In technology as in economics, many — perhaps most — predictions resemble nothing so much as prodigal sons, wasting their noticeable progenitors’ fortunes of credibility. Conceived and brought forward as beloved convictions, they come back to haunt their once proud forbears as unfortunate embarrassments. “Bitcoin is evil,” wrote New York Times columnist Paul Krugman late last year. The immediate reaction of pro-Bitcoin technologists was to pass around Krugman’s 1998 insistence that “the Internet’s impact on the economy will be no greater than the fax machine’s.”
As evidenced by the Krugman flare-up (and by the adorably sarcastic image of a doofusy Krugman sipping a glass of champagne often posted online alongside the fax machine dictum), Bitcoin has generated more controversy — more strange prophecy, more general befuddlement, more name calling — than any other single technological development of the past five years. No wonder: Significant global legal and moral turmoil has surrounded its rise. With its promises of anonymity, frictionless international exchange and exquisite cryptographic sophistication, Bitcoin seems to have touched every vital cultural concern of our era: personal privacy, massive economic and social interconnectedness, and the rise of a new and exclusive elite whose power comes not from birth or nationhood but from technological know-how.
Krugman says that some of his own “suspicions” were confirmed when he got a note from his old college roommate John Levine, “who was a techie before anyone knew such creatures existed (let alone that they would rule the world).” Writes Levine:
“[P]art of the disconnect is that Bitcoin solved a major technical problem, one that people had been thinking about for about 20 years, and we nerds just can’t believe that it doesn’t also solve an economic problem. The technical problem is double spending — if I have some digital money, it’s easy enough to verify cryptographically that it’s real, but if I give it to you, how can you tell that I haven’t also given it to someone else? Until Bitcoin, the answer was to have a bank that knew which coins were valid, so you’d present my coin to the bank, which would check its database and if it’s valid, cancel it and give you a new one. Bitcoin has its decentralized blockchain which is a very clever recasting of the problem so that the state of the ‘bank’ is whatever the majority of Bitcoin miners agree that it is.”
But underneath this praise of innovation from his former college roommate, Krugman files a more strict liability indictment of Bitcoin than simply calling it evil: It’s not actually what it purports to be, namely a currency. “Everyone agrees that it’s technically very sweet,” he writes. “But does it work as money? That’s a very different kind of question.”
Other responses to the Bitcoin phenomenon have been more sanguine than Krugman’s. Marc Andreessen, co-founder of venture capital powerhouse Andreessen Horowitz and head of the team that built the first commercial web browser, recently spoke out in an outstanding piece in the New York Times. Any follower of the digital edge of financial technology can’t afford to miss it. Andreessen attempts to calm the clamor over the digital currency and outlines its potential effects on modern commerce, economics and society.
When Andreessen speaks, the people listen. In the world of technology Andreessen is not simply an influencer but a titan, alongside Larry Page, Sergey Brin, the late Steve Jobs, Bill Gates and Mark Zuckerberg. First an innovator, then as mentor, Andreessen began his career as an intern at IBM. By his early 20s, he had led the creation of Mosaic, the first web browser. Mosaic became Netscape Navigator; with the help of a business-minded mentor named Jim Clark, recently departed from Silicon Graphics, Andreessen became the first proselytizer of the commercial power of the Internet. Andreessen’s work on the browser was the necessary precursor to the accessible World Wide Web that we know today and a seamless, visual means of understanding and interacting with the Internet’s civilization-altering capabilities. (His code also forms the basis of Internet Explorer; it was stolen or licensed by Microsoft, depending on whom you ask, in 1997.)
After a string of successes with companies like Ning, a social media platform, and investments in mobile videoconferencing company Qik and Twitter, Andreessen partnered with Ben Horowitz in 2009 to form Andreessen Horowitz. Lean for a VC of its stature, with six general partners and $2.5 billion under management, Andreessen Horowitz has earned its name by backing some of the most dynamic start-ups of the past ten years, including Airbnb, Facebook, Pinterest, Skype, Udacity and Zynga.
At a moment when Tom Perkins, of the legendary venture capital firm Kleiner Perkins Caufield & Byers, has brought down opprobrium on his own head by comparing San Francisco citizens to Nazis, Andreessen has been a particularly calm voice in Silicon Valley and outside it. He bided his time before wading into the morass of public commentary on Bitcoin, and when he did he explained its historical derivation and its value propositions clearly — as well as providing real insight into his own faith in Bitcoin without smearing, well, anybody. (Not for nothing has Andreessen been called “ridiculously gracious” by Glenn Fleishman, a Seattle-based technology journalist and one of Bitcoin’s most fervent dissenters.)
Instead of speculating in the wildly volatile Bitcoin, wise investors — like Andreessen — have backed companies expanding its ecosystem. Andreessen’s firm helped close a $25 million round of funding for Coinbase, which builds digital wallets and payment-processing infrastructure. OpenCoin, which pushes an open source digital payment platform and currency called Ripple, has also received angel funding from Andreessen Horowitz. This makes sense: In his post Andreessen explains that phenomena like Bitcoin and the Internet, which are not so much things as evolving systems, experience network effects. Investing in the Bitcoin ecosystem is one of the more straightforward means of encouraging or even inducing positive feedback. Back firms that make it easier to use Bitcoin, and virtuous circles are initialized; the more people who use it, the more it will be worth, and the more worthwhile it will be to have invested in it.
Andreessen outlines Bitcoin’s touted ability to make secure transactions possible over insecure networks, developed after years of research in cryptography. He also makes clear that anonymity is not the same as pseudonymity, or encryption, or security — all badly needed distinctions when Bitcoin is indicted as the hand-held mask in a carnival of moral corruption. (Bitcoin is a “digital bearer instrument,” which can be used without exposing its sender’s personal information, a godsend for companies like Target, whose systems are under constant attack by identity thieves.) And he poses an exciting question: What if we could move all sorts of digital objects all over the web more safely, swiftly and cheaply than ever before?
Within the U.S. alone, Bitcoin and its parallel technologies will alter business more thoroughly than any form of e-currency or credit card. Initiatives like the state of Vermont’s recent push to license all-digital businesses stand to gain from widespread Bitcoin use: If digital signatures can be attained securely, and all documents exchanged online, then many, many new enterprises would never have to lock themselves into any semblance of brick-and-mortar existence. For more and more businesses — particularly small businesses, helmed by a growing class of the tech-savvy self-employed — ownership of almost all physical property past a laptop represents unforgivable waste and drag. Offices, Aeron chairs, filing cabinets full of paper, local business licenses and operating agreements and bank statements vanish into thin air. Or, rather, into the cloud.
Secure, paperless, cheap: Bitcoin seems mysterious and therefore wicked or extravagant to many, but its applications are in fact refreshingly practical. Because the processing fees associated with credit card transactions disappear, Andreessen points out, Bitcoin makes possible hyper-micro- or nano-transactions, those that involve charging users only fractions of a cent to access content. Paywalls to access even premium content, say, the New York Times online, would be leveled. Fees for the world’s unbanked would plummet. It would become possible, if the promise of Bitcoin is fully realized, for a teenager with a Raspberry Pi (a tiny computer purpose-built for developing countries) to start an e-commerce site and accept a currency free from inflation and free from the bondage of prohibitively expensive banking structures.
However this upstart currency booms or busts over the coming months and years, it’s time we start talking reasonably about it. It’s hard to imagine putting Bitcoin back wherever it came from, or saying, à la Krugman, that a thing that already exists shouldn’t be.