Sunday, July 6, 2014

How does Bitcoin came to be ? Beyond a payment system.

I am heavily invested into Bitcoin since my goal is to help entrepreneur to take the technology to the next level.

The mass is not yet completely aware of Bitcoin, and does not understand how it came to be. The concept of e-cash is not entirely new, so why Bitcoin is such a big deal ?

What is new is
"a reliable e-cash where you can transfer fund on the internet with A knowing B and B knowing A, the way I can take a 20$ bill and hand it to you, and there is no record on where it comes from, and you can get it without knowing who I am" quoted from Milton Friedman, 1999.
This economist could define Bitcoin before it even has been developed. He is libertarian, heavily influenced by Adam Smith.

So what is important ?
  • Reliable
  • Anonymity (A and B does not know each other, and nobody knows them)
  • No record of where it comes from
Such e-cash could not exist by being backed by a company, principally for money laundering problems, government would have put pressure to such company to disclose privacy and track funds.

The genius of Satoshi is about creating such e-cash without it being controlled by a company, so nobody can take control, or stop usage of Bitcoin. The incentive to make it works is backed in the source code and not defined by any legal terms. Bitcoin can't be controlled by a central body, Bitcoin is controlled by consensus, and this is enforced with source code, not with the subversive legal system.

So why Bitcoin came to be and why it is not a fad ?
First, a fad is fired by a marketing budget too fat for a product. Bitcoin started from 0.
Secondly, early adopters jumped in the boat for ideological reason more than speculation and fashion.
Third, we will not deny that it is in the human nature to find the most economical way of achieving its purpose. Small payment commission is not the real reason behind Bitcoin adoption, we must admit that the fiscal incentives play a way bigger part. Powerful economic incentives drive adoption.

The ideological reason of using a new money for transaction which is not controlled by any government or central bank that act for its self-interest is the prime motive for Bitcoin usage.

Why is it important ? As I will explain in future post, Milton Friedman explains how the FED did not saved the great depression, contrary to what we learned, but created it.
Intentionally or not, the main conclusion we should draw is that by giving too much power to a central body, a failure of that body will ripple through the whole system. 

"A system that depends on the right person to works is not a good system."

"We will not solve our problem by electing the right people. We will only solve our problems by making it politically profitable for the wrong people to do the right thing"
These quotes from Milton Friedman. 

For the believers, Bitcoin is a way to take that centralized power off the hand of a few, and back in  hands of merchants.

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