You've probably heard a lot about BitCoin in the last few years, and maybe you really don't care to learn much about it. (That's OK!) It's only for criminals and people selling drugs on the internet, right? (Wrong.)
Even if you aren't planning on investing in a cryptocurrencies, as a software product manager, it's still good to understand the basics. In this post I'll talk about:
- A few basics around how Bitcoin works
- What blockchain is
- BitCoin's main product applications
How does BitCoin work? Just give me the basics...
I recorded a podcast that talks about BitCoin more in detail (if you're interested), but for now, let's just go over the basics of how BitCoin works.
- When was BitCoin invented? The idea has been floating around for a couple of decades, but BitCoin became a real thing after the financial crisis in the late 2000's. Specifically, it was unleashed by Satoshi Nakamoto in September 2009. FYI: No one actually knows who Satoshi Nakamoto is.
- Who regulates BitCoin? BitCoin is not controlled by any government or other centralized governing body. Rather, it's regulated by a peer-to-peer network, in which several computers have to validate each transaction.
- Why would people spend time to validate transactions? Because they have the potential to mine more BitCoin (see below)
- How is BitCoin tracked? Each BitCoin has a public key and a private key. The private key is the part that you have to keep secret. (Like, write-it-on-a-sticky-note-and-bury-it-in-your-backyard kind of secret.)
- Is BitCoin really anonymous? In order to spend your BitCoin, you must have your private key. No personal information is needed to purchase or spend BitCoin, as with a bank account. And yes, that's why criminals like it.
- How are more BitCoin made available? Not unlike gold, BitCoins are mined. As computers confirm transactions (peer to peer confirmation), they are subjected to a computing test - forcing them to look for new keys. They’re being rewarded with new BitCoin for maintaining the ledger.
- How many BitCoin are available? There will never be more than 21 million BitCoin.
- So a BitCoin is worth thousands of dollars. What if I want to buy a candy bar? Each BitCoin is divisible up to 8 decimal places, so each bitcoin can break into 100m pieces. The smallest denomination of a BitCoin is a Satoshi, which is the most adorable name ever for a currency. This means it's actually way more flexible than the fiat currencies we currently use.
- How are all BitCoin transactions logged? Using the blockchain. What the hell is blockchain technology? Keep reading.
BitCoin is possible because of the Blockchain
BitCoin isn't possible without blockchain technology. If I'm being honest, the blockchain is probably a way bigger deal than BitCoin itself, which is only one of a myriad of applications for blockchain.
- Blockchain is a digital ledger in which transactions are recorded chronologically and publicly.
- The ledger is distributed. Think about a bowling game in which every player is keeping an independent ledger. At the end of the game, you check everyone's total points among each person's ledgers. All ledgers have to match before the transaction is 'approved'.
- Transactions on the blockchain can't be reversed.
Why are people so jazzed about BitCoin?
- Lack of fees. There are billions of people in the world who can't afford banking. BitCoin has the potential to eliminate - or at least to significantly reduce - banking fees, bringing more people into the financial services loop.
- Security through anonymity. In recent years we've heard of huge corporations getting hacked - Target, Sony, Yahoo, etc. This is because there is a singular central repository holding all of our personal information. That's not the case with BitCoin. First off, they don't have our personal information. Also, because the ledger is distributed, fraud is much more difficult.
- Because it's laissez faire. In a way, BitCoin is the ultimate laissez faire ideal. Libertarians are super jazzed about BitCoin because it’s pretty much the most Libertarian thing ever. The value of BitCoin is truly decided by the public and cannot be manipulated by any central bank. (Ron Paul has been complaining for years that the Fed is illegal...)
What are the product applications of BitCoin?
The single most important product application for BitCoin will be micro-payments. This will open up a myriad of new pricing strategies and monetization models for product managers.
Think about a product like the New York Times online subscription. Maybe I don't want to pay $15 a month for unlimited access to content. Maybe I want to read several different online news sources, and if I pay a monthly $15 subscription fee for each one, that adds up pretty quickly.
As a user, I only want to pay for what I consume. The way the current banking industry/ credit card industry is set up, it's just not currently feasible or profitable to charge $0.02 to read a singular news article.
BitCoin could change that. By eliminating fees and with its ability to be broken down into tiny denominations, BitCoin could enable such a pricing strategy. This could put an end to subscription models as we know it, and make micro-payments and micro-sales a profitable model.
BitCoin Related Products and Services
Lots of new services will be created to support BitCoin and other cryptocurrencies. We're already seeing cryptocurrency 'wallets' - like CoinBase - which store your private keys for you, so you don't have to write them down on scraps of paper and bury them in your backyard, although that method is pretty fun.
Takeaway: There will be a lot of product growth in cryptocurrency-related services space.
Other Bits of Info for Product Managers
- Overstock, Dell, Subway, Virgin all currently accept BitCoin
- BitCoin payment feature is built into Shopify’s platform. Shopify does admit that very few of its customers enable the payment feature... but it's there! - just most businesses that use Shopify don’t enable this feature
- There are currently 2.5 billion people on Earth who do not have access to banking - because banking is expensive. There is a huge product opportunity to make banking more affordable, and to bring these people into the loop.