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Alok's Posts / Startup

What Entrepreneurs can learn from Bitcoins!

My column in the February 2014 issue of the Entrepreneur magazine:

What Entrepreneurs can learn from Bitcoins!

It took me a fair bit of effort to attempt this article. First of all, understanding the often-quoted ‘Bitcoins’ was not an easy task. Secondly, trying to find lessons for entrepreneurs via a ‘concept’ was something I had not attempted before. But I guess you know entrepreneurs by now – they always do things they are not sure of completely!

Amongst the voluminous explanations of Bitcoins on the web, I came a cross a very nice, concise series of videos explaining Bitcoins on the Khan Academy website. Do review the same at leisure. It will be well worth your time. 

In one of the videos, the narrator says, “For a while, suspend belief while trying to understand the concept of Bitcoins…” 

That was the Archimedes moment for me! I knew there was a holy, unspoken, secret connection between Bitcoins and Entrepreneurs when I heard this statement. I also knew it was my job to try and bring the equation to light.

So to begin, what are Bitcoins? 

Simply put, Bitcoins is a virtual currency for people like you and me to do business with each other. Now, let’s assume that you want to hire me to write an article on the sorry state of Indian Politics. You want to publish that article anonymously on the Internet to highlight the plight of our nation and use that piece to inspire Indians to vote and effect a change. 

You don’t really want to tell people that you are contracting out a rather controversial article. Also, I may not want to be publicly associated with a strongly biased article. But we both want to do business. Bitcoins come to the rescue! 

You offer to pay me for my services via bitcoins and I accept to receive the same. Why, you may ask? Because Bitcoins are anonymous and not traceable by anyone. They are the perfect way for people to do business with each other without revealing identities. They don’t leave any digital footprints like credit cards records, bank transactions, etc. 

We agree and you ‘send me’ Bitcoins in advance to pay me. Let’s set the price at 2 Bitcoins for my work. While writing this article, the current rate is about US $800 per Bitcoin. So, you are paying me about US$ 1600 for my article!

Is that it? 

Not really. That’s where the genius of Bitcoins comes in! To verify that you actually own these 2 Bitcoins you’ve promised to give me, we both need to invoke the Bitcoin system to undergo an elaborate ‘verification’ process. This involves the entire community of Bitcoiners (also known as miners) who will go through complex coded algorithms and programs to check that the 2 Bitcoins you possess really exist and that they can be transferred to me. The miners will be paid a fee for their service and will also earn Bitcoins as a reward for executing these complex calculations. 

Now, if you are imagining long haired, unshaven, zombie-like people with 30 inch glasses, chewing pencils, eating from plastic plates while executing this verification process; you are mistaken. All that the miners actually do is stack up computers in locations with cheap electricity and cool weather to perform these calculations! It’s machine-meets-machine; man simply watches! 

The genius of Bitcoins is that only 21 million Bitcoins will ever be made available to mankind via this machine-driven verification process that becomes harder or easier, depending on how many Bitcoin transactions (like the one between us) are being verified by the miners. Each year, the miners’ ‘reward’ (in Bitcoins) reduces, so that eventually the 21 million mark is reached and there are no more Bitcoins to be issued. Hence, Bitcoins, their issue and their maximum circulation have been predetermined from the beginning. So why will miners keep working after this? For ‘fees’ that will then grow more valuable.

I hope this explains the concept. Read the section a couple of times again if it doesn’t. Moving on to the lessons for entrepreneurs:  

1. Bitcoins come predetermined with appreciation. 

Think about me for a minute. After receiving your 2 Bitcoins what would I do with them? Keep them? Exchange them for real world money? Hoard them or simply use them to buy something else? That all depends on my ‘perception’ of the future value of Bitcoins. 

It’s like you receiving an M. F. Husain painting as part of an inheritance from your rich Mamaji of Indore. What would you do? Sell the Husain and deposit the money in some fancy bank to earn measly interest? Or keep the Husain safe and sound and watch its value appreciate year after year? 

Bitcoin’s secret inventor (pseudonym “Satoshi Nakamoto”) had the foresight to ensure that Bitcoins appreciate in value ever since they were invented in 2009. The price as late as in 2011 was US$ 1.00 for 1 Bitcoin. In 2013, the price jumped over US$ 1000 for 1 Bitcoin. 

Does this smell like a bubble or a scam? Are you thinking of Madoff or XNet or YNet when you read this unrealistic price movement? 

My argument is that no one really knows what the real value of Bitcoins will settle at, but the genius of capping the amount of Bitcoins that will ever be available, is commendable. 

When was the last time you did a business or service that was limited and restricted in supply? Only a great artist like Husain comes to my mind who purposely restrained himself to create value and wealth that would increase with scarcity – not with abundance. 

Lesson: If you are running a business that is selling perceived value of the future, learn how Bitcoins created phenomenal value even before it began. Sometimes, less is really more. 

2. Employment via wealth not cash. 

Imagine if Bitcoins were really a large Bank. The images that come to mind are fancy offices with hundreds of suited-booted people, swishing glass doors and transparent conference rooms. You don’t need to be a Marwari Munim to understand that all these things cost money, and money is the one commodity that’s not available! Bitcoins Bank would have failed even before it started, because it’s impossible nowadays to sustain costly operations that ‘may’ become valuable in the future. Could only ESOPs have made these people work for the bank for free? I doubt it. 

By letting miners (you could become one right now by ditching this article and hitting google), earn Bitcoins for the effort they expend in verifying Bitcoin transactions, the Bitcoins business has achieved the impossible. It’s made thousands of highly intelligent people invest their time and resources into it for free, and has rewarded them in a constantly appreciating currency that makes them work harder and faster without spending any cash. It has traded massive rewards for massive effort only on the basis of faith! 

Lesson: If you are going to do a business that requires enormous employment, work out a Bitcoins logic of sharing something that will be perceived as wealth and demonstrate its value as fast as you can. Hint – if you dole out ESOPs, prove their real value via some means, as fast as you can. 

3. Be a caveman that hacks the Higgs Boson 

If the headline sounds stupid, let me explain. I mean, be as naïve as you can while trying to solve the most complex problem in the world. The founder of Bitcoins (who we know is a genius) cultivated raw naivety in himself and must have pondered, “How can I made a frictionless, easy to use, unregulated currency for the world…?” This led to the ingenious invention of Bitcoins! Think – who would have ever asked that question as late as in 2009??

So as an Entrepreneur, you may be the cleverest human on earth; but are you as naïve as the caveman to ask the most unassuming questions that no one would ever care to dream about?  

Lesson: Cultivate being Naïve. It will be the cleverest thing you would have done!

****

 If Bitcoins intrigues you, read Who moved my Bitcoins?! also written by me!

*******

 

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9 Comments

  1. Why the limit on number of bitcoins ?

    Reproducing the below link from Fred Wilson’s blog on BITCOINS hearing wrt regulation.

    https://www.avc.com/a_vc/2014/02/video-of-the-week-the-nys-dfs-bitco

  2. My approach would be that of warren Buffet , dont invest in things which you dont understand ,bitcoin can be a bubble may be a fraud , but for now its a medium for illegal activity like purchase of drugs, weapons etc Anonymously . 

  3. Well written, 

    Bitcoins is a very hot topic in the world today. It’s very important for a entrepreneur to know about what it is and what can be done with it. Whether bitcoin will last, its a mystery, many new virtual currencies have emerged. 

    Bitcoin, Ripple, Litecoin, Peercoin, Namecoin, dogecoin, etc…..

    Bitcoin’s main program is released as open source, you can therefore start your own coin at any time.

    This said, not being able to track usage in the black market, by passing government taxing system, etc. It will be interesting topic to keep tabs on. Either the governments will plug this gap or plug the coin. 

  4. Though the RBI does not approve of Illegal Bitcoin trading as  per FEMA and Forex regulations in place with their September 2013 Circular.

    First time in the country, ED raids a Bitcoin seller in Ahmedabad – India – DNA

    The Raucous Bitcoin Trading Pit That Sits In The Shadow Of The New York Stock Exchange

    Beginners Guide to Mining Bitcoins

    Choose your wallet – Bitcoin

    Mt.Gox – Bitcoin Exchange

    🙂 

  5. Bcoz its based on encryption algorithm similar to public key private key similar to RSA,

    And if you follow RSA basics you will find you can have limited number of public key private key pair in total, 

    Hence Bitcoins also do have Limit.

  6. So Any one Planning to Start a BitCoin Exchange ? Space Just got created!

    So when the Mt Gox Collapses the Virtual World Crumbles too!!

    After the recent Hack (Pony Botnet malware) attempts on the Exchange Site, Pony botnet have stolen some 85 virtual “wallets” that contained Bitcoins and other types of Digital Currencies. The firm said it did not know how much digital currency was contained in the wallets. Hackers hauled away majority of the Stocks in the exchange. 

    Botnets are collections of infected computers that take orders from central “command and control” servers. The botnets steal data from compromised PCs and can also deliver other types of malware that force them to perform tasks.

    Cyber criminals have also developed botnets that force enslaved computers to create, or “mine”, digital currencies, which the fraudsters then claim as their own.

    Bitcoin mining is a time-consuming process in which computers perform complex math calculations. The operators of those botnets are stealing electricity and data center resources when they use compromised machines to mine digital currencies.

    (Users can go to these Trustwave sites to check if their Bitcoin wallets and credentials have been stolen.)

    Mt. Gox files for bankruptcy protection after losing $473M worth of Bitcoins, has $63M in debt

    The troubled MtGox bitcoin exchange filed for bankruptcy protection in Japan Friday after claims of a multi-million dollar theft from its digital vaults, media reports said.

    The Tokyo District Court accepted the application from MtGox, Jiji Press and public broadcaster NHK said.

    The action was taken after US prosecutors reportedly served a subpoena on the company.

    The website of Tokyo-based MtGox went dark on Tuesday, possibly heralding huge losses for investors, and sending ripples of alarm throughout the global community of digital currency adopters.

    MtGox froze withdrawals earlier this month, claiming there was a bug in the software that underpins Bitcoin, making it vulnerable to thieves.

    The value of the volatile unit plunged on the Tokyo exchange and was hovering around $130 on Tuesday, just quarter of what it was fetching on other platforms, until the site suddenly disappeared at lunchtime.

    February 26th 2014

    Dear MtGox Customers,

    As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.

    Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.

    Sincerely,
    Mark Karpeles


    Dear MtGox Customers,

    In light of recent news reports and the potential repercussions on MtGox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

    Best regards,
    MtGox Team


    The former popular Bitcoin exchange, which shut down suddenly this week to “protect the site” and its users, announced this morning that it’s officially filing for bankruptcy protection, the Wall Street Journal reports.

    In a Tokyo District Court this morning, Mt. Gox said that it lost nearly all 750,000 of its customers’ Bitcoins, as well as 100,000 of its own. At current Bitcoin values, the loss is worth around $473 million. The site previously used to handle around 80 percent of Bitcoin transactions.

    “There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble,” Mt. Gox founder Mark Karpelès said during a news conference at the court, per the WSJ.

    Karpeles spent much of the week in hiding as Mt. Gox crumbled, and at the same time others in the Bitcoin industry quickly distances themselves from Mt. Gox’s failure. Karpeles resigned from the board of the Bitcoin Foundation on Sunday, which helps to guide and promote Bitcoin, following reports of the massive loss. Additionally, competing Bitcoin exchanges Coinbase, Kraken, and Bitstamp.net condemned the site’s shutdown.

    Just Wondering about the ones who have their Money (Virtual in Bitcoins and real converted) stuck right now!!! With no fault of theirs and little hope of getting them recovered as well. Just another POV.

  7. Hi Sandeep

    Bitcoins was designed by its inventor to mimic a precious metal like gold. An important property for something to be used as money by society is that it should be limited in supply or precious.

    Our current money, our national currencies are artificially kept limited in supply by our central bank’s monetary policy.

    Hence, the limit on number of bitcoins to keep it precious.

    – Sandeep Goenka, co-founder of zebpay,

    the world’s simplest mobile bitcoin app for non geeks, now easily buy, store and spend bitcoins in India

  8. Hi Prashant

    That means you understand the way our current money system works? Also Rupees and Dollars are a medium for illegal activity like purchase of drugs, weapons etc 🙂

    However, bitcoins is increasingly considered to be as big as the invention of the internet itself. Please do spend 20 mins and try to understand: https://youtu.be/pmU28mgihB4

    Sandeep Goenka, co-founder of zebpay

    world’s simplest mobile bitcoin app, download and get 100 bits free 🙂

  9. Hi Darshan

    In Dec 2013, governments around the world released cautionary notes because it is in this period that bitcoin price jumped 10x in 1 month from $100 to $1100 and caught the attention of the whole world.

    Since then bitcoins has been given a legal status in almost all western countries and the perception around bitcoins legality has changed dramatically.

    In India, bitcoins is not illegal. Nishith Desai Associates (NDA) is India’s leading law firm with billion dollar companies as its customers. They released a whitepaper last month and have clearly stated that bitcoins is not illegal in India: https://blog.zebpay.com/bitcoin-is-legal-in-india/

    NDA is also on my bitcoin company’s board and we are working hard to change this perception in India. Stay tuned 🙂

    Sandeep Goenka, co-founder of zebpay

    world’s simplest bitcoin mobile app targeted at non geeks. easily buy, store and spend bitcoins!

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