Bitcoin critics really hate Bitcoin. Today Alex Payne blogged what I am sure he felt was a scathing and effective indictment of Andreessen Horowitz’s investment in Coinbase, which is probably the leading startup focused on the Bitcoin economy. He wrote:
Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues.
To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress.
Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face while lacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.
Wow. That is harsh.
Of course, Payne is 100% correct. Unfortunately, most of what he says is irrelevant.
One is on solid intellectual ground to claim that Bitcoin is highly likely to fail. And, its true, Bitcoin may have many negative political and societal ramifications. Bitcoin’s critics are right to point out all the reasons why Bitcoin will or should fail. They should pat themselves on the back and nod in collective judgmental agreement at currency pirates run amok.
When it comes to indicting venture capital investment in the Bitcoin ecosystem, however, these critics demonstrate a profound lack of understanding.
That Bitcoin is likely to fail is completely irrelevant to whether VCs should invest in it. Their ire is sadly misplaced.
All that matters, is that Bitcoin might succeed .. and nobody can say with 100% certainty that it won’t.. but if its does, the business opportunity will be immense. Think about this: A16Z invested just 1.9% of its current $1.3B fund in Coinbase. If Coinbase follows Webvan into technology oblivion, the firm and it’s limited partners, will not lose one moment’s sleep over the loss.
On the other hand, if Bitcoin succeeds, Coinbase is well positioned to be the next Mastercard or Visa. Mastercard and Visa today have a combined valuation of $280,000,000,000 in current market capitalization. If A16Z owns 20% of the company, we are talking about a venture capital investment for the ages. The people at A16Z aren’t “grim mercenaries.” There are few opportunities this big out there. The folks at A16Z are rational actors who are just doing their jobs.
The fact that in Bitcoin has security holes or faces a very difficult regulatory environment is also irrelevant. Investors can’t wait until all the technical problems are worked out. Investors can’t wait until the government issues a proper set of regulations. If investors waited, nothing would ever happen. And regardless, someone else will simply beat them to the opportunity. Paypal was illegal and subject to massive security risks when it was launched. Uber also had no regulatory framework in which to operate. Those companies turned out pretty well. Society is adapting to both.
The hand wringing about Bitcoin’s potential negative societal implications is also irrelevant to whether venture capitalists should invest in it. Many of our most profound technological advancements are used for illicit purposes. The Internet itself is probably the greatest tool for stealing, exploiting, degrading and dehumanizing that was ever created. Should VCs not have invested in the Internet because its primary use case is the global dissemination of pornography? Venture capitalist aren’t morally obligated to invest only if they can rule out all negative consequences of a technology.
Luckily, a few hundred years ago, some pretty smart folks invented a system for deciding how to deal with the negative consequences of new technologies. We call it the political process. We call it democracy. It’s messy, but better than all the alternatives.
The more important point is that progress requires all the players to play their roles. We need venture capitalists to invest in nascent, unproven, and difficult to understand technologies like Bitcoin. We need social critics to shed light on the negative societal impact of new technologies so that the political process can manage the inevitable dark side of anything new. It is the confluence of all three actors – investment, knowledge and politics – that will shape the world in a positive way.