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