(Photo: Jason Benjamin)
After being bombarded by email requestsfor months, Freakonomics Radio has finally caved and made an episode about Bitcoin. It’s called “Why Everybody Who Doesn’t Hate Bitcoin Loves It.” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.) The gist: thinking of Bitcoin as just a digital currency is like thinking about the Internet as just e-mail. Its potential is much more exciting than that.
Bitcoin is often described as “virtual gold” — as well as everything from a “bubble” to a “Ponzi scheme” to “a haven for individuals to buy black market items.” But what excites some people, like Silicon Valley veteran Marc Andreessen, is Bitcoin’s potential as a new technology that could underlie any number of transactions, well beyond the simple swapping of currency.
Andreessen, a Web pioneer, is now on the board of companies like Facebook and eBay. He is not a disinterested observer in the Bitcoin debate: his venture-capital firm Andreessen Horowitzhas invested around $50 million in two Bitcoin-related companies, including Coinbase, and Andreessen says they plan to invest much more to enable Bitcoin to go mainstream.
Why such confidence? The reason, Andreessen tells Stephen Dubner, is that Bitcoin is “the solution to a fundamental problem in computer science”:
ANDREESSEN: One of the things … that’s been missing on the Internet for 20 years is kind of a native concept of money…The ability to very easily pay somebody online, the ability to very easily charge for a piece of content, the ability to very easily exchange a digital title, or a digital key, or a digital contract has just been missing because you have no mechanism for establishing trust. And so Bitcoin basically holds the promise of being the first solution to establishing trust over an untrusted network.
Susan Athey, an award-winning economist at Stanford with a background in computer science, is also a big believer in the technology behind Bitcoin; for what it’s worth, Athey advises the company behind Ripple, which is Bitcoin’s top competitor (by market cap):
ATHEY: The beauty of a new currency, which is part of a virtual currency protocol, is that what I’m moving from me to you is just an entry on a secure, public ledger. And that public ledger is maintained by a set of computers all talking to each other using a protocol. So I don’t have to worry about some bank giving me an IOU and then giving that IOU and handing it to another bank. Instead, if I make a transaction over the virtual currency, it’s just an entry in the ledger. So I don’t need a middleman.
New York Superintendent of Financial Services Benjamin Lawsky, who is leading the charge toregulate Bitcoin in the U.S., tells Dubner that he is concerned about the freedom Bitcoin affords to criminals:
LAWSKY: It’s very hard to transport $1 million in hard currency overseas. You can’t just put it in a backpack and get it on a plane very easily. But it is very easy to do that now digitally using Bitcoin.
That said, Lawsky is also excited about the possibilities of a technology like Bitcoin, which could bring down all sorts of transaction fees. This may be bad news for traditional banks, credit-card companies, and other fee-seeking middlemen. But, as Lawsky points out, a lot of other people stand to benefit:
LAWSKY: Right now, there are thousands and thousands of New Yorkers who work hard every day to send money back home to their families in whatever country they’re from…And right now they’re paying fees for those wire transactions each week at the end of the week, 7, 8, 9 percent. And that’s a lot of money for people who often can’t afford it.
A crowd of leading economists, including two Nobel laureates and former Fed chairman Alan Greenspan, have bashed Bitcoin. They’ve expressed alarm about the astronomical rise in the digital currency’s value. Marc Andreessen argues that they are missing the larger point:
ANDREESSEN: It’s a little bit like dogs watching TV. It’s like, it’s all very interesting, but like whatever until another dog shows up on screen and then the dog freaks out. Economists, like this stuff is all like, whatever, technology, geek, nerds whateverand then “currency” is the flag. And so the minute the word “currency” shows up, all the economists perk up because if there’s one thing economists are all experts on it’s currency… And they look at it and they say, “Oh my god, people are paying $600 for this thing, it’s just a piece of fake digital currency, people have just lost their minds.” I don’t think that they are looking at the underlying substance.
The episode also addresses a question many of you asked when Freakonomics Radio ran a fund-raising campaign: why don’t you guys accept Bitcoin?
AUDIO TRANSCRIPT
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And by the way, if Krugman isn’t invited very much in Freakonomics, it’s probably because his field of studies is not covered by the podcast, if only because the show is more oriented towards microeconomics rather than macro.