluctuate, you may lose money These are the challenges and obstacles it faces. So I will feel that if there are more applications that provide consumers with financial incentives to use it For example, there is an app you can download and say I want to buy this and pay with bitcoin Then you can have a 3~6% discount Then people will be willing to use it In fact, there is such a thing called Fold App. Has anyone heard of it? You can go and see if they are doing something like this. It seems that only Starbucks can be used at present. If you use their app, I don’t know how they do it.
However, they give you a 20% discount on the purchase of Starbucks coffee. This is very good, right, because Starbucks coffee is quite expensive. So, Fold App Basically, you pay with Bitcoin. You can get a 20% discount at Starbucks. This is great, and they try to expand to more retail stores like the Whole Foods Supermarket (a supermarket chain selling organic food) We need to have more discounts at the Whole Foods Market, right? Ok, so I will summarize it soon. I think some big thing is that Bitcoin is like in many controversial events. Many people say this is crazy, it will fail There will be many price fluctuations, many people fail and many people lose, many people go bankrupt But this market is working like this The market is not perfect This is the merit of the Austrian economics.
We take these into account, right? We understand that there are real failures and losses in entrepreneurial and real markets. They won’t be perfect bitcoin and won’t be perfect It won’t be perfect, so we shouldn’t expect it to be perfect So whenever you see someone failing, some people say it’s the end of it. No, this is normal. This is the way the market works. This is the first time What makes me really interested is that this is a very rare moment when we can witness the competition of currency goods. This is a very rare moment in history. Because it is still largely unregulated, there are many related ventures. There are a lot of profits, a lot of losses, we see a lot of ups and downs, right? It will be very interesting to see how currency goods will compete.
Bitcoin and blockchain will not disappear Blockchain must also be that they will only grow stronger The government has begun to use the blockchain to register property certificates. So this technology will definitely stay But on the basis We should all support and be optimistic about things like Bitcoin. Because after all, it is creating an option Even today, for someone in the US, you don’t see the need to use it. But it’s there, it gives you an option. If you need it, you can use it, right? Imagine someone in Argentina or a war zone Think about those people, this gives them an option This is a great thing For this reason, we should all support it. Thank you.
Great program/documentary on RTE last month regarding digital currencies and their future. For those outside Ireland you’ll need an Irish proxy in order to access the channel and it’s archive.