Joshua Eichler-Summers
Blog of Josh Summers

Venture capitalist & founder. Lots to learn, but happy to help.
Investment Team at DN Capital
Founder of Taaalk

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Confusion, Greed, Uncertainty and Bitcoin

24 Feb 2015

To bring a virtual currency to a point where it has real value it needs to reach a critical level of adoption.

Other tech heads think so too - ones much smarter than me!

This is the graph of daily transaction volumes in USD that Mr Altman was linking to:

As you can see, Bitcoin is not trending towards that critical level of use.

However - there are good reasons why it should. Virtual currencies have highly tangible benefits over real world currencies:

  • They enable a borderless monetary system with no intermediaries. This means an international transaction that currently takes several days could be done in minutes.
  • They cut the cost of moving funds between two parties to ~zero. Currently the fee charged to a retailer for a £100 transaction is between £0.08 (debit card) to £1.60 (high rewards credit card).
  • They allow very large sums of money to be moved extremely quickly (15 min) with full certainty that it will arrive where it is meant to go. In the world of investment banking that’s a big deal.

Links to sources: Mobile Payments Today, This Is Money

But yet, we’re not getting an increase in virtual currency adoption, and I believe confusion and greed are the reasons why.


Virtual currencies are opaque things. They’re very complex, highly technical and tricky for even vaguely technically-minded individuals to grasp solidly. The higher the level of opacity in a system, the more susceptible it is to illogical decisions motivated by greed.

I’ll use my(vaguely-technically-minded)self as an example. Back in November of 2013, when Bitcoin was flying off the chart, I bought half a Bitcoin for ~£350. My investment thesis was based on my long-standing inability to understand real-world money’s trick of increasingly leveraging itself. We don’t actually have the money that we think we do in our bank accounts - it has been loaned out to people. Those people believe they have it in their bank accounts too - but they don’t either! This is why banks die when there is a ‘run’ on them.

As far as I understood it, this wasn’t the case with Bitcoin. Bitcoin has it’s growth controlled by an algorithm (I think!), and I’d heard notions that this algorithm was asymptotic (perhaps!). [This cap is in fact not true for all virtual currencies - but more on this later.] A solid hedge against the global financial system collapsing (I thought!).

I was / am an overconfident and over-lazy investor, so I didn’t do much research. But I had a lot of good feeling backing me up! Bitcoins price was rocketing. If I had some Bitcoin my bank balance would be rocketing too. I didn’t need much of a story to give myself a convincing reason to place the bet.

Bitcoin price 1st Jan 2013 - 26th Nov 2013


Bitcoin price 26th Nov 2013 - Oct 31st 2014

The great thing about a complex system is that our brains gets think up lots of theories about it whilst having no clear way of understanding if those theories are correct or just hocus-pocus. When it comes to financial assets (or pretty much any form of gambling), our hopeful homosapien brains really like to do this. They like to do this because of a very human trait called greed.

At the end of this article you can read how further Bitcoin complexity ended my financial adventure in an even more painful way than the market would have.


I am greedy. I didn’t buy Bitcoin because I wanted to buy drugs online, a Dell computer or anything for that matter, I bought it because I wanted to hold it and make money - and as we established above, the complex nature of Bitcoin means I’m easily able to tell myself a hypothesis of why this is going to happen.

The problem is that greed doesn’t mix very well with transactional currencies (especially those that are not widely used and have no physical component - i.e. no printed money in circulation). It doesn’t mix well because it makes the future very uncertain.

Dollars (or fridges for that matter) don’t suffer from wild price fluctuations. A quick mental exercise tells us one of the reasons why: we all have a few dollar bills (and at least one fridge) lying around the house - so it’s very unlikely that tomorrow we will wake up and be able to swap one of them for a brand new car - because everyone would do it and it become car-chaos! The fact that we’re pretty sure this won’t happen removes a great deal of greed from the system; you buy a coffee with your dollars (and your spare room isn’t packed with fridges). This is currently not the same for virtual currencies - especially not with Bitcoin.

Let’s compare the major price fluctuations of USD to Bitcon since 2009 with USD to GBP since the year 2000 (as far as Google Finance lets me go back).

USD to Bitcoin

  • June 2010: Bitcoin price rises 900% in five days ($0.008/Bt to $0.08/Bt)
  • 8th July - 18th Nov 2011: Price falls 93% in four months and ten days (and ~50% in one day) ($30/Bt to $2/Bt)
  • 11th Mar - 11th Apr 2013: Price rises 375% in one month ($48/Bt to $230/Bt)
  • 4th Nov - 4th Dec 2013: Price rises 410% in one month ($225/Bt to $1,147/Bt)
  • 4th Dec - 7th Dec 2013: Price falls 39% in three days ($1,147/Bt to $694/Bt)

USD to GBP That big jump you see is equal to a 44% increase over six months and five days (£0.5/$ July 18th 2008 to £0.73/$ Jan 23rd 2009). Bitcoin is on a different planet.

We as humans suffer from FOMO (Fear Of Missing Out). This FOMO reaches another level entirely if the thing you’re missing out on is several million dollars (as opposed to your next door neighbours wine-and-cheese themed pool party), and that’s the situation we’re in with Bitcoin.

How are you meant to pay for a pizza with a virtual currency that could one day be worth millions and millions of dollars? You can’t.

How do you know if you should buy some theater tickets with Bitcoin if a guy who bought his coins for $27 later traded a fifth of them in for a plush flat in Oslo? You don’t.

If you’re a business, how are you meant to make any sort of solid financial projections with a currency that’s value can rise 400% in a month, and fall 40% in three days? It’s impossible.

In it’s current state, greed breaks Bitcoin as a transactional currency. I believe that this is one of the main reasons we’re not moving towards critical adoption.

Perhaps, Perhaps

Please note: you are entering the world of my speculations…

So to solve Bitcoin (or a different virtual currency) one of the main adjustments that needs to happen is that greed needs to be removed from the system - and, as far as I currently understand it, that might be a realistic possibility.

As I mentioned previously, virtual currencies do not have to have a cap on their quantity. The number Bitcoins might be limited by an asymptotic algorithm, but - after a recent talk with the very bright Jutta Steiner who is Head of Security for the blockchain-focused Ethereum Project - I learnt that the total amount of a virtual currency in existence can be manipulated by changing the algorithm the currency runs on.

It is possible to have an opening in the algorithm which allows any number of coins to be killed or created at any given time (…or something like that). If this opening were filled with with another algorithm - one that constantly kept the value of the virtual currency on a par with the USD (or some other major currency) - there would be no doubt about the future value of the currency. This would eliminate the desire to grasp onto one’s coins and not let go. It would remove greed from the equation and let a virtual currency become a transactional one enabling us to enjoy the tangible benefits that are waiting to be had.

I have no idea if that’s actually possible though…

Please discuss on Hacker News.

The sad end to my Bitcoin adventure
Not only was my bet wrong, but my understanding of virtual wallets was wrong too! After my hard drive crashed and the man at Apple told me he would have to wipe it - I quickly learnt that I had lost my little bit of Bitcoin. Fingers crossed the global financial system stays strong.

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