Both-Pilled by Bitcoin

Have you ever heard the bold claim that “Bitcoin replaces the banks” or even more radically that “Bitcoin replaces fiat?” altogether?

If you’ve had even moderate exposure to the maddening world of Bitcoin and the wild west that it birthed, then chances are you will have seen many vocal advocates making their case to this effect.

“In five years, if you try to use fiat currency they will laugh at you … there will be no reason to have the fiat currencies.”

— Tim Draper (2017)

The allure of this mindset is powerful. Out with the old, in with the new! Let’s do away with everything that came before and set up shop in the flashy new red-pill citadel of Bitcoin. I’d be lying if I didn’t admit that I was suckered in by this thinking too, for a brief time.

But one thing missing in this simplistic narrative is, of course, nuance.

It’s an absolutist, binary view of the new monetary landscape, and one that has no room for coexistence or harmony. And if your love of Bitcoin is based purely on the idea of railing against the incumbent financial system, then I’m afraid you might be barking up the wrong tree. In fact, this misses the point entirely.

Rather than just seeing Bitcoin as one of two incompatible financial systems, either of which you must choose and fight for, you can think instead of Bitcoin as lighting the touch-paper on the rapid expansion of consumer choice when it comes to money.

It’s not about making one choice. It’s about everyday?freedom?of choice.

The ‘Opt-out’ Fallacy

Previously, I wrote about how?competition is central to Bitcoin’s past and future success as a project.

This covered how Bitcoin nodes compete with one another to produce blocks (intrinsic competition), and how Bitcoin itself competes with other blockchain networks for market dominance (extrinsic competition).

Competition, in both forms, is found throughout Bitcoin and its infrastructure:

• Nodes compete to produce each block.
• Nodes compete to provide the lowest transaction fees.
• Bitcoin companies compete to provide the best interfaces to Bitcoin data (e.g. block explorers, social media apps, and exchanges).
• Bitcoin companies compete in industries they are disrupting.

But one aspect that I failed to mention was how Bitcoin competes with the incumbent financial system — an additional form of extrinsic competition.

This particular competition is the one that is being oversimplified by the vast majority. But it’s also the one that works in favor of us, the actual?users?of Bitcoin.

The prevailing wisdom is that, by choosing to put your wealth in, use, or advocate for Bitcoin, you are effectively ‘opting-out’ of the traditional financial system.

Often, the precise motivation for this line of thinking will vary. For many, it comes from the fear of fiat currency inflation; a valid issue that was magnified by the?events of the last year. While for others, the aftermath of the 2008 banking collapse provides a convenient backdrop for the belief that Bitcoin is a reckoning for greed and gambling in financial services.

Many of these reasons hold water, and I wouldn’t be one to dismiss them in their entirety. But to use them to motivate an outright overhaul of the whole system is not necessarily the correct response. And more important still, it just isn’t what excites me about Bitcoin anyway.

Instead, I believe that Bitcoin is?not?going to be a wholesale replacement for fiat currency, or indeed the banking system, and that neither was it ever intended to be.

The first part of this claim is fairly easy to swallow; it’s pretty much common sense. No matter how successful Bitcoin becomes — and it has?grown to a significant status?already — it’s a pretty safe bet that at least some countries, with the strongest economies, will always want to hold on to their own form of fiat money.

Whether it be for sheer independence, or the need to enforce monetary policy, it’s a fair assumption that this won’t change on any timescale that concerns me.

As for the claim that Bitcoin was never intended to ‘replace’ other monies or currencies? We can look back to the origins of Bitcoin for some hints here, too.

“While the system?works well enough?for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

— Satoshi Nakamoto [2]

The phrasing here is telling. Bitcoin was designed with a clear use case in mind; low-value payments that suit online interactions. A native currency for the Internet,?as many have put it.

Nakamoto seemed to think that the incumbents could handle everything else ‘well enough’, which doesn’t quite match the war cries to tear down the system and replace everything with Bitcoin.

Choosing to use Bitcoin clearly doesn’t have to mean?opting-out?of the fiat world. There are plenty of good reasons to keep using dollars for many things in life, and Bitcoin doesn’t change that fact.

What Bitcoin does provide, however, is a?credible?alternative?that I can use as and when it suits me.

Sure, this sounds pretty boring and isn’t particularly sensationalist. But it’s accurate, and it’s incredibly powerful.?This alternative hasn’t really existed before; the ability to transfer virtually any amount of money at near-zero cost anywhere in the World is what Bitcoin can enable, and this is a major advantage it has over traditional fiat and its monopolized payment rails.

In fact, Bitcoin has at least three distinguishing benefits over our existing monetary systems:

• Cost?— it is cheaper to use (when done right);
• Transparency?— activity within the system is visible; and
• Consistency?— monetary policy (i.e. supply) is predictable.

The Internet was?built with micropayments in mind, but Bitcoin also has huge potential in reducing friction and cost in the real world. Ever been slapped with a minimum card spend at a local shop? This is just one more problem for which Bitcoin presents a viable solution.

But for each problem Bitcoin does solve, there will always be caveats. Perhaps the merchant loves the idea of reduced card payment fees, but does not want to be subject to Bitcoin’s infamous volatility, or to have to worry about securing his funds properly?

The point is that the merchant now has?a choice?between these two sets of tradeoffs. Before, they had no choice but to take regular card payments and be subjected to extortionate fees and minimum spend constraints.?Now, they have the option to accept Bitcoin, if the cost-benefit analysis of doing so seems to work in their favor.

Just having the option to weigh up the pros and cons of using Bitcoin vs fiat money is a revolutionary notion. It's an analysis that you might do for brick-and-mortar purchases, savings, or online purchases, and to each person the analysis yield a different result.

But the very fact that we now have a viable alternative to even compare against is what’s truly groundbreaking.

A New Frontier in Commerce

The impact of Bitcoin on existing payments systems is fairly easy to see and understand. Most of what I’ve talked about so far is about the more obvious effects of increasing freedom of choice in money.

But what’s not so clear-cut is what unforeseeable changes might result from the advent and growth of Bitcoin.

There are dozens of new business models that are already being trialed and tested as a direct result of Bitcoin’s creation. Many of these tend to involve either monetized micro-actions or real-time payment streaming.

Both of these modes for transferring value have potential applications in everything from social media to video broadcasting and likely many other areas we are yet to conceive of. Both are also uniquely empowered by Bitcoin and were widely considered non-viable models until now.

This is once again a matter of choice, and the freedom to exercise that choice in experimenting with new business models and the creation of entirely novel markets.

Without Bitcoin, it simply wouldn’t be possible to challenge the existing status quo in consumer habits.

Take Netflix or Spotify for example. Platforms like these have popularised subscription-based models for providing media content to users, so much so that we are still?increasing our subscription-based spending?each year. But, have you ever found yourself checking your bank statements to find you’ve been billed for a subscription you hadn’t used for months?

If so, you might then find yourself asking the question:

Wouldn’t it be better to only pay for what I use, when I use it?

Being able to answer that question, however, is not something we could have easily done without Bitcoin. What alternative means of payment could have allowed pay-as-you-go streaming services before Bitcoin?

The important point is that we are now beginning to explore and answer these questions. We now have the means to test the waters in saturated and bloated markets to find inefficiencies and improve them. And Bitcoin may not always be the right choice!

In some areas, we might find that the existing systems we have work ‘well enough’ too, and aren’t quite as ripe for disruption as we might expect.

But in many other instances, we may instead find that Bitcoin offers a truly compelling alternative, either by reducing costs, improving efficiency in value transfer, or by opening up a previously untapped market.

In either case, it is again the fact that we have the choice between two different paradigms that are helping to answer these questions and discover the best possible solutions to our problems. And even when the optimal choice between Bitcoin and an older system may not be obvious, the very existence of Bitcoin as an alternative can provide a competitive force that encourages the incumbents to innovate and improve to stay ahead.

Rather than replacing stagnant legacy systems, Bitcoin can simply provide the impetus to improve them.

As Uncle Ben’s famous comic book saying goes, “with great power comes great responsibility”.

Bitcoin is brilliant, and, if you really wanted, you could almost certainly hit the rage-quit button on fiat money and go completely Bitcoin-native. But that might also mean you need to take complete responsibility for securing and monitoring your own assets in a way that the old financial world wouldn’t.

To me, there’s really no need to take such a binary stance on Bitcoin.

Why just take the red pill, and undergo a radical conversion to the ways of Bitcoin-maximalism, when you could enjoy the best of both worlds?

[1] TecraCoin,?What is Genesis Block, and why Genesis Block is needed??(2019)

[2] S. Nakamoto,?Bitcoin: A Peer-to-Peer Electronic Cash System?(2008)