TOC should guide us to think clearly. I’m going to try to do this regarding the phenomenon of the Bitcoin and expose myself to your cause-and-effect criticism. I don’t know much about the Bitcoin and I’m certainly not an expert on how Blockchain, which supposed to protect the security and privacy of transactions and agreements between parties, truly operates and whether the information is absolutely safe without any chance of breaking in.
I’m going to broadly and freely follow Goldratt Six Questions for assessing the value of new technology, but use only four of the questions from the second to the fifth. The point is that the Six Questions are target at the developing organization providing guidance to improve the overall value, while here I like to assess the value of the Bitcoin for me.
Two posts covering the six questions have been published on this blog. The link to the first one: https://elischragenheim.com/2015/12/28/uncovering-the-value-of-new-products-part-1/. Then, at the bottom, click on the next one.
The current limitation that the Bitcoin eliminates (question #2) is the need to rely on a specific middle player, like a bank or a credit card, to provide safe transaction of money from one party to another. Another related current limitation is the need to exchange different currencies for international trade. The use of Bitcoin still requires a middle player to put such a transaction as part of a block of information, but this could be done by many service providers. The purchase of Bitcoin would still have to use exchange from the current currency to Bitcoin.
There are two problems with current middle players. First they charge per transaction and their fee is not low. Second, the middle player gains direct access to private information that can be used against the parties, most notably informing the tax authorities. The threat of losing privacy is an obstacle also for many who like to engage in illegal, or immoral, activities, like selling or buying drugs. The bigger the middle-player is the higher the concerns that the information stored would be used against the true owners of the information.
Do we really want to help people to hide their illegal activities? This is a moral question that I leave to the reader to decide. Generally speaking there are other violations of privacy that we all like to prevent.
The current ways to bypass the limitation (question #3) is by using cash or barter. Due to security issues and practical logistics cash is used in a very limited way. Another way to reduce the limitation is working with many banks and several credit-cards.
The first step to using Bitcoin (question no. 4) is to buy enough Bitcoin or mine it. Just as a comment – Bitcoin can be any decimal number. Mining Bitcoin is tricky as only very big computers can do it and relatively only small quantity of Bitcoin is still available to be mined. So, the easy way is to buy Bitcoin from others that already have. The problem is that you can buy Bitcoin by either cash or using the same middle players. Businesses can buy Bitcoin by selling products or services to clients that pay with Bitcoin and this could be a good way for keeping their business transactions confidential.
So, it seems that Bitcoin could give considerable value to businesses that need confidentially of their financial transactions. It could also give some value to small clients for buying through the Internet from foreign sellers, as it might be cheaper and quicker than the current means of international transactions. It also helps small clients to keep their privacy of what they buy and from whom.
But, when we give attention to potential reservations of using Bitcoin (question #5) we now see a very serious drawback:
The exchange rate of the Bitcoin behaves in very volatile way
The fact that the exchange rates of most regular currencies fluctuate is already a major problem. The bottom line of many businesses with wide international activity has considerable dependency on the exchange rates between the local currency and the Dollar or Euro and the fluctuations of these rates causes considerable pain.
For the TOC readers let me add some explanation on the impact of the exchange rate on throughput (T). Suppose a deal is made in American Dollars and the money is going to be paid one month after the delivery of the goods. Suppose we live in another country with a currency called s-coin where every s-coin equals exactly $1 at the date of the delivery. It is obvious that the actual generated T might be 3-5% up or down from the theoretical T at the date the goods have been delivered. This means the value of T cannot be known until the actual payment. The same possible distortion could affect the price of materials as well. Throughput means revenues minus the truly-variable-costs (TVC), mainly materials. But, what is the cost of materials? Is it the original purchasing price, or the current price for replenishing the same materials? I think it should be the latter. When the materials are purchased from a foreign supplier it adds another source of uncertainty to the level of throughput.
As we see, the impact of the exchange rate on international business activity is quite significant. Using Bitcoin dramatically increases the level of uncertainty of the T for deals that have been formally completed. So, the deal itself is actually a combination of two very different deals at the same time. One is a deal of goods sold at the value of $X. The other deal is selling $X for Y Bitcoin, which is a very uncertain deal in itself.
Currently the Bitcoin behaves in a crazy way that fits addict gamblers and almost nobody else. It is possible it’d continue to be highly fluctuant in the future, because we don’t see any clear way to give Bitcoin a value. I claim that this is a major cause not to use Bitcoin as money – it is too risky.
Can this basic flaw in the functionality of virtual money, having unstable value, be fixed? Think about it as a necessary condition for any future replacement of the Bitcoin, and let the great minds in economy work it out.
Eli Schragenheim 
I am investing with one company that selling packages worth 60 USD plus 1.5 USD mining fees, (the package is fraction of bitcoin depend of the bitcoin price of today, for example I bought the 1st package in 61.5 USD when 1 bitcoin worth 8000+ UDS it was value 0.0094+ BTC. today, 1 bitcoin worth +14300, with same price of 61.5 USD the package’ value +0.0043) each package you buy earn from 0.75 to 1.25% every day in average of 1% daily. after 140 days or until your package earn 140% ROC (Return On Capital) your package will expire totally and it will not earn any more and you can not withdraw it back.
you can set your system to re-buy automatically or manually you can do rebuy every time your ROC reach a package price of today, here the power of compounding is another factor in calculating your final earning after 140 days or 140% for each package.
if we a simple run a calculation, 1 package bought in 61.5 USD running active and earn 1% every day (in average) and the price of bitcoin not changing, every day you earn 0.615 USD as ROC, after 100 days you accumulate a value of one new package, do re-buy.
when your 1st package stopped been active, say after 140 days, you still have 1 package that you bought in the first re-buy, running active PLUS bitcoin worth 24.6 USD. go on, after 60 days you can compound and re-buy another package and so on ..
HOW we can implement TOC principals here on this system?
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Have you heard the story about the man who came to Ecuador and offered to buy monkeys for $100? Many monkeys were collected and sold.
The next month, he upped his price to $200. More monkeys were sold.
The next month $500! Everybody was trapping monkeys and selling them.
The man announced that, after a one month hiatus, he would buy monkeys the following month for $1,000. But, there were no more monkeys to be found in the rain forest!
People went crazy! They searched everywhere but all the monkeys were in the pens of the crazy man. People started bribing the guards, first to have a monkey for $300, then $500, then $700. They finally emptied the pens.
The next month, they waited for the man to return but he did not. They looked for the guards but they were gone too.
How do you like my story about monkey business?
I can tell you one about tulip bulbs in Holland, if you don’t like this one. It is an old story. But, it is different this time.
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Have you heard the story about the British Empire paying for people to catch venomous cobra snakes in Delhi?
The British government was concerned about the number of venomous cobra snakes in Delhi. The government, therefore, offered a bounty for every dead cobra. Initially, this was a successful strategy as large numbers of snakes were killed for the reward. Eventually, however, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The apparent solution to the problem made the situation even worse.
I can also tell you the story of how governments tried to ban the Internet if you don’t like this one. It is a much more recent story. But, it is different this time.
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Eli, thank you for considering a discussion on this very hot and important topic. I would like to propose a view on the problem of volatility you are concerned with.
The volatility cannot exist in Bitcoin itself, it can only exist when you look at the exchange rate of Bitcoin vs. another currency. It is true that Bitcoin has a very high volatility vs. the US Dollar at the moment.
But let us consider that Bitcoin is a paradigm shift, and it has the potential to change the way finance works in the future. We all know that the benefit of Bitcoin is that it is a truly international currency, that is not affected by governments in any way. It truly reflects a global supply and demand.
Should we assume that in time, Bitcoin will become THE currency that is being used in the whole world to do transactions. Then it will no longer be affected by volatility. Because all transactions are done using a single currency, and around the whole world a single Bitcoin is exactly one single Bitcoin no more and no less.
It is true that a ton of aluminum in China might cost 0.144 BTC while in the USA it costs maybe 0.17 BTC. But when all the commodity pricing is being done in Bitcoin, what is volatile is the price of aluminum not the price of Bitcoin.
It does require us to believe that a huge change in how financial systems of the world work is coming and that it is, in fact, a change that is possible. This is something most of us will find very difficult to do.
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You touched on the topic of confidential transactions, which might be important – but it is not *really* confidential where Bitcoin is concerned. The way Bitcoin works is that I have a full view of the transactions that happened to Bitcoins I own from the beginning of time. Which is coincidentally the 3rd of January 2009, almost exactly 9 years ago. That is when the first Bitcoin “block” was mined, and it includes the text “The Times 03/Jan/2009 Chancelor on brink of second bailout for banks”.
I think that a much bigger advantage of Bitcoin, is that it creates a real financial free democracy. Money as we know it has been changed. A major problem with fiat money is that it is controlled by regulation and institutions that do not treat all of their users as equals. For example, a bank can decide to not allow some of their customers to transfer their money in whichever way they like, either by providing a reason or just saying “because”. While at the same time it can decide that for other customers of theirs they can “forget” debts and loans if the bank feels like it. I am sure that most businesses have experience with the delinquent behavior of our modern financial institutions.
Where Bitcoin is concerned, an institution (a middleman as you say) that allows you to temporarily give them your bitcoins and then does not allow you to withdraw them when you feel like it – will be considered a hostile place that will get almost zero customers using their service. Although companies like Coinbase do exactly this and still enjoy a large number of customers who “trust” them. I guess bad habits are hard to break (inertia), and a couple of generations need to pass before people realize what real financial freedom really means.
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Kesor, I think you still ignore the problem of volatility. Yes, any assessment of value is based on a chosen currency, but the relative uncertainty regarding the current value of the Dollar is very small compared to the BTC. One ton of aluminum is worth $X and tomorrow it might be worth 0.2% more or less, and when you decide to pay in Euro – no problem the rate would be compared to the Dollar within a certain range of less than 1%. But, with the BTC the range can be huge. If I trade in aluminum any decision to sell, or buy, in BTC is highly uncertain depending on the BTC value next week.
How can the BTC gain a relatively fixed and agreed upon value? Based on what such a value would be determined and seem reasonable to business people all over the world? What about all the other similar virtual coins that compete on the same advantage of eliminating the impact of governments and banks?
Yes, it is a new paradigm – but, I learned to face new paradigms by checking the cause-and-effect behind them. Let me know this simple cause-and-effect: what would stabilize the value of the BTC?
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I believe that I answered that question, what would stabilize BTC is that it is the major coin used for trading of goods around the whole world. It will not happen today, it will not happen tomorrow. But several hundred years ago the Dollar was not “the gold standard” either, and before 2002 the EUR didn’t exist either.
Is it so hard to imagine that in 10-20 years from now BTC will be the dominant coin used for trade around the world?
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Hi Eli,
I think what would create stability are the following two major events:
1. Bitcoin, or a small collection of a few cryptocurrencies grow to a sufficient market capitalization that it is not as easy, as it is at the moment, for the price to be influenced by a relatively small number of relatively large speculative transactions.
2. These currencies begin to be used for sufficient transactions that it becomes easy for people to see the price of items in Bitcoin. (E.g. I want to purchase a car, and I can see that in the past ten days 500 Mercedes C270s were sold in South Africa for BTC 2.4 – that’s an example, not a current quote of fact) There must be enough items of enough variety and quantity that it becomes an accepted change of value. So in the above example, it becomes accepted that one Mercedes C270 is worth BTC 2.4
For the 1st item above to happen, we need quite some time still, for the rest of the Bitcoins to get mined until the end, and for the value of Bitcoin (and the other cryptocurrencies that will be in the top crypto indices) to reach a market capitalization that is comparable with those of the large currencies in the world.
For the 2nd item to happen, we
a. Need some very significant technological improvements or innovative ideas to make transacting in these cryptocurrencies practical – i.e. the speed must be such that a transaction can be near-instantaneous
b. Need to reach the tipping point of early-adopters to tip over into mass usage.
c. Need to have a market mechanism by which people can easily see historical transactions and current offers on the products they want to buy with their crypto currency. Companies like Amazon, and Taobao in China, might already be getting us there by making it very easy to compare all the competitive offerings for a single product.
d. Need to have a market where enough products are offered with cryptocurrency as an acceptable payment system, to make it worthwhile for businesses and consumers to use that market.
e. Need to have enough businesses and consumers with enough Bitcoin in their wallets that they buy and sell in Bitcoin, rather than to see Bitcoin as a speculative currency. Effectively they need to get to the point where Bitcoin is what they would consider their “normal” currency, and they would only exchange it for a conventional currency when they need to buy something that absolutely is not available in exchange for Bitcoin (or whatever other cryptocurrency they use.)
These things will not happen tomorrow, but I think if we look at the current trends and direction that things are moving then they are:
1. Cryptocurrencies are growing in market capitalization – albeit in fits and starts.
2. New cryptocurrencies are continually being launched and different models of wallets and exchanges are trying out different ways to create near-instant transacting.
3. Big consumer-facing customers are beginning to test receipt of crypto as payment (One of the biggest retailers in South Africa recently accepted Bitcoin as payment in a short pilot to test and learn from it.)
4. International remittance companies – especially here in Africa – are looking at crypto – which will create increased distribution of Crypto into the wallets of ordinary citizens.
I cannot say that it will be Bitcoin, or Ethereum, or one of the others, or whether there will be a collection of preferred currencies – but I think all the trends are moving towards a point where cryptocurrencies will become a means of exchange in themselves – and then the fluctuations of the crypto-based price for comparable goods will be stable.
It will probably not be a matter of “all of the above will happen, and then suddenly crypto will stabilize,” but rather a matter of the above trends continuing, and as they continue, crypto becoming increasingly stable, which will again accelerate the above trends.
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Ashton, actually your two events are one:: The chosen set of cryptocurrencies have become stable enough so their value does not widely change due to arbitrary market transactions, or by few speculative transactions (like you wrote). This is exactly what I have stated as a necessary condition for BTC or a similar currency to become viable for trade, and then Mercedes C270 would have a relatively fixed price in BTC. The Mercedes would also have a price in Dollars, unless you think the national currencies will be wipe out, which automatically means there is a perceived value that one BTC equals $X. I think the market would first state the BTC is Dollars, and then the Mercedes would be able to announce a BTC price – not exactly the same, because using BTC has some advantage, but there is certainly a direct link.
My question is: how such a stable price be achieved? What is the process? Suppose all the world is convinced that it is time to bypass the banks and governments, and there are good reasons for such a wish, but how the appropriate price for such a coin is settled? It can happen if there is a certain justification why one BTC should equal, say $12,000 plus minus 2%. I’m not aware of such reference. Without the reference any speculative move would push the value without any limit.
Technology can be vastly improved. So, I agree that transactions need to be absolutely secure, yet fast, relatively friendly for users – you name the requirements. The problem with a true necessary condition is that it cannot be solved by solving the other necessary conditions.
I assume most owners of BTC look at it as an investment. This might stay because people like to gamble. But, if I think that the value of BTC will go up, then why should I use it to buy my new Mercedes C270? And if I think the value of BTC would go down then why Mercedes CFO would allow such transaction? If you are a gambler – play the game, buy and sell BTC, and buy your car with SA Rands.
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