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Brad Feld had a very interesting post about Bitcoins and Fred has been a fan of Bitcoins. Given that I was working on my PhD in Economics it was only a matter of time before you heard about my 2 cents 🙂 just kidding about the Economics part… I valued the learning and relationships and network but application of those principles in real life always falls short of anything useful. I apologize to all my Economics Professors, as one say  “Its not you… its me” problem. Lets define what is desirable in a medium of exchange, we don’t have to re-invent the wheel on this we can logically determine what are the characteristics of a good medium of exchange…

  1. Needs to be accepted by providers of value i.e I should be willing to denominate any good or service that I provide in that medium of exchange a.k.a currency
  2. Needs to be able store its value as a self contained unit with someone backing the value, in market terms a market maker i.e someone willing to buy it from me for something else of value at all times (BTW, that is one of the big functions of Central Banks we can argue until cows go home whether it is right or wrong). Market makers provide liquidity to the system. Unfortunately self governed systems seem to lock up when there is trading frenzy. The last sentence in itself warrants a blog post and several books have been written explaining this.
  3. Needs to be portable, transferable and safe… ie not lose its value due to external factors. This is the hardest one to maintain because value and safety are functions of resilience and foundation.

There are lot more, like it needs to be divisible, available, transportable etc but for me the above 3 are very important. Given these things do I believe Bitcoins can live upto it? yes it is possible but in the near future not really sure. I think the problem we have is Bitcoin has become a medium of speculation rather than a medium of exchange. I think speculation is not a bad thing but if that is driving the frenzy then it violates the 2 characteristic that I listed above. No-one would be talking about Bitcoins if its value has not be gyrating like a giant seesaw. I think the crowd mentality to follow this “frenzy” is crazy, reminds me of the dot com bubble and then the financial crisis. I like Warren Buffet‘s response

@beckyquick tweet

I have never understood the speculation on Currency because that usually does not create any value and if one has market moving capabilities like Fred Wilson or Brad Feld, maybe they can create value out of this. IMHO, they are not interested in the speculative nature of Bitcoins but more the reason to reduce friction on the transactions on the internet. When one looks at Bitcoins as a way to disrupt the online transactions market it makes a lot of sense. As anyone who has sold anything on the internet can tell you the transaction cost per transaction is quite high until you get to scale because the ultimate settlement is still done the traditional way. I shake my head everytime I am charged $25/wire transfer by Bank of America online banking. Makes no sense! Bitcoins and other ways of facilitating online transaction that reduces friction is of considerable value and they basically can disrupt the strong hold held by transaction settling companies like Banks and Credit Card providers.

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