Thirsty Finance Official Blog

Loud advocacy for the promise of Bitcoin

January 29, 2014, 6:36 pm

Bitcoin, the digital cryptographic currency, may be poised to shake up the world of finance. An artist's rendering of this intangible currency, above.

Might Bitcoin be for real?

Writing in the New York Times Dealbook blog, Silicon Valley venture capitalist and entrepreneur Marc Andreessen discusses why he believes bitcoin may become a permanent and transformative part of the modern financial landscape.

Andreessen, who is also known as the founder of Netscape, which created the web browser in the early 1990s, and the founder of one of the most respected venture capital firms in Silicon Valley, has a track record of seeing clearly the promise of new and emerging technologies -- and he has thrown his weight behind bitcoin. Comparing the arrival of bitcoin with the personal computer in 1975 and the internet in 1993, Andreessen makes a number of salient points to suggest why this may be a permanent and disruptive new technology. Here are some of his contentions:

  1. Bitcoin is the result of decades of research and development into cryptography and digital currencies
  2. Bitcoin is the first digital currency to solve the problem of lack of trust in an environment like the internet
  3. Bitcoin is infinitely divisible
  4. There are literally no or very little transactional fees to use bitcoin. This makes infinitely dividing bitcoins into smaller and smaller quantities perfectly realistic. In contrast, transaction fees make tiny transactions of dollars, etc, impossible.
  5. Bitcoin does not rely on secondary data like credit card numbers that make financial fraud so common
  6. Bitcoin can easily be remitted. All one needs to do to receive payments is provide a barcode that can be scanned by the sender -- Andreessen tells the story of one person holding up a sign with a bitcoin barcode at a protest demonstration, and that person receiving over $25,000 in bitcoin after his sign was aired on television.
  7. Lastly, between the speculators who have given bitcoin tremendous value and the entrepreneurs, investors and businesses who are investing heavily in it, bitcoin has the critical mass to continue growing through a positive feedback loop

Considering the potential for monopoly

Like trading and investing, venture capital is about identifying opportunities with whose upside far outweighs the downside. And in bitcoin, Andreessen sees such an opportunity. Moreover, due to its properties as a feedback loop, the technology has the potential to be a 'monopoly' type technology that ensures it will be well insulated from competition. This characteristic of 'monopoly' is something both Peter Thiel and Warren Buffett base their investment strategies upon:

Is Bitcoin in a bubble?

Much of the skepticism about bitcoin is based upon the euphoria induced by the new technology, and euphoria is prima facie evidence of a bubble. Andreessen acknowledges that in the short term speculation in bitcoin may have outpaced its technological maturity, but he would contend that years from now, this bitcoin will have gotten over the bubble and may be here to stay

For a discussion of the similarities the price of bitcoin shares with a traditional financial bubble, have a look at this article.

The above chart of bitcoin shows 6 months worth of trading data. As can be seen, the price experienced a parabolic spike typical of financial euphoria, following by a correction of about 50%. At this point, following the reversion to the mean of both high and low price extremes, bitcoin is coiling up, preparing to take off. And when it takes off, it can only do so in one of two directions: either up or down. Since bitcoin has already experienced its highs, and sold off from those highs, it's reasonable to expect bitcoin will at least test its old highs. That may be the short-term thesis. And Marc Andreessen has put forth his long-term thesis. What happens in between is guaranteed to be a wild ride.

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