Why Is The Bitcoin BlockChain Important?

As I research Bitcoin, I am learning.  Initially, I looked at it as a pure medium of exchange. The trader in me does that all the time.  If one only looks at Bitcoin as a medium of exchange, the logical conclusion is that Bitcoin is no different than Holland Tulip Bulbs.

Today, 50,000 merchants worldwide accept Bitcoin for payment.  If we think about the early days of the internet (1993), that’s sort of how websites were.  My wife and I got on AOL back in the early 1990′s.  There were no websites to go to.  When you went, they didn’t do anything.  They were just ads designed to get you to physically get in touch with them.  At this point, Bitcoin is more than a tulip bulb.

Bitcoin isn’t just about the coin.

Because it is what it is, Bitcoin is also a platform that can be coded and built upon.  Ethereum is beginning to do that right now.  They aren’t the only ones.  Eventually, kids will be able to create their own cryptocurrencies on their iPads and play games with one another on them.

When thinking about totally distributed one to one networks that can connect anyone anywhere to someone else anywhere-in a totally anonymous way—and build value between the two people, this thing is Coase Theorem on steroids.

But wait, there is more.

The other intriguing aspect to Bitcoin is the online general ledger which hasn’t been explored deeply yet.   Here is a link to the blockchain of Bitcoin.  Anyone can see it.  You can see the transactions happen, and volumes.  They publish statistics about how many coins have been mined.  It’s kind of like market data that flashes across a trader’s screen.

It’s not like the Bitcoin blockchain is unique.  A lot of people are getting jazzed that it’s a totally distributed P2P network where transactions happen and I totally trust and don’t worry about the counterparty I am transacting with.  I hear phrases like, “highly distributed” or “anonymous”.

That isn’t unique or impressive.  It’s existed in the futures industry for over 100 years.  When I trade an futures contract with someone at an exchange-the counterparty is anonymous, and could be anywhere.  The exchange clearinghouse is essentially a blockchain.  When I was on the board of the CME, one of the things we always talked about was clearing.  Clearing is the most valuable asset of an exchange.  It’s the glue.  It’s what builds the trusted network.

In the open outcry arena, even if I know my counterparty is a schmuck, the clearinghouse puts in place all the things we both need so I know the counterparty will perform.  There are repercussions up and down the chain if they don’t.  The repercussions far outweigh the economic incentive to “DK” the trade, everyone falls in line.

What’s different about the Bitcoin blockchain is there is no cost to it.  Clearing costs money to operate.  But, the blockchain isn’t actually “clearing”-it’s just a transparent online ledger.

What’s the advantage of an online ledger transparent to anyone?

To illustrate that, I have to digress with a bit of a story.  When old traders get together, sometimes we talk about the code of the floor.  ”Your word is your bond.”.  Friends of mine were talking about this the other day.  When you make a legit promise to someone, you stand behind it.  Trust was a currency on the trading floor.  No lawyers to twist words, phrases or meanings.   Traders think about those days wistfully.

Why?

Because in the real world, it’s terrifically hard to trust anyone.  Hard to even trust the words of a supposedly reputable business.   Individuals and companies don’t live up to their word.  No one is what traders would call a “stand up guy”.  All traders have stories about how real world people screwed them over.  The “civilian” population seems to be filled with “schakren” or “ligner” type people.  Scumbags.

The blockchain could keep them in line:

For example, let’s say that you have a screen-play for a movie. Before shopping it around in Hollywood, you want to prove that it’s yours, so that a greedy producer can’t steal it. Using BitCoin, you can add the signature (and date) of your screen-play to the “block chain”, the “public ledger” where all Bitcoin transactions are stored. Now, if producers get greedy, you can (in theory) pull out this proof in a court and sue them.

All of a sudden, instead of having to save and comb through millions of emails, you just do a simple search of the blockchain and boom- you have your evidence.  Additionally, you can tell the world that the opposing party is a schmuck, and is not someone to be trusted.

Peer pressure has a way of keeping people in line and uplifting ethics if applied properly.  Bitcoin becomes a digital fingerprint.  Proof with evidence.  Weasels don’t like bitcoin.

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