Other than widespread fascination over its meteoric price rise, much of the discussion around Bitcoin in 2017 has revolved around questions over the future direction of the protocol, most specifically the highly charged scaling debate and the implementation of SegWit. With the forthcoming fight over the 2x part of SegWit2x, the blocksize issue remains unsettled and the community will stay firmly focused on this over the coming months, as it should.
While I have my own opinions on the subject (I’m against forcing a blocksize increase just because some companies agreed to it), I don’t spend enough time on Bitcoin to consider myself any sort of authority on the matter. Therefore, I pretty much keep my mouth shut and let people who spend all their time on the topic have at it. Nevertheless, when I feel I have something to add to the Bitcoin conversation I certainly don’t shy away, which is what inspired today’s post.
A headline that caught my attention yesterday was the following published by CNBC: Real Estate Project in Dubai to be the ‘First Major Development Where You Can Purchase in Bitcoin.’ Upon reading the article, it appears the move is in large part a marketing gimmick (a smart one), but I don’t think it’s just that. I believe those involved in the development genuinely find Bitcoin interesting and want to support it, which is consistent with a significant conclusion I’ve arrived at based on many other data points.
2017 has been the year when an increasing portion of the 1% finally started to embrace Bitcoin. Not a huge percentage by any means, but certainly enough to affect the price. We can call them the early(ish) adopters of this wealthy class. Specifically, this real estate project highlights the fact that adoption of Bitcoin amongst people with significant financial resources is happening faster than many realize. Why does this matter?
While it obviously matters to price, I’m thinking way beyond that. For starters, more wealthy people moving into the space helps provide some degree of political protection since we know that people with significant financial resources influence public policy. Just as Silicon Valley VCs coming into Bitcoin in the relatively early days helped provide political protection, so too will the involvement of more and more wealthy people. While that’s pretty important, I’m thinking beyond that still.
As I was reading the CNBC article I kept thinking to myself, “who in their right mind would part with Bitcoin for one of these apartments if they can spend their fiat instead.” As deflationary money, Bitcoin is structurally superior to the U.S. dollar or any other government/central bank run currency printed in unlimited quantities to prevent corrupt bankers from taking a loss. Sure, there will be those very early adopters who happen to have tens of millions of dollars in Bitcoin, thus representing the vast majority of their net worth. For them, it might make sense to spend some of their fortune on stuff like this real estate project, but for most people this is not the case. Most Bitcoin holders have far less than 50% of their net worth in Bitcoin, with much of the rest likely in shady central banker fiat currencies. These people will not be rushing to spend their Bitcoin on an apartment or anything similar, so what will cause Bitcoin to function more as a transactional currency? What needs to happen, and why does it matter?
Based on what I read, the Dubai real estate development does not seem to be offering apartments for sale in Bitcoin so they can get access to the crypto currency to hoard, but rather, they will immediately turn the proceeds into fiat via BitPay. I could be wrong about this, but that’s my assumption. If that’s the case, then this isn’t really drastically different from some of what we’ve seen in the past. What I’m really looking out for is the day when people start accepting large sums of Bitcoin as payment with the intention to hold it. Once this starts to happen, we’ll know some major changes are afoot.
While it’s true this may never happen, if Bitcoin continues along the successful path it’s currently on, forward thinking people inevitably will try to offer items for payment in Bitcoin, not for marketing reasons, but for the express purpose of obtaining Bitcoin. Why would they do this you ask, rather than just go to an exchange or buying OTC? My answer is that we may very well get to a point where whales want in, but simply cannot buy the amount they want without pushing price through the stratosphere. If that point arrives, the best option might be to sell assets for Bitcoin in order to obtain the desired stash. How will we know when that day has arrived?
Just because someone wants to acquire a bunch of Bitcoin doesn’t mean those who own it will part with it so easily. This is where discounts might come into play. If we enter a very inflationary future, the only way to pry Bitcoin loose from dedicated hodlers might be to offer discounts on real assets to those willing to pay in Bitcoin. That Miami condo you’re thinking about selling? Offer a 10-15% discount to those willing to pay in Bitcoin. I find it only marginally interesting when goods or services are offered for Bitcoin these days. What will really get my attention is if sellers start offering their wares at a discount to Bitcoin buyers.
The above probably won’t happen in earnest until the public really starts to lose faith in government/central bank currencies. When we hit that point, selling Bitcoin for fiat would carry too much risk for a holder and the only way one will feel incentivized to part with it is if real assets are offered at a discount, to the fiat price.
Of course, it’s entirely possible that the environment described above never occurs, but if things continue along their current trajectory the chances are increasingly likely. For me, the sign that things are entering a totally new era for Bitcoin, and money in general, is when sellers start to offer discounts for those willing to pay in Bitcoin. I’ll be watching very closely for that day, because it could very well represent a major inflection point in monetary history.
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So what is the difference between many significant vendors offering theri wares at a 10% Bticoin disocunt vs fiat currencies, and Bitcoin simply increasing in value 10%?
If you are saying that the situation would arrise because people can’t get a hold of Bitcoins becuase there are too few sellers, then Bitcoin would probably skyrocket into bubble valuation, in which case you certainly wouldn’t want to sell your physical property for Bitcoins (but maybe you’d sell it for food, water, guns and/or ammo in that situation…).
Not necessarily true. I am discussing a potential environment where inflation is a serious problem and people are looking for an alternative form of money to use as government/central bank currencies are on fire. In that case, I can certainly see wealthy people selling assets for Bitcoin to get their hands on it.
If I offer my $1M apartment for $800K BTC doesn’t that just mean BTC will go up that much more vs. the dollar? Isn’t that what it means for the price of BTC to go up. To say goods or assets costs more in dollars than the going-rate in BTC just means the going rate isn’t the going rate, right? Or am I missing something?
That’s essentially right. So the sellers are offering a discount, let’s say 10%, because they assume the environment is such that Bitcoin will appreciate way more than 10% due to government/central banks currencies being inflated away. Thus, this is the best way to get their hands on some without moving the price.
On a related topic, Bitcoin is only slightly better as a currency than the USD. This is because Bitcoin still has no intrinsic value: you can’t use it for anything except as a currency.
So I don’t see the scenario where I would not be willing to sell you food or water for USD, but I would sell it for a currency that only exist in digital form. Bitcoin stills seem like its only usefulness is as an underground currency for purchase that you don’t want tracked (but that may be an illusion…) as opposed to a storage of long-term wealth.
Actually, that’s not what it is most useful for. It’s primary societal function is one of financial freedom. It allows permission-less value transfer globally. That is a big thing.
Totally fair that you wouldn’t accept Bitcoin, but I’m pretty certain enough others will.
The point that is hoovering here but not expressed explicitly is: Bitcoin is merely a way to transfer tokens in a decentralized manner (=without a controlling authority). However, it’s not money in the sense that you will hold it. And in my opinion it will never become money in any fashion similar to what FIAT is today and hence never challenge a corrupt money system that is overdue for competition. The problem has everything to do with lack of a sound money creation mechanism. All real money creation, from gold to FIAT is in some way or another work-backed. Gold requires work to be excavated and purified. FIAT require future work to nullify the debt by which it was created.
The popularity of bitcoin is not due to its function as money, but 99% due to hopes of becoming rich. People buy bitcoin as a speculation. And they will get rich – when the number of speculators have doubled. And those new speculators will also get rich – when the number of speculators have doubled again. And so it goes on – that’s exponential growth. But exponential growth and limited supply is a catastrophic combination:
All network phenomena require exponential growth to reach and saturate a market, like the number of facebook users from 2005, or like the number of internet users from 1995 etc etc. If bitcoin is going to become a commonly used currency it will need to see exponential growth in its user base. That growth must come from a steadily increasing demand. But by basic economic law this exponentially increasing demand will also lead to an exponentially increase in price. However, such a dramatic increase of value always lead to collapses. There will be small bubbles and large bubbles on such a path. Hope, greed, fear and despair drives the swings. The volatility makes bitcoin useless as money because you cannot hold on to it – unless you are a speculator. So in conclusion, bitcoin, with its limited supply, is working against itself in the process of becoming money, because this require the combination of stable price and exponential growth. That’s not possible to achieve with limited supply.
Having said that, bitcoin IS a disruptive technology, being the first time ever a way of transferring tokens (where each token may be ascribed value) in a decentralized fashion. But a money transfer system is not a currency. However, the emergence of the block chain has given us the tools to create new money systems. But this fact seems to be ignored in all the buzz of ICO’s which all are more or less new schemes to sell pre-printed limited supply (=me only-) money. But I am convinced that some place in the future we shall have fair and functional money supported by the blockchain. I’m just surprised to see how slow that is going forward.
I believe Overstock.com is keeping 50% of the bitcoin it receives as payment. Previously I think they kept 10% of the bitcoins they received. That is a significant shift in investment strategy.
Sinev, that is my other problem with Bitcoin. It doesn’t make sense that you can just generate it through intense computations that have no secondary value: it is a waste of valuable resources.
https://www.quora.com/How-much-CPU-time-is-needed-to-mine-1-bitcoin
A much better system would be similar to the original currencies: you automatically earn them through labor, just as a fisherman may hand a farmer a piece of paper saying that he owes the farmer 2 fish later if the farmer gives him some grain now.
Of course, blockchain technology may end up forming the basis for a similar system in the future
You are not the first one to argue that meaningless computation in order to create money is a waste of resources. But that would apply to gold as well: Mining gold takes huge amounts of energy – and it probably has a more negative impact on nature than pure computational work.
Energy is spent on a lot of useless things in our society. Would it be so bad if energy was spent on creating functional and fair money? That would be essentially worked-back money. Bitcoin however is not so. It’s a common misunderstanding to think that bitcoin creation reflects energy cost. The ‘meaningless’ computation that support the bitcoin blockchain (PoW) is only used for maintaining time distance between blocks. The ‘creation’, or supply, of bitcoin is deterministically enforced by the code. The cost of bitcoin is rather a form of taxation on later adaptors paid to earlier adaptors.
There is always margin for discount.. Sellers uses them to increase sales velocity. I’d rather use them to be paid in bitcoin. What you describe will happen, the strong tipping point will be when discounted items will be rare and expensive ones. Never thought about political protection argument before, great one thanks.
I think the conversation in this post is theoretical at the moment. As a merchant that has been accepting Bitcoin for many years from clients paying for services, my opinion is probably similar to many other merchants accepting Bitcoin.
When Bitcoin was cheap I never sold any of it. Just held onto it. But now Bitcoin is in the $4000+ range, I sell every Bitcoin I get as I get it. When Bitcoin was cheap I didn’t really want to get rid of it. With Bitcoin at $4000+ I can’t wait to get rid of it. So it really depends on the price point of Bitcoin which determines what people want to do with it.
I think the real estate development selling for Bitcoin is just the beginning. Eventually, all of them will be doing it in the years to come. The more developed countries will start it first. The least developed will lag behind as expected.
There is a large market out there of wealthy Bitcoin holders that have plenty of Bitcoin and not that many places to use it. Real estate in a desirable destination is one way to get some real assets with excess Bitcoin reserves. It’s totally logical.
But what do the BRICS nations do with bitcoin?
When the Weimar wheelbarrows are full of fiat currency backed by nothing will everyone want bitcoin?
It is already happening. I am offering a house for sale and will give a large discount if paid in bitcoin.
I’ve been intrigued by Bitcoin in the past, but I’m leery of anything computer-based. I think the fiat currencies will fail, but I’ve given up on Bitcoin. I believe physical US cash will retain value for a while after a SHTF scenario because it can be exchanged freely without banks or computers. In many areas local currencies are being implemented and I think they could retain some use when SHTF, also. Our local farmer’s market has an alternative currency of sorts and I’ve also visited an “intentional community” that uses one. These options are tangible, visible and available to ordinarily people.
A personal anecdote. I’ve been offering a 10% discount to people who pay with Bitcoin on my 6 tiny retail websites since about 2013. My average sale is about $100, and I sell hammocks, cashmere and rugs. I include a message about the 10% discount with bitcoin on my monthly newsletters to about 100,000 people. I have had about 10 bitcoin paying customers in total in the last 4 years. I know it doesn’t feel like it for people who are interested in Bitcoin, but it is still very very early days for Bitcoin.