Sign up FAST! Login

Andreessen Horowitz VC Chris Dixon Defends Bitcoin

Stashed in: @cdixon, Awesome, @a16z, Bitcoin, Bitcoin

To save this post, select a stash from drop-down menu or type in a new one:

Why wouldn't you just use digital certificates tied to real currency?  Why do you need a whole other currency that requires all sorts of new fraud protections when you have a generation already in place?   Heck a non-exportable x.509 tied to a specific paypal account is more useful and protected a thousandfold.  Bitcoin's not disruptive, it's quixotic.   

I'm laughing that he feels the need to defend his investment in the poltical realm. 

He should have taken that $25M and cornered the market and bitcoin and exited when others tried to follow by executing on all the issues you need to solve to actually make it main street useful beyond a bubble. 

You're right, Chris Dixon's post is strange. It's filled with weak arguments.

I guess he was responding to the post from al3x about Bitcoin and Magical Thinking:

I agree with you that Bitcoin is not disruptive, and now that speculators have taken over its value, it's not stable, either.

I love your line "Bitcoin's not disruptive, it's quixotic."

second the love of that line

It's worth reading what Chris Dixon wrote:

Chris Dixon writes:

I’m not claiming that Bitcoin (or any new technology) can save the economy or the world. The technology industry is in the business of creating products and services that either enable new activities or make existing activities less expensive. Venture capitalists are in the business of funding entrepreneurs who run experiments to try to create these new products and services. I believe the only way the technology industry can offer meaningfully improved financial services is by building new services that don’t depend on incumbent companies. Bitcoin is a serious proposal for dramatically improving the payments industry. There are plenty of open questions but I think it’s an experiment worth running.

I don't believe that Bitcoin is a serious proposal for dramatically improving the payments industry.

Because Bitcoins themselves have no stability in price whatsoever.

We can't improve payments with a currency that has ridiculously wild swings in value.

What's wrong with the dozens of existing payment solutions including startups like Stripe and Square? Dixon never says.

He does say this:

Charging 20% interest rates (banks) and skimming pennies off every transaction (Visa and Mastercard) is a very profitable business. Starting a new payment company that doesn’t depend on the existing banks and credit card companies could be disruptive.

On that we can agree. Where I disagree is that Bitcoins are important to that disruption.

> Because Bitcoins themselves have no stability in price whatsoever.

So, you think that bitcoin could never have a stable exchange rate?

> So, you think that bitcoin could never have a stable exchange rate?

By definition, it would never have one as it'll always and only ever be market driven.  I guess it all depends on our definition of "stable". 

There are markets for baht, peso, rupee. Those are currencies. Those are market driven.

Of course, thus it all depends on the definition of "stable".  

Baht and Rupees are market driven, Pesos are a fixed value pegged against the dollar.  Bitcoin will never have a fixed value pegged against any currency, so that one's really easy to rule out.  Bitcoin having a floating value against multiple currencies as supported by the online exchanges right now is simply whatever the market makers say it is based on demand dependent on the full faith and creditworthy assurances that the cryptography is unbreakable and the model for how they issue and setup the market is trustable. 

Back to my original question: can bitcoin never have a stable exchange rate? If you say no, please explain how baht and rupee can be stable enough to be currencies.

What's your definition of stable?

But I was just trying to point out the paradox.  Some argue to make Bitcoin a stable currency, it needs to be pegged to a world currency like the US dollar.

Doing so would by definition destroy the founding principles of normal rigidity and stickiness.  From the FAQ itself:

Where does the value of Bitcoin stem from? What backs up Bitcoin? Bitcoins have value because they are useful and because they are scarce. As they are accepted by more merchants, their value will stabilize. See the list of Bitcoin-accepting sites.

When we say that a currency is backed up by gold, we mean that there's a promise in place that you can exchange the currency for gold. Bitcoins, like dollars and euros, are not backed up by anything except the variety of merchants that accept them.

It's a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn't equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a useful currency, it alone doesn't make anything valuable. For example, your fingerprints are scarce, but that doesn't mean they have any exchange value.

Alternatively it needs to be added that while the law of supply and demand applies it does not guarantee value of Bitcoins in the future. If confidence in Bitcoins is lost then it will not matter that the supply can no longer be increased, the demand will fall off with all holders trying to get rid of their coins. An example of this can be seen in cases of state currencies, in cases when the state in question dissolves and so no new supply of the currency is available (the central authority managing the supply is gone), however the demand for the currency falls sharply because confidence in its purchasing power disappears. Of-course Bitcoins do not have such central authority managing the supply of the coins, but it does not prevent confidence from eroding due to other situations that are not necessarily predictable.

I'm not sure what parts of your message need response, aside from "what's your definition of stable?" But I don't think that is relevant. The claim was, I believe: "bitcoin does not have price stability now and thus can not add value to the payments world." Well, the dollar did not have price stability in the 70s. The baht had horrific stability during the Soros heyday. Nobody denies that those are currencies. So I'm waiting for someone who has claimed that bitcoin is not *currently* stable and therefore unsuitable as a payment vehicle, to explain why bitcoin can not stabilize. 

Again, what's your definition of stable?  Bitcoin has no inherent stability as a currency.  It's not centrally controlled.  The definition of a stable currency is "centrally controlled".  

You can't see the humor in that? 

The Baht is centrally controlled and subject to macroeconomic tinkering by the Thai government.  Even the US dollar in the 1970s, while no longer "pegged" to other physical things of worth, was still centrally controlled.   If you have something that has a finite amount pegged to something that for all intents and purposes has an infinite amount, you don't think that creates an unstable relationship of one in relation to the other? 

I don't believe that "stable currency" is defined as "centrally controlled." (please cite a source). I believe that "stable currency" means one that is stable in purchasing power (or in some cases, stable in exchange rate with other currencies). The major factors that contribute to this are political stability, economic stability, judicious government intervention (or lack of bad government intervention).

I agree with you that bitcoin has no inherent stability. Where I think you are wrong is your belief that other currencies do have *inherent* stability.

Take the baht. The trading power of the currencies market overwhelm any durable monetary control that the Thai government has over its currency. George Soros made billions because of that. Thailand has USD 172 billion-worth in reserves. On average, USD 5.3 trillion-worth trade in foreign exchange a DAY. You chose the word "tinkering", which is a good one; that's all the the Thai government can do, monetarily, with the baht. (Many economists argue that even the mighty US Fed is really no match for the forces of the international currency market).

What I'm driving toward is this: I keep hearing the argument that goes: bitcoin's exchange rate has been unstable. Therefore, it will always be unstable. That's not a valid argument.

Or the argument that goes: bitcoin's exchange rate is not controlled by a central authority, therefore it can't be stable. My point, as above, is that other very functional currencies are only controlled in a limited way by a central authority. 

Again, it all comes down to your definition of stable.  It's simply a semantic argument.   I've made no statement (much less expressed a belief) as to the bhat being a stable currency or not.  I simply said: if you use the definition of stability as being centrally controlled--even in a limited way, then that is how you distinguish them.  I also didn't say it will always be unstable. I said definitionally, it's an unstable currency as there is no central control.  What it'll be in the future is anyone's guess.  The way it becomes a stable currency is through its volume and velocity. Its volume is fixed.  It's velocity increases with the more legal places it's accepted and the more intrinsic value it accumulates through it's liquidity through conversion into other currencies. 

You are both right. 

Bitcoin definitely needs more liquidity. 

And it can serve as a functional currency without being controlled. 

But until the wild price swings are assuaged, a merchant would need to be very risk loving to be willing to accept payment for something, only to have that payment lose some or all of its value the next day. 

No doubt. My contention is with the argument that because bitcoin is volatile now, it will always be volatile. I don't think there is any evidence to support that, nor is there any theory to support that with which I concur.

Romain Dillet adds:

Charlie Stross stated that “Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind — to damage states ability to collect tax and monitor their citizens financial transactions.” Paul Krugman then quoted his post, neither denying nor approving this thought.

As long as Bitcoin remains a young and volatile currency, Bitcoin’s mechanisms will remain beautiful on paper. Using it for real world transactions would be crazy, and I think we are still a couple of years away from getting a stable Bitcoin that can be trusted. 

Bitcoin is not ready for real world transactions. It may never be.

Those concepts have been around without Bitcoin.  Okay, I'll concede it can be interpreted as a weapon. The Sovereign Individual (not to be confused with the quacky sovereign movement) is a book that covered the odd relationship between citizens and governments through taxation and financial institutions. It covers the commoditization of information technology and more relevant here, taxes and financial vehicles.  They make the argument that the wealthy will become government "customers" and not captive taxpayers.

As to trusted...there's a concept in security technologies called assurance.  It takes typically 10 years to build up the assurance "capital" for any new technology to become trusted.  I would bet less than 1% of the small number of bitcoin owners/users truly understand the crypto theories behind the currency.   You ever wonder why you see so many pictures of Bitcoins as "containers"?  Why online storage services are confused with actual bitcoin values?  People see them as the exact same thing.

That's fascinating. 

Visa and MasterCard work for exchange because they each have institutions that will provide assurance. 

Bitcoin needs that if ever it is to thrive. 

Discover Card can become very relevant again?

You May Also Like: