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.