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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.
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