On the legitimate use of bitcoin

6 min readDec 27, 2017

Recently some highly recognized economists like Robert Stieglitz, Nouriel Roubini and Paul Krugman made a bunch of derogatory comments about bitcoin:

“Bitcoin Is Evil”
“Bitcoin ‘Ought to Be Outlawed,’ Nobel Prize Winner Stiglitz Says”
“Bitcoin is A Giant Speculative Bubble”
“Crypto Fool’s Gold”
“Yellen Says Bitcoin Is a ‘Highly Speculative Asset’”

Why? Most likely because the establishment hates innovation.

I also assume that these respected people are completely uninformed about the blockchain technology and I would recommend that they take for example this course at Coursera: “Bitcoin and Cryptocurrency Technologies”

The good point: if so many “famous” people speak negatively about something, then this must be the biggest opportunity we have seen in life.

One could argue that these professors and intellectuals are obsessed with central banking and central banking money value manipulation. This approach would not work with bitcoin which shares some characteristics with gold, i.e. is rare and cannot be supplied in arbitrary quantities. Bitcoin in essence means independence and the establishment usually hates independence. Most intellectuals are obsessed with orthodox thinking.

Now, I do not know where bitcoin is heading and I do not know in what form it will become useful. But I also know that without tinkering and without crazy ideas the world is not moving forward. I do not recommend buying bitcoin — but go and create a useful application which relies on the blockchain technology.

The mainstream financial media seems also not so much in favor of bitcoin when you read headlines on Bloomberg & Co like the following. I will update this list in the future because the amount of articles on bitcoin in late 2017 is almost exploding. So, how can something completely useless make so much headlines?

When there is a bubble, there is not a bubble about bitcoin but a bubble of reporting. Why do some financial news organizations create hourly headline updates about the latest exchange price movements of bitcoin?

First and foremost, bitcoin is a digital asset. And it has many potential practical applications. In principle you can do with bitcoin in the digital world everything you can do with gold in the real world. And more. The advantage of bitcoin is that for many transactions the middle-man is eliminated, and it therefore has the potential to bring banking to many poor people and countries in the world. It is borderless and a sign of true globalization.

Some useful, potential applications:

In an environment in which poor people trade by exchanging goods and services bitcoin can be used as a cheap store of value. The exchange rate of bitcoin to the US dollar or other currencies does not matter here because people use bitcoin primarily to keep track of the value of a series of transactions. (More generally speaking, no ordinary consumer in Switzerland, for example, worries about the exchange rate of the Swiss franc to some other currency). Bitcoin is the natural solution for a store of value in a digital barter economy.
Bitcoin can be used for efficient, international money transfer. If someone from Mexico or Colombia, for example, works in the US and wants to transfer money back home to his or her family, bitcoin is a simple solution.
In advanced economies bitcoin can be used as a new asset class to diversify one’s portfolio. The supply of bitcoin is finite and there is a certain amount of energy and resources needed to mine it, hence there is a natural price floor for it.

In terms of “team development” language bitcoin is currently in the “storming” phase. The current, huge price swings of its exchange rate to other established currencies is a symptom of this. But that doesn’t mean that some equilibrium price will be found in the future. As said, mining bitcoin does not come for free and this establishes a lower price bound. Many critics argue that the current “valuation” of bitcoin is too high. On the other hand many alternative assets in 2017 are also comparatively expensive. Or why would you pay 180M USD for Picasso’s “Les femmes d’Alger”?

It is fascinating to witness a phase of self-organization: there is no central authority of bitcoin, nevertheless the market somehow seems to organize itself. It is like the birth of a child, being build out of a single cell and its DNA blueprint.

To hear that bitcoin’s main use case is about the support of the underground economy is a symptom of the backwardness of regulators. Bitcoin’s transaction history is visible for everyone. Yes, it allows for multiple identities, but once you identify yourself by converting bitcoin into some real-world cash or by buying real-world goods and services your complete transaction history is transparent. New forensic tools are needed, for sure, but it is the inevitable consequence of technological development.

What is disappointing and what I miss from people like Stieglitz & Co is a thorough analysis about what is the fair price of bitcoin today, what drives the current exchange rate, how should bitcoin exchanges be regulated, what is the distribution of current use cases of bitcoin et cetera. So please: but your orthodoxy to rest and start working!

I expect to update this blog many times in the next year, here is a list of links for starters to dive into the blockchain community. It is hard to predict how this self-organizing system called “bitcoin economy” will evolve — hence we needs to keep our eyes wide open.

On the legitimate use of bitcoin

Written by Dr Marius Sdl