A few notes about Bitcoin

I’ve been curious about Bitcoin over the past few months and a couple of these videos have been on my viewing list for a while (Thanks William). I finally got to them. If you have heard of Bitcoin but don’t know how it works, I’d suggest the first video.

The second video is intended to be a crash course in Bitcoin and the notes below are based on what I’ve understood from listening to it. I’m not sure I fully understand this but I do understand Bitcoin and the need for it a lot better than I did before. That’s a start.

I do think Bitcoin can be a great candidate to solve some deep rooted problems. For example, I worked in Argentina for about a month last year on a project and I can speak for the sorts of trouble the common man is in thanks to a disastrous economic system. It’s nice to see Bitcoin being viewed as a potential solution (see below).

That said, I’ll move on to the notes. I hope it helps whet your interest and give you a background on Bitcoin. Apologies if the notes are sparse/unclear in places.

Why Bitcoin?
Only 1 billion out 7.5 billion people can move money around largely because of politics and government policy.
– Cryptocurrencies have existed since 1980s and all previous versions fell because of one problem – while you can use cryptography to provide ownership, you can’t prevent it from being copied. So, you needed a trusted 3rd party that kept track of everything.
– Bitcoin is the first cryptocurrency that is on a distributed system called “blockchain.” This has enabled a network of distributed nodes/computers on a network to agree on the current state of the Bitcoin ledger.
– Bitcoin is controlled by everyone participating in the network but not controlled by anyone or any groups of participants.
– Financial services that account for 8% of the GDP show that there is something completely screwed up. There is too much inefficiency.
– Payment systems like Visa are a nightmare for merchants. It currently takes a week for a merchant to receive the money. In Bitcoin, transactions are irreversible.
– Bitcoin transactions are location agnostic and have a fixed fee of 0.5 cents irrespective of the amount.
– This is the first time we’ll have a currency driven purely by math and not by politics.

So, how does it work?

– Think of blockchain like Sudoku – it is hard to solve but easy to verify.
– The Bitcoin network achieves consensus every 10 mins on the latest state of the network and reaches a “verified” state. As new blocks are added, it adds security to the existing blocks.
– You’d need to invest 400 million dollars worth of computing power to fool the network for 10 mins.

How did Bitcoin’s creation come about?
– The creation of Bitcoin has been an evolutionary process thanks to governments attacking Peer-2-Peer networks until Bittorrent evolved so much that it became impossible to catch those who torrent.
– So, it is now very easy to create a new cryptocurrency (the cost of conversion from one to the next are very low) to solve a problem that Bitcoin might face. Basically, they are here to stay.

What is all this talk about Bitcoin being deflationary in nature?
– Current rate of Bitcoin inflation is 2%. Demand is increasing much quicker. So, overall, there is a deflationary characteristic and thus, the value of each Bitcoin will grow.
– By 2140, there will be 21 million coins. So, the value has to grow.
– We’ve never had a deflationary currency because of high demand. Normal “fiat” currency (Fiat currency is money derived from government regulation or law) deflates only when demand goes down. It doesn’t mean deflation is bad – it is just challenging all our current assumptions.
– It gives rise to the “coffee dynamic” – You don’t want to use Bitcoin to buy a cup of coffee because it is a deflationary currency and it’ll be worth a lot more in a few years. So, as a merchant, you want to discount the coffee to the point where you hit the sweet spot where I can’t not buy. You can infinitely subdivide bitcoin so that’s not a problem. So, we reach a point where you give it for $1 (when you might normally have charged $2) and assume it will grow if you hold on it.

What else should I know about Bitcoin?
– Bitcoin is not the money for the internet. It is the internet of money. It is a platform on which a lot can happen.
– The process of creating Bitcoins or mining is incentivized by a small commission.
– Bitcoin is not anonymous because you can track addresses. However, one person can create multiple addresses. And that’s a privacy nightmare and needs to be fixed before it goes mainstream.

What sort of disruption will Bitcoin cause?
– Bitcoin will first take out something like western union. Remittances first, international transfer, inter-bank transfers, etc., will follow. Think least efficient to most efficient. Remittances are $115 Billion market with 10-30% percent charged – and it is more expensive the poorer you are.
– Another economy on the cusp is Argentina. There were recently two 60 year old men who did a big real estate deal via Bitcoin barcodes because all their money is outside the country and this is the simplest way to get the deal done. Argentina is in all sorts of financial nightmares due to capital controls, corrupt government, and a deflationary currency since every Argentinean is trying to swap Peso for USD – if they shut theirs doors next year, Bitcoin will be prime candidate to replace it. It also fits because it is a largely educated market with ubiquitous internet.
– The Zimbabwean dollar is less valuable than goat shit because it burns longer. So, why not Zimbabwe? That’s because the world is moving up the chain of Electricity -> Internet -> Smartphones while Bitcoin is gradually moving down the chain. For example, Bitcoin transactions can just be done via SMS in places like Kenya.
– Expect multiple cryptocurrencies in the future, e.g. Lightcoin, for example, where it is faster.

What sort of risks do we expect?
– Regulatory risk is the biggest as the governments are sure to attack it.
– There might be unforeseen bugs.
– It will be hugely volatile. So, buckle up.

Like-valued instead of like-minded

We seem to constantly be in the search for like-minded people – to start families together, to make life long friends, to build companies, etc.

I’d argue that what we need is less “like-minded” folk and more “like-valued” folk. What we need are people who share similar values – who approach the world with integrity, with a long term view to make the world better, with a focus on growth and learning – and radically different ways of thinking about it.

We don’t need folks who think like us. I’d say we need to surround ourselves with folks who believe in the same ideals but are ready to push our thinking about how to pursue them.

We move from values (why) -> processes (how) -> ideas (what). Focus on the values, not the ideas.

The MBA Application Process – An Offer of Help

I am happy to share that I will be heading to the Kellogg school of management this fall to pursue my MBA. The MBA application process is long and painful and it is not something you get through with a lot of help. It is also not for everyone and I’d definitely not recommend doing it because everyone else you know is. It’s a huge commitment (2 years) and, depending on your point view, a huge expense/investment.

I went through a lot of soul searching myself and spoke to a few people, failed in my first attempt, did some more soul searching and spoke to many more people before it worked out this time. It could just as easily not have worked out. That said, I do know that I had a much better process the second time around. Even with that, it had its lows and I’m glad it worked out. There’s tons of logistical “big rocks” that need to line up for it all to work out but that’s part of the process. I’m not celebrating too hard – the big idea is to have a positive impact on the world and this feels like a step in the right direction. I intend to make full use of the privilege and make the most of it. The rest is gravy.

I didn’t want to do a generic post on how to go about the application process as it is a very personal thing. So, if you need some help to think through it, I’d be happy to help (in full confidentiality). Alternatively, if you’ve made up your mind and need help thinking through the process, I’d be happy to help with that too. There are many components of the process – the GMAT, choosing schools to apply to, building up your profile, writing essays, preparing your resume, preparing for interviews, etc. I am good at some parts of the process and can help. For the other parts, I’ll connect you to others who can help.

Traditionally, the “offer of help” posts have revolved around reviewing resumes and helping you think through specific problems where an external point of view may help. That offer still stands. I’ve met some wonderful people (readers and friends of readers) through these posts and I’m hoping to meet a few more of you this time.

*Update: Sorry I forgot the “call-to-action.” Please just email me on rohan at rohanrajiv dot com to get in touch.