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Remember BitCoins? They Aren’t Going Away.

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Have you heard of Bitcoins? They are a form of digital currency that have made the news here and there, but hasn't gone mainstream. However, that might be about to change.

If you aren't familiar with them, here's a brief introduction:

In June 2011, I wrote, Bitcoins: The Future of Money or End of the World? There's no question that there is a brilliant design behind Bitcoins. In fact, the design is so brilliant that despite a few obvious problems, (ahem, liquidity), I couldn't dismiss them. They truly could be the future of money.

If you read that article and bought some Bitcoins, you could sell them today for a nice profit. However, you would have gone on a roller-coaster ride watching about 80% of your investment disappear along the way. I like to judiciously speculate and even I can't convince myself to buy them. I tried to the other day, but after they nearly doubled in a few short days due to this Cypress mess, I couldn't pull the trigger. (Of course, I also like to buy things at a discount, so this sudden raise in rates made it the opposite of the "bargain" that I look for.)

Yesterday Expensify announced that they are officially taking Bitcoin as a reimbursement option for expense reports. This is kind of a big deal, because as corporations start to acknowledge Bitcoins, they become a more legitimate form of currency. So despite what Bloomberg said a week ago about it not being a currency, I wouldn't bet against it.

I talked with CEO David Barrett of Expensify about their adoption of Bitcoin and why they've chosen to support it. If I was a real reporter, you'd probably see a quote here. Instead I'll just paraphrase how it went, using my own interpretation (not David's). Reimbursement via direct deposit is great because it only costs Expensify a few cents in transaction fees. Reimbursement to other accounts, such as Paypal are really tough, because Paypal fees eat up 3-5% of the reimbursement. As Expensify deals with more international clients, they have a need for a payment system that A) can meet their needs of servicing many countries and B) can keep the fees low. Bitcoin fits with exactly what Expensify is looking for.

I think many other companies will feel the same. That's one of the big benefits of Bitcoin. However, again the downside was support for Bitcoin. I asked Barrett about that and he was quick to point out that while Expensify is clearly an early adopter, the path for Bitcoin's legitimacy is already paved. Companies like CoinLab have been attracting venture capital funding in it's quest to provide support tools for Bitcoins. Silicon Valley Bank will be holding Bitcoins for CoinLab.

So now it's time for me to ask the readers? Is it time to start putting some of your money in this extremely speculative currency that may be where the future is going? Let me know if the comments.

[Final Thought that Maybe Only I Find Interesting: I didn't realize when I was talking with David Barrett that he was the CEO of Expensify. It wasn't until I read this this article on the Verge (which has the real quote from Barrett) that I learned it. Someone less professional than I would probably do Xander's imitation of the Snoopy Dance at getting the same level of access to the story as the Verge. Someone more professional than I would probably have not mentioned this...]

Posted on March 28, 2013.

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13 Responses to “Remember BitCoins? They Aren’t Going Away.”

  1. I don’t see the practical use of it. It may involve lower fees for payments and the initial currency exchange doesn’t seem to have an extremely wide spread, but the value fluctuates so much that you don’t know what you’ll actually own next month. You would have to deposit, pay, and withdraw within the same day to have any kind of certainty. Sounds a lot like hyperinflation. Given the strictly limited supply I don’t see that changing.

    That leaves speculation. Currency speculation doesn’t seem that exciting, especially when it’s extremely volatile and near the high end of its historical range.

  2. Given that bitcoins are still mostly used for black and grey market transactions, I’ll pass. I’m not a big fan of speculation.

    But I do think that the price will go up. The currency is designed to be deflationary. Since less and less bitcoins are produced while the black market is increasing their use of them, I can only see their value going up. Assuming of course that governments don’t step in to shut things down on either the bitcoin end or the black market end.

    • Lazy Man says:

      The value fluctuates now, because it is a very new and not mature market. That is to be expected. I don’t think it’s something specific to the implementation of Bitcoin itself.

      Think of a company like Microsoft going public around 1986. There weren’t a lot of shares then, but if a few people saw what it would become today, they would buy it and the price would go up very quickly.

      I believe the supply doesn’t matter much because you can exchange fractions of Bitcoins. If there were only a 100 Bitcoins in existence, I don’t need to own a whole coin…. I could own 1/1000th of a coin. If a whole Bitcoin was worth a million dollars due to the limited supply, that 1/1000th of a coin could still buy a lot, like a new laptop.

      Myfijourney, I wish I knew what percentage of them were used for black and grey market transactions. I focus on the legitimate market, which admittedly there aren’t much now, but the point is that is changing. The ability to convert it back to any currency would make it interesting to me.

      I don’t think the government could shut down Bitcoin if it wanted to. Don’t quote me on that, but it was designed so that it couldn’t be regulated by governments. As for the governments shutting down the black markets, it seems like they should be doing that anyway.

  3. The supply does affect the value. If demand varies and supply is fixed, then the value will vary too. That’s potentially bad for anyone who is holding them for more than 10 minutes. If the market grew by a lot this might happen over years rather than hours but it would still happen. Companies can issue more stock if there is a lot of demand, but bitcoin has been designed to prevent that so the options are very limited.

    • Lazy Man says:

      Oh, sure standard rules of supply and demand apply here. As you point out, supply is relatively fixed (the growth rate is planned in advance). If demand goes up the value of the existing supply will go up. If demand goes down the value of the existing supply will go down.

      It’s potentially bad, but the same could be said for holding gold, Apple stock, or an ETF of the whole market. The difference is that there have been consistent demand for the previous items and Bitcoin is new and figuring out its demand in the future is difficult. Without looking at the chart, news like that in this article points to potential for sufficient demand.

      Yes companies can issue more stock, but the market capitalization of the company still remains the same.

      Let me put a realistic example out there with bitcoin. There’s a hard limit to 21 million Bitcoins ever existing. Right now, let’s say that there are a million in existence (I don’t know the exact number or even a good estimate.) Let’s say that I start to buy them up. As I do that, the price goes up. I can still continue to buy them up, but then effectively the people who own fractions of a bitcoin would become very rich as the supply is down. The person with 1/1000th of a Bitcoin ends up selling 1/10,000th a bit coin to finance a car. My point here is that because you can deal in fractional levels of Bitcoins, it doesn’t matter if there is a single Bitcoin out there, it can be divided into nearly infinite pieces via fractions and everyone would just be dealing with those fractions. We’d be talking about a millionth of a bitcoin was worth $75 and what a great time it was when you could buy a whole bitcoin for that price. In short, 21 million bitcoins can represent an infinite amount of money.

  4. The reason we hold other currencies instead of gold is because their value tends to correlate well with our spending. Gold rates pretty poorly on that measure and bitcoin has even more limitations than gold.

    Being outside of the US I’ve always been somewhat aware of exchange rates, and I’ve had substantial income from outside the country for the last 7 years which has made them much more important. If I had the same income 10 years ago as I do today, it would have been worth 50% more then because of the exchange rate. My income has grown a lot in that time period but that’s a huge drag, and that’s from two of the most stable and reliable currencies in the world (which also don’t have a strictly limited supply so their value can be corrected if something goes wrong). If I had USD assets over the same time period they would have seen a similar decline.

    If you kept all your cash in gold, the actual gold you get for a given income would have fallen by 88% over the last decade. Sure you can buy more today with that gold, but hold on to it for 10 more years and let’s see what happens.

    In the end I think bitcoin is like communism. It sounds best to those who have never lived with it :)

    • Lazy Man says:

      I thought we hold other currencies other than gold because handling gold tends to be a pain.

      I don’t see how gold’s value correlates less with our spending than any another currency’s value. Since the values can be equally converted via an exchange rate (whatever it is on any given day) the conversion can be easily made. I admit, I’m not a historian on the gold standard.

      My thinking here is that we could pay each other in tulip bulbs if we could agree on their value. The only reason a piece of paper called the dollar has value is that we all agree it does. If we agree the same with bitcoin, I don’t see the difference.

      I don’t see a comparison with gold, because I really don’t think anyone will take it for a transaction, where we are already seeing that for bitcoin. Gold will never be a practical way for me to pay my Amazon.com debt.

      I guess I see bitcoin has having potential to be a universal money standard. If bitcoin was a universal standard, there wouldn’t really be a need for exchange rates. Yes, it’s a little John Lennon-Imagine-like, but it’s true. People in Russia can price their goods and services in bitcoin as I do in the US. If you don’t have to worry about the exchanging back and forth, it really isn’t a problem. Right now bitcoin looks particularly crazy because of speculation, but if it were more wide-spread I don’t think you’d see such speculation.

      We can imagine a world where everyone has different measuring systems (English, Metric, Lazymantric, etc.), but a common one simply makes sense and is more efficient. I don’t see any comparison to communism there.

  5. I would like to see a common currency, although traditional economics hold that people would have difficulty with the occasional need for falling prices (including incomes) so economic adjustments could be slower and more painful in that system.

    Now who’s willing to go through 50-100 years of pain so bitcoin can get there? And what if it gets there and then the economy splits in two and starts losing transaction: http://bitcoinmagazine.com/bitcoin-network-shaken-by-blockchain-fork/. According to this article you can’t even independently re-create the software behind bitcoin without raising serious concerns about corrupting the whole system.

    It’s hard to call that more decentralized than a government-administered currency, the many tangible assets that already exist, or the virtual credit that people create between themselves whenever it’s convenient to settle a transaction.

    • Lazy Man says:

      That was a long, long article that I didn’t have the time to read, but it does look like it fixed itself within a few hours. In talking about Bitcoin’s success or failure, I’m presuming that technical detail such as these don’t become issues in the same way that I don’t expect a country’s currency’s success being dependent on a short term failure of a printing press.

      As long as people agree to use the virtual currency, it has as many tangible assets as the pieces of paper in my wallet. There are many people claiming that a Bitcoin is worth many Washington’s for example.

  6. What I got from it is that the group of people with the most hardware wins and could even go as far as changing the rules, for example by removing the hard limit. Obviously some attacker with 5 servers will never be able to take on the network directly because it has a lot of power already. They could create their own bitcoin economy but no one would see their transactions as valid because they are too weak.

    In this case it wasn’t an attack, it was a software error that created two parallel economies. It required the cooperation of several central people, who had enough computing power to overrule all other known bitcoin users, to resolve the issue. Before this happened someone was able to “copy” $10,000, apparently just as a demonstration that they posted on a forum. A few people lost some new bitcoin in one of the “alternate universes”. They had to give it up in order for their future transactions to be seen as valid by everyone else.

    So in the last month we’ve seen unpredictable and permanent losses (a tax on the innocent to save the system), people who could print money for themselves while this was happening, and a solution decided and implemented by a few players who have the power to change the rules. Call those fixers Ben and Tim and no one would know the difference :)

    Interestingly the article also points out that almost all bitcoin transactions run through the same software and attempting to create compatible software would probably destabilize bitcoin because of subtle differences. In this case just having two versions of the same software caused the problem. That’s convenient for attackers who only need to figure out one way in, which eventually happens to any server software, in order to compromise the whole system. There are no subtle differences in some parts of the network to slow them down.

    • Lazy Man says:

      The great thing is that software errors can be corrected. We don’t throw out out computers as invalid tool because it can give us an operating system error cause us to lose a little work unpredictably and permanently.

      How much money is counterfeited globally? How much money is unpredictably and permanently lost globally due to bank robberies?

      This alternate universe thing didn’t bring down the system or even create much of a blip in it. If I had bought 5 bitcoins 6 months ago, I still have 5 bitcoins today.

  7. Sure – the point is that those software errors can be fixed in the same way that a bankrupt bank can be fixed. Someone comes down from on high and declares “These contracts never really existed, you former bondholders own equity, and all the deposits are now in XYZ Bank because I said so. Good luck!”

    The principle is that it’s decentralized and uncontrollable but there is fine print on that.

  8. […] Man @ Lazy Man and Money writes Remember BitCoins? They Aren’t Going Away – Have you heard of Bitcoins? They are a form of digital currency that have made the news […]

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