The recent drop in bitcoin price has given ammunition to bitcoin skeptics. But this weekend, readers of The Wall Street Journal got a long-term perspective on bitcoin with an essay titled, “The Revolutionary Power of Digital Currency.” The essay sported a dazzling illustration showing of the headline bursting out from an unzipped leather wallet.
A side note advised readers the 2,472-word essay by Michael J. Casey and Paul Vigna is adapted from a new book by St. Martin’s Press. The book is titled, “The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order.”
The essay notes that while bitcoin is only six years old, and critics are already calling it dead, such predictions miss an important point. The technology underlying bitcoin will become more influential as developers create newer, better versions.
Bitcoin critics are not without cause for concern, the authors state in the first paragraph. They cite the half-billion dollars’ worth of bitcoin lost from an online Tokyo exchange; the arrest of the vice chairman of a bitcoin trading company on drug-related charges; and a recent warning to investors by billionaire Warren Buffet.
But these concerns do not change the authors’ view that bitcoin “is a radically new, decentralized system for managing the way societies exchange value. It is, quite simply, one of the most powerful innovations in finance in 500 years.”
Why the Naysayers?
The authors give insight into what might be motivating some of the bitcoin naysayers: the bitcoin model could slash trillions in financial fees, eliminate work done by payment processors, and cut into legal and accounting fees. In other words, by disrupting the global economy’s status quo, many parties stand to lose.
Bitcoin’s flaws include wild price fluctuations, vulnerability to hacking and an attraction for drug dealers, the authors note. “Until these perceptions are overcome or bitcoin is replaced by a superior digital currency, the public will remain suspicious of the concept, and regulators will be tempted to quash it,” the essay states.
Charles Dixon, a partner in the venture capital firm Andreessen Horowitz, is quoted as saying that probably 10,000 of the best developers around the world are working on bitcoin. The improvements are expected to make bitcoin wallets more secure and insurable.
For readers less familiar with bitcoin, the authors explain the key differences between established currencies. Bitcoins exist only as entries in an accounting system, known as the “blockchain” that records balances and transfers among bitcoin “addresses.”
The authors then demonstrate how a bitcoin transaction for a cup of coffee is more efficient and less expensive than a credit card transaction.
The credit card transaction involves: a billing processor; a card association (Visa, MasterCard, etc.); the customer’s bank; the merchant’s bank; a payment processor; and a clearing house network managed by the regional Federal Reserve Banks.
The credit card transaction takes two or three days and a merchant fee of between 2 and 3 percent. The bitcoin transaction includes almost no fees and takes seconds to complete and 10 minutes to an hour for the bitcoin miners to update their blockchain records.
Bitcoin in Emerging Economies
Bitcoin’s advantages are particularly visible in emerging markets where under the current financial system migrant workers can pay 10 percent or more in transaction fees for international payment services, the essay notes.
While bitcoin has some issues, the authors remind readers the same holds true for the established banking system that began in the late 1400s: bank failures.
In explaining bitcoin, the essay reviews some economic fundamentals, noting that “money is an all-encompassing, society-wide system for keeping up with who owns or owes what.” It notes that the bitcoin blockchain offers “an online, decentralized and fully public mechanism for recording those shifting balances.”
The essay also points out the interest that bitcoin has attracted from Internet pioneers: Netscape founder Marc Andreessen and LinkedIn founder Reid Hoffman.
While digital currency technology could displace millions of positions in existing intermediary services, the essay notes bankers are currently exploring ways the technology can bring new efficiencies to the financial system. It states the United Kingdom and Mexico are exploring the use of blockchain technology.
The authors conclude that while the Internet has decentralized much of the world’s economy, finance remains stuck in a traditional system, a system that digital currency could improve.