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Wed February 5, 2014
A Venture Capitalist Is Betting A Pair Of Socks (And $50 Million) On Bitcoin's Future
Originally published on Fri February 7, 2014 8:26 am
Ben Horowitz is a big-time venture capitalist. His firm invested in Facebook and Twitter. More recently, his firm invested some $50 million in startups related to bitcoin, the virtual currency that works like online cash. Ben thinks bitcoin is going to change the way people buy and sell stuff on the Internet.
Felix Salmon, a high-profile finance blogger at Reuters, is a prominent bitcoin skeptic.
"I said, 'Why don't we just bet?'" Ben told us. "I've read enough of Felix's stuff to know that would be irresistible to him."
"He's right about that," Felix said. "Being challenged by Ben Horowitz is kind of the high point of my career. So I immediately said yes."
When we heard about the challenge, we invited Felix and Ben to come on Planet Money to hash out the details of the bet. Basically, we offered to be their bookie. Fortunately for us, they accepted. (Listen to the show.)
If you can't wait to see what the bet is, scroll down to the bottom of this post; the details of the bet are described in bold.
The Case For And Against Bitcoin
Before we got to the details of the bet, we asked Ben and Felix to make their cases. Ben went first.
Most of the coverage of bitcoin has focused on its skyrocketing value — from a few cents per bitcoin in 2010 to over $1,000 per bitcoin last year.
But Ben's belief in bitcoin isn't based on how much it costs to buy a bitcoin. It's based on the belief that bitcoin is a major technological advance that will make it cheaper and easier for people to buy and sell stuff over the Internet.
Ben: It's a real computer science breakthrough. This is a problem that we've been trying to solve in computer science since the early '80s, which is: How do you prevent the double-spending problem?
In other words: It's very easy to make copies of digital things (think of all the piracy of digital music and movies). But for digital money to work, it has to be impossible to make copies. Otherwise, counterfeit money would be rampant and the system would collapse. And bitcoin has solved that problem.
And, Ben says, the way we buy stuff online now — basically, using credit and debit cards — is a problem for a lot of businesses that sell stuff online. For one thing, the businesses have to pay credit card companies a fee of around 2.5 percent of everything they sell. And for companies with tight profit margins, that fee is a big deal.
Also, Ben says, credit card companies reject some of perfectly legitimate customers because they get flagged as potential frauds.
Ben: As a merchant, you end up rejecting approximately 8 to 10 percent of your good customers due to potential fraud. Netflix, I think, only accepts customers from 40 countries because of this credit-card problem. And merchants in, like, Kazakhstan, they're just done — there's no way they can be online.
So that's Ben's case. And, to some extent, Felix actually agrees with him: he says the the current way of paying for stuff online is a big problem. But, Felix says, bitcoin has its own fundamental problems.
One of the biggest problems Felix cites with bitcoin is somewhat counterintuitive: The fact that bitcoins have become so valuable so fast means no one is going to want to spend them to buy stuff. Instead, people will just buy them and hold onto them.
Felix: I'm skeptical about bitcoin in particular partly because it is a store of speculative value. It's a place where speculators like the Winkelvoss twins will come in and buy up lots of bitoins for no reason other than they think they can find a greater fool to sell the bitcoins to tomorrow.
In fact, Felix points out, the way the bitcoin system was designed — the way the computer the code was written — only a finite number of bitcoins can ever exist. And that fact alone means they're likely to get more and more valuable over time. In other words, deflation is built into the system.
Felix: And because bitcoin offers the potential for so much profit just by sitting on it — the longer you don't spend it, the more you benefit — then everyone has an incentive to not spend their bitcoins. And you can't have an have effective payments mechanism if you're not spending the currency.
Ben thinks the rise in bitcoin price will slow significantly.
Negotiating The Bet
First thing: What's the duration of the bet?
Ben: I think it makes sense in the five- to seven-year time frame. It is a big thing to upgrade the the payment structure of the Internet if not the world. ...
Felix: There's no way that bitcoin is going to be a common payment mechanism in five years' time. It probably will not even exist. It's just going to be a vague memory.
They agree to five years.
Next: What are the terms of the bet?
Felix and Ben didn't want to bet on the price of a bitcoin in dollars. That could just be the result of people speculating. They wanted to bet on whether people were actually using bitcoins to buy stuff.
After some back and forth — should they pick a particular retailer? If they did, would we actually know what share of a retailer's business was in bitcoin? — we offered an alternative.
We offered to do a poll five years from now to ask them whether they used bitcoin to buy stuff. Ben and Felix negotiated the specifics, and came up with the following.
Here's the bet:
Five years from now, in January, 2019, we'll poll a representative sample of Americans. If 10 percent or more say they have used bitcoin to buy something in the past month, Ben wins. If it's fewer than 10 percent, Felix wins.
Last question: What are the stakes?
Betting a bitcoin was a no-win proposition for Felix. If he's right, the value of a bitcoin will be trivial in five years. If he's wrong, his cost could be astronomical.
For stakes, they settled on one of the first things you could buy with bitcoin: a pair of alpaca socks.
That gave Felix one last chance to make his case.
Felix: Part of the reason I am going to win this bet is exactly that everyone who bought alpaca socks for bitcoin two years ago is kicking their warm feet right now saying, "I wish I hadn't bought those alpaca socks. I wish I'd held onto the bitcoin because now I'd be a millionaire."
DAVID GREENE, HOST:
Bitcoin is a virtual currency that's been around for a little while. Think of it as digital cash you can use to buy stuff on the Internet. It's actually causing a big debate in the worlds of both technology and economics. Backers say it will transform the way we buy and sell things; skeptics say it's just a fad that's going to disappear.
Recently, a high-profile backers of bitcoin went beyond singing its praises: He publicly challenged a bitcoin skeptic to a bet over what we will be using for money in the future. Jacob Goldstein from our Planet Money team got these two people together.
JACOB GOLDSTEIN, BYLINE: Ben Horowitz is a big-time venture capitalist. His firm was an investor in Facebook and Twitter and it's also invested about $50 million in bitcoin-related startups. Felix Salmon is a finance blogger at Reuters. He recently published an essay arguing that bitcoin was doomed. Ben wrote a comment on that essay challenging Felix to a bet.
BEN HOROWITZ: And I've read enough of Felix's stuff to know that would be absolutely irresistible to him, so.
FELIX SALMON: He's right about that. So, of course, being challenged to a bet by Ben Horowitz is kind of high point of my career and so I immediately said yes.
GOLDSTEIN: Ben says bitcoin is a big improvement over the way we buy stuff online now - basically, using credit and debit cards. For one thing, Ben says, the way it works now, businesses that sell stuff online pay a fee of about two and a half percent to credit card companies for everything they sell. With bitcoin, he says, the fee is much lower. Also, Ben says, in the current system lots of perfectly legitimate customers can't buy stuff online because they get flagged as potential frauds.
HOROWITZ: As a merchant, you end up rejecting approximately eight to 10 percent of your good customers due to potential fraud. You know, Neflix, I think, only accepts, kind of, customers from 40 countries because of this sort of credit card problem and then merchants in, like, Kazakhstan, like, they're just done, like there's no way they can be online.
GOLDSTEIN: So that's Ben's case. And, to some extent, Felix agrees with him. He says the current payment system is a problem. But, he says, bitcoin has problems of its own, economic problems. Bitcoin has had this incredible rise in value from a few cents per bitcoin in 2010 to over $1,000 per bitcoin last year. And that, weirdly, is a problem if you want more and more people to be spending bitcoins.
SALMON: Because bitcoin offers the potential for so much profit just by sitting on it, the longer you don't spend it, the more you benefit, then everyone has an incentive to not spend their bitcoins and you can't have an effective payments mechanism if you're not spending the currency.
GOLDSTEIN: Ben, for his part, says the price of bitcoin won't keep going up and up like it's been. It'll settle down and people will start using it to buy stuff - so that's the argument. Now, we have to figure out how to turn it into a bit. First question, how long's the bet gonna last? When will we know who won?
HOROWITZ: I think it makes sense, you know, in the five- to seven-year time frame, because it is a big thing to upgrade the payment infrastructure of the Internet if not the world.
SALMON: There's no way that bitcoin is going to be a common payment mechanism in five years' time. It probably will not even exist. It's just going to be a vague memory.
GOLDSTEIN: So we've got a timeframe, five years. Next question: How do we figure out whether people really are using bitcoin to buy stuff? We decided that in five years, at the beginning of 2019, we'll do a poll of a representative sample of Americans and we'll ask them, have you used bitcoin to buy anything. Felix started out by saying that if at least 25 percent of Americans say yes, then Ben wins.
Ben came back at Felix at five to 10 percent.
SALMON: To be frank, I think that the answer to who has won this bet is going to be blindingly obvious by the time we get to five years from now. I hope the niceties of trying to work out, ooh, have we managed to get to 10 or 25 percent or anything like that, we're not going to even need to run the poll. It's going to be obvious who's won.
GOLDSTEIN: So Felix, if it's going to be blindingly obvious, the low end of Ben's range was five percent.
SALMON: If you make it past week, I'll do it at five percent. Past month, I want 10 percent.
GOLDSTEIN: I thought you just said it was going to be blindingly obvious.
SALMON: I think it is, but I'm negotiating a bet here. I'm not going to (unintelligible).
GOLDSTEIN: Here's what they settled on. In 2019, if at least 10 percent of Americans say they've used bitcoin to buy something in the past month, Ben wins. If it's less than that, Felix wins. What exactly will the winner get? After some deliberation, they settled on a symbolic prize, a pair of alpaca socks, one of the first things ever bought with bitcoin.
SALMON: Alpaca socks it is. And, of course, you do realize, Ben, that part of the reason why I am going to win this bet is exactly that everyone who bought alpaca socks at bitcoin two years ago is kicking their warm feet right now saying, "I wish I hadn't bought those alpaca socks. I wish I'd just held onto the bitcoin because now I'd be a millionaire."
GOLDSTEIN: We'll have more on this story in 2019. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.