Quantcast
≡ Menu

Bitcoin: The Financial Singularity is Here

Growing bitcoin graph conceptI have to admit – I was a total bitcoin skeptic. But after spending several months learning about cryptocurrencies I have come to believe that bitcoin is the financial singularity – the most disruptive technology of our present day beyond whose event-horizon human affairs as we know them – be it financial or otherwise, will be fundamentally transformed.

Why I was a skeptic

“Bitcoin is fake money used only by criminals, libertarians and anarchists” – reported the media.

Bitcoin Is Evil” – opined Nobel-prize winning economist Paul Krugman.

I want Bitcoin to die in a fire: this is a start, but it’s not sufficient” – finished it off Charlie Stross.

So how can anyone not be a skeptic?!

And so I was – the media reported it, the experts condemned it, one of my favorite science fiction writers wanted it dead – case closed!

Or is it?

Let me share with you why I believe bitcoin is the financial singularity. And then judge for yourself.

What is Bitcoin?

The most fundamental document about bitcoin is Satoshi Nakamoto’s break-through white paper Bitcoin: A Peer-to-Peer Electronic Cash System.

After we lay out the technical foundation it is important to recognize and differentiate between bitcoin – the currency, and bitcoin – the technology.

Bitcoin – the currency, is simply cash for the internet. It does not have any intrinsic value of its own and is not backed by a government. [Like AI, it is backed by silicon ;-]

It is technocratic, predictable, scientific, non-reversible, mathematical currency, traded via a decentralized trust network of payments, and using distributed “proof of work” report, stored in a database called the “blockchain.”

Notably, as far as currencies go, bitcoin is arguably the most successful i.e. the most valuable currency because, at the moment I am writing this article, 1 bitcoin is traded for over 640 US dollars. [And I don’t know of any other currency that is as highly valued as that.]

But bitcoin – the currency, works because of bitcoin – the technology. And the technology has three main features:

1. It is decentralized – no single person, organization or government does or can control it.

2. It is pseudonymous – transactions are conducted under a pseudonym i.e. a fake name. [As opposed to anonymous – without any name.]

3. It has near zero transaction cost and it doesn’t matter whether you send a penny or a billion, the transfer fee is the same.

Libertarians, anarchists and criminals are allegedly the groups most concerned with the first two features. Most people, however, don’t really care about those. But everyone cares about the last one – near zero transaction cost. Whether you are a private individual sending money to your parents, a not-for-profit NGO collecting donations, or a multi-national corporation – everyone wants to diminish transaction fees as much as possible. And so, it is the third killer-feature that arguably is and will continue pushing bitcoin – both as currency and as technology, from the extreme into the mainstream.

I also need to stress that other cryptocurrencies can be built upon and use, in part or in whole, the bitcoin technology – as they have been. Those are usually referred to as altcoins. [e.g. NXT.]

It is for that and other such reasons that Andreas Antonopoulos often says that “Bitcoin is not currency; it’s the internet of money!

What are the problems that Bitcoin solves?

Bitcoin solves 3 major problems:

The first one is the so called double-spending problem. Put simply “double-spending” results from the fact that, in contrast to physical goods, digital files can be copied infinitely. This means that if I get a single digital coin there is nothing preventing me from copying and spending it a million times. Traditionally this issue is resolved by trusted third parties such as government institutions but bitcoin does it via “an electronic payment system based on cryptographic proof instead of trust.”

The second problem that bitcoin solves is getting a bunch of people who don’t know and don’t trust each other to agree on a transaction. Mathematicians refer to this as The Byzantine Generals’ Problem. [Imagine a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.]

The last one is the traditional transaction cost problem. Unless you are a mathematician or a cryptographer, you may fail to appreciate the elegance in Satoshi Nakamoto’s first and second solution. But his mathematical and cryptographic break-throughs result in the resolution of the problem we all care about – near zero transaction cost.

Bitcoin is disruptive

“Give me control of a nation’s money and I care not who makes it’s laws” said Rothschild.

The power to control the supply of money has been the prerogative of the state [or the sovereign of the realm] for thousands of years. Bitcoin stabs at the very heart of that center of power. Taxation and the maintenance of an army are derived from the ability to control money. Without taxation and/or an army the state cannot exist.

By decentralizing the ability to control money, bitcoin undermines the very foundation of the state as an institution. And, consequently, the whole concurrent international state system. It is for this reason that Charlie Stross wrote 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.”

Now, if you are an anarchist or libertarian the above agenda suits you just fine. But, if like Charlie Stross [or me] you are not, then you are likely to oppose bitcoin on ideological grounds. [Just like libertarians support it for their own ideological reasons.] Ideology aside, I think we can agree on the profound long-term effects that bitcoin is likely to have – not only on the state as an institution, but also on the whole international system.

Just like snail mail was disrupted by email, old-fashioned money will be disrupted by bitcoin.

But ask yourself what is more important in your life – money or email? If, as I suspect, it is money, then consider how the world has changed since the invention of the internet and email. Realize that bitcoin is both: as a currency bitcoin is the first app – just like email was the very first killer-app for the internet; as a technology bitcoin is a platform – just like the internet, its impact will span way beyond that of its first app i.e. email, in ways we cannot foresee from this side of the event horizon. Still, it is not too big of a stretch to guess that its impact will include, but will not be limited to, the current banking, payment, legal and voting systems. It will necessitate a total re-think of our whole concept of money and, consequently, the economy, governance, law and politics…

Bitcoin: the financial singularity is here

By now it should be clear that, after bitcoin, the world will never be the same. But, similarly to AI, it is hard to foresee whether bitcoin will be good/bad or the end/the beginning of civilization. Yes, you will find the full spectrum of ideological opinions on the topic. But the reality is that the proof is in the pudding and right now we simply don’t know; we can’t know. That is why it is a singularity.

Bitcoin may be the beginning of a new socio-economic system unlike anything we’ve seen so far – one that we can’t possibly imagine from this end of the black hole. Or it could simply be the end of the current system resulting in chaos and anarchy – a disturbing alternative not only for Charlie Stross and Paul Kurgman. The good news is that we are having a soft take-off of this financial singularity and the slower pace of change ought to give us a better chance to understand, steer and adapt to the bitcoin world. No, bitcoin is not perfect – it is hugely disruptive and will likely precipitate a crisis in most realms of our civilization. But our current economic and monetary system is very far from perfect either. And we know it is not going to change from the top down. That is why I prefer to focus on not wasting this opportunity to create a better future, rather than fight it. [After all, a crisis is a terrible thing to waste.]

To sum it all up, in my opinion bitcoin is here to stay – in what shape and form – I can’t really say. I am not sure if bitcoin – the currency, will survive. But I have no doubt that, in one form or another, bitcoin – the platform, will prosper. And thousands, perhaps millions of cryptocurrencies are going to be a major part of our future. [Maybe I will launch a singularity coin ;-]

Though it is unlikely to replace the American dollar any time soon, bitcoin may well end up replacing smaller, more volatile currencies such as the Argentinian pesso or the Zimbabwean dollar. Though it may not replace the banking system any time soon, it may provide a financial framework for the billions of people not able or eligible to use a bank. Thus bitcoin doesn’t have to replace entirely the current system to be successful. But it will make it less and less relevant.

***

It will take some time before the dust settles and we can start seeing what it all ads up to and begin weighing the consequences. But if bitcoin does not work – people will lose money. If it does work it will change the world as we know it.

I myself am convinced it is the latter. And whether that change is for the better is up to us. So let’s not stand as mere spectators while history is made in front of our eyes. Let us roll up our sleeves and build a better future, better you!

Like this article?

Please help me produce more content:

Donate!

OR

Please subscribe for free weekly updates:

  • DigiThink

    Very interesting article… You are going down the path many sceptical did… Join the 10 %: http://news.rpi.edu/luwakkey/2902

  • “Though it is unlikely to replace the American dollar any time soon, bitcoin may well end up replacing smaller, more volatile currencies such as the Argentinian pesso or the Zimbabwean dollar. Though it may not replace the banking system any time soon, it may provide a financial framework for the billions of people not able or eligible to use a bank. Thus bitcoin doesn’t have to replace entirely the current system to be successful. But it will make it less and less relevant.”

    The “any time soon” in a contest of exponential change is tricky.
    As Bitcoin replace weaker currencies first, all around the world the need of US$ will reduce drastically because they will not be needed to settle international payments.
    This will make the US$ weaker, a lot weaker, and will push more people in the US (and EU and Japan and China) to adopt bitcoin as a medium of exchange and store of value. In turn, all of this will increase the value of using bitcoin and reduce the value of using the traditional banking system and the USD.

    This is a positive feedback loop and larger it become faster will grow.

  • Great singularity perspective Nikola, thank you for opening my eyes to my blind spot: I have been resisting this area. In one concise article, you have moved me from in action to opportunity. Great related articles too. This is an important topic that London Futurists are interested in and talking about – Thanks to David Wood for messaging us.

  • Steve Morris

    Bitcoin has been looming larger and larger on my radar and has now, in the last month, reached the point at which I can ignore it no longer. Suddenly I am reading Bitcoin articles everywhere and have read up on it myself. Can’t say I understand it completely, but it seems to be gathering real momentum. As someone with strong libertarian leanings, I hope that it could one day knock down central banks and their unhelpful meddling in markets. When they are gone everyone will wonder what good they ever did.

  • proto

    “Though it is unlikely to replace the American dollar any time soon,
    bitcoin may well end up replacing smaller, more volatile currencies such
    as the Argentinian pesso or the Zimbabwean dollar.”

    It’s “peso” (ARS). I’d like to point out some reasons why Bitcoin will NEVER be replacing ARS.

    * Argentina has a considerably slow percentage of computer-literate citizens, who are mostly mobile users – there’d need to be a massively adopted mobile platform for Bitcoin payment, there should be arrangements with banks and credit card companies to accept Bitcoins and also with big and small

    * Bitcoin total amount (I think it was 16 million) won’t be enough for even a year’s worth of national taxes, total incomes, earnings, etc. If I recall correctly, Satoshi said there wouldn’t be more Bitcoin production in the future.

    * Given the recent developings involving Argentina’s vice-president and the currency printing scheme fraud, it will be impossible for people to trust ; government will always find a loophole to exploit it. Also, what sane gov’t would use an infrastructure they can’t control?

    * Argentina has not even the 10% of its GDP in form of non-tangible assets (digital, in this case); if we lack infrastructure (and possibly knowledge) for the most elementary intangible internal incomes (government’s apathy about it being the main culprit), one couldn’t expect nothing but rejection to the idea of a digital currency replacing a physical one .

    Source: I’m Argentinean.

  • You are most welcome Mark – I am very happy that you find it useful and motivating because that is why I do what I do 😉

  • Pingback: Vitalik Buterin on Singularity 1 on 1: Ethereum is a Decentralized Consensus Platform()

  • Pingback: Arthur Traviss Corry on Singularity 1 on 1: Give Bitcoin a Try!()

  • augieray

    I am still a skeptic of the currency (not the technology). I appreciate the thoughtful article, but despite having read quite a lot, I am always left with the same thoughts:

    1) Since cryptocurrencies can be endlessly created, there is no fixed supply and hence no stable value. To use a physical metaphor, if today shops accept shells and I collect shells, but tomorrow the shops decide to accept coconuts too, then the value of my shells is reduced. US dollars and other currencies hold value because there is a reasonably limited and controlled supply, but every time I turn around there’s a new cryptocurrency–Bitcoin, Namecoin, Dogecoin, NXT, Betacoin. If there is no limit to the types of cryptocurrencies, then no one cryptocurrency can reliably store and hold value. Imagine if US dollars could simply be printed at will, and you get the idea of the challenges of cryptocurrencies that can be created at will.

    2) To me it is a red blinking light that something else is going on other than the “internet of money” that every article seems to trot out the Libertarian BS about armies and governments controlling the money supply. First of all, this factually untrue in the US. The Fed controls the money supply, and while it is influenced by government officials, it demonstrably has its own mind. (Many presidents have been angered that the Fed won’t expand the money supply and lower interest rates, but the Fed does what it wants.)

    Also, it is not government’s ability to “control” money that gives them the opportunity to tax and maintain an army; it is their ability to set laws governing commerce that do so. The US government can just as easily tax Bitcoin commerce as it does US dollars. If block chain ledgers are available for anyone to examine, the US government can track Bitcoin, and even the pseudonymous nature seems a minor inconvenience for government tracking. Increasingly, governments are requiring exchanges to collect personal information, and it seems to me Bitcoin is no more anonymous than most other forms of digital transactions.

    Of course, government regulation of Bitcoin depends to some extent on people following the laws and reporting such transactions, but the same is true today even with dollars. HSBC was fined for money laundering because it did not follow US laws–the bank didn’t need to rely on cryptocurrencies to do it, nor did the US government need to “control” currency to discover the violation and enforce a penalty. Bitcoin no more undermines the US government’s ability to tax than does Mexican pesos or Euros (which can be used to transact business without US dollars.)

    The key to Bitcoin, as you point out, is the tech, not the currency. I still think Bitcoin is a lousy currency, but Bitcoin is a very interesting technology for transferring value. Bitcoin’s lack of stability may undermine it as a store of value, but if two parties want to transfer value today, the lack of stability need not be a concern in this moment–they can transfer money with minimum fees and then convert the Bitcoins immediately to alleviate the risk of rapidly shifting values.

    In this way, it truly does challenge banks and money transfer firms. But while banks may have their fee structure challenged, they can also avail themselves of cryptocurrencies to avoid fees themselves? Couldn’t BOA create BOAcoin to transfer money globally and avoid any fees they might otherwise face? In fact, with the competition for mining being so great that people cannot even cover the cost of their electricity without specialized hardware, couldn’t banks themselves be in a great position to out-mine everyone else and earn the fees for themselves?

    Sorry for the length of this comment, but your article got me thinking. I still fail to see how cryptocurrencies can ever be sufficiently stable to act as a true currency for the masses, but the technology should be game changer for some financial service firms.

    Disclosure: I work at a credit card company within customer care. I have nothing to do with products or money transfers, and my opinions and questions do not reflect those of my employer. These comments and questions are my own personally as I seek to learn.

  • Disqusser

    I disagree with your first statement; *any* currency can be created at any time, this is not something that is unique to cryptocurrencies, and it does not directly devalue any existing one. The value of the currency lies solely in the trust and use of it, not in its uniqueness.

    I do agree that a government’s power is given by its ability to control the currency, it may even be the other way around for most existing currencies. Indeed, taxes, and spending choices are orthogonal to what currencies are in use. The limited control they do have is to print extra or less to influence the economy, but most of that control has been given away decades ago anyway.

  • Andrea

    How does one go about acquiring bitcoin dollars ?

  • You can sign up for an account with a number of bitcoin exchanges such as https://coinbase.com/ or https://www.bitstamp.net/

  • Andrea

    Thank you, Socrates

  • Mark Larkento

    Great comments, Augie, and worthy of further discussion.

  • Pingback: Jerome C. Glenn on Singularity 1 on 1: Science is an epistemology in the house of philosophy()

  • Thanks very much for your comment friend!

    Let me see if I can address briefly your points:

    1. Both cryptocurrencies and government issued fiat currencies can be “endlessly created.” This does not mean that they will be. And so while some governments keep printing money others are more capable of resisting that temptation. Furthermore, one of the main differences here is that the money supply of a cryptocurrency can be “locked in” by design before it has been issued and cannot be easily changed thereafter. So in a way, cryptocurrencies can be made to be less pliable by short-term thinking and selfish politics.

    Now your point that the variety [i.e. number] of currencies can explode without a check is valid. But as you point out this will not make any of them valuable on its own. In fact, value will come by demand and that means only some of those cryptocurrencies will actually have value, not all. Very similar to our global fiat currency situation.

    2. While I can agree with you that the US Fed is not bound to do the government’s bidding, it is a centralized institution which does control the supply of money and thus have a huge impact on everything that happens within the US and abroad. [see again the quote from Rothschild…] The main difference here is that with bitcoin once a currency is issued no one will be in charge to do anyone’s bidding. And that is a big difference.

    3. Yes bitcoin is pseudonimous and the the government can start taxing it. But ability to enforce much on the blockchain is very limited and the government cannot seize accounts and/or prevent or reverse transactions as it can within the current banking system. So for example, currently if you live in the US you must use US currency. It is for this reason that the Mexican peso or the euro make no difference for the US – because US citizens are pretty much forced into a currency monopoly controlled by the state. But in the long run bitcoin currencies may end up providing an easy and useable alternative so that people can sell their US dollars for bitcoins and this will have a huge impact on everything. That is big difference that has impact on its ability to tax. So yes, currently bitcoin is no more threatening than the Mexican peso or the euro but, since it is not a foreign fiat currency controlled by a foreign government, it may well end being a threat.

    4. As a store a value bitcoin is rather unstable but as adoption grows those fluctuations will be dimished as a percentage of the value lost or gained. This is also often a feature of newly issued government currencies which take a while to gain acceptance, adoption and reputation.

    5. Yes, the BofAmerica can issue its own coin – just like anyone else. So the make-or-break detail here is how sought after i.e. what is demand for it. If they manage to convince and/or incentivise enough people to use it they can be successful indeed. But it easier said than done. As per your mining point we covered that issue during my interview with Andreas Antonopoulos, so check it out if you haven’t done so already: https://www.singularityweblog.com/andreas-antonopoulos-on-bitcoin/

  • augieray

    Thanks Socrates. You and I are not on the same page, but I appreciate the discussion. My thoughts:

    1. Fiat currencies MAY be endlessly created, but central banks manage growth. Such is not the case for cryptocurrencies–while each grows at a predetermined pace, the NUMBER of cryptocurrencies can (and has) grown exponentially (which brings me back to my original point about unlimited virtual currencies undermining value.)

    2. You are correct that cryptocurrencies are at no one’s bidding while the supply of US dollars can be manipulated. That, in and of itself, means nothing however. You have to look at HOW the Fed manages it. Most economists believe they have done so quite well–lowering rates & increasing the supply as the economy falters and raising rates and limiting the supply as inflation rises. Bitcoin could, with enough adoption, prevent central banks from evening out the economic cycles, which doesn’t seem like a benefit to me.

    3. People in the US will ALWAYS need to convert bitcoins back to dollars since that is the official currency for paying taxes. Fed, state and local taxes account for 30% of income, so the idea Bitcoin will be held for transactions like dollars are today seems impossible to conceive, and whenever people need to convert bitcoins back to dollars, the government has ability to seize and prevent transactions.

    4. Your dream of mass adoption of bitcoin is nowhere to be seen. The number of daily transactions has been essentially the same for over ten months (https://blockchain.info/charts/n-transactions). With no growth, there is no way for bitcoin to stabilize. And to the extent many people are treating it like a speculative investment and not a currency, this volatility will continue. We are a long, long way from Bitcoins being adopted as a currency for transaction by anywhere near the number of people necessary to bring stability to the currency.

    5. So, who do you think will have an easier time creating cryptocurrencies and encouraging adoption? A shadowy bunch of speculators telling everyone they’re going to get rich (if they’ll only buy the currency so the price will rise and those same promoters can cash out) or a national bank regulated and secure? You may answer one way, but most people without the Libertarian streak that is driving bitcoin fans will likely answer another.

    6. Thanks, but I’m afraid I don’t have 85 minutes to give up right now. If you have something you’ve written that makes your point about mining, I’d certainly be interested in a link for a quick read.

    Thanks. There is much to learn here, and while I think the technology will bring great things (as you point out with your “Internet of money” quote), I don’t foresee the currency itself gaining the adoption necessary. But, I could be wrong–time will tell!

  • Pingback: Designing AI Infrastructures that Sustain the Human Race()

  • Pingback: Does Evolution lead to Singularity?()

  • Pingback: What is SolarCoin?()

  • Pingback: On voluntary taxation or what could also be called “P2P taxation” or “emergent swarm taxation”()

  • Pingback: David Orban Explains the Bitcoin Singularity | Coins Market News()

  • Pingback: Nick Gogerty on SolarCoin: Think Networks and Adaptation()

Over 3,000 super smart people have subscribed to my newsletter: