Visualizing bitcoin

We will be writing a few articles on blockchain, with a fairly strong focus on what preceded that term, bitcoin. The article below is the 1st of the series so don’t be afraid to read through the entire introduction, as it should help explain why we decided to use data visualization as a way of exploring what bitcoin and blockchains are by presenting them as dynamic (as in alive and growing) structures.

Eyeing the Blockchain

Blockchain has been all over the news for the past few years now. Unless you’re living under a rock, you probably already know that everyone can pay their morning coffee with a fraction of a bitcoin and that the entire land registry of Venezuela is a terrific large scale implementation of this revolutionary technology, “the blockchain”, applied to real-world problems.

Of course, you’ll also have heard or read numerous other claims and promises of how blockchain will be used, the potential breadth of which is seemingly infinite. All of this will be preceded by necessary introductory explanations of what bitcoin, ethereum or “THE (as in the one and only) blockchain” is. If you’re lucky you also get some nice 12-step diagrams of how the blockchain works.

Now some people will be curious enough to learn more about bitcoin or ethereum or the blockchain. A lot of the people we meet tend to describe a similar pattern of hearing about it once and not thinking much about it, only to get sucked in on the second or third encounter and going through one of the “I want to understand all about it” moment. (fairly akin to the “I want to know all there is to know about you” moment, but we digress).

Hopefully, if you’re in for a nice ride, along the way you will discover that purchasing coffee with a fraction of a bitcoin is entirely possible although not very convenient and that this whole Venezuela story died years ago at a very early stage of the idea. If you are patient and put in a fair amount of work, you eventually reach that point where you can understand how and why bitcoin was created (original white paper) from a sum of already existing components, and what type of promises bitcoin and blockchains — now that other communities have started to look at Bitcoin (capital B for the protocol) — offer.

However, the exact definition of what any of those terms mean is never exactly clear, and worse, many very smart men and women seem to disagree strongly on certain aspects that become hot topics of controversy within the community (ies).

A Square Peg in a Round Hole

This brings us to a little experiment that we conducted a few weeks ago and thought was interesting enough to share.

We were given the opportunity to work with the Medialab of a prestigious educational institution on the visualization of data related to our field of research. We’d come in with a list of questions we were trying to research and sets of data that could be used to respond to these questions.

We chose to focus on bitcoin, the cryptocurrency, and more specifically on quantitative data that could help us determine bitcoin’s asset class.

We’ll skip through the time it took us to “care” for the data — which must make the whole data science practice extremely painful at times — and ended up with traditional calculations of volatility, correlation and performance for assets representative of their asset classes.

This is when we started working as a group and listing all our results on a whiteboard to draw some conclusions that would help us establish what we wanted to show, and how we might potentially want to visualize it.

What we tried to do at first was compare asset to asset, characteristic to characteristic to try and determine where each of them stood within traditional asset classes. The results weren’t immediately obvious. Maybe this is why depending on where you live in the world and to which regulator you pose the question, you get different answers when asking what type of asset bitcoin is. Should bitcoin be treated as a currency, as a commodity or even as property?

However, there might be another reason for the seemingly slow and painful progress that is being made on this question. One that does not necessarily jump at you at first, but that becomes obvious once you have asked the original question the other way around. See the point is, we’re not supposed to figure out which asset class bitcoin belongs to, as there are several common traits with all existing asset classes although it never necessarily checks all the attributes; the real question is which asset class does bitcoin not belong to?

image credit

A Shift in Perspective

Ask yourself the right question and you’ll find the right answer. That was the turning point in our experience. And that led us quite naturally to our narrative. What if usage of all standard asset classes was so anchored in common practice by billions of people, that these asset classes could coexist with little overlap, creating almost no friction or competition amongst themselves.

Sketch representing 5 asset classes that would, as a whole, create the entire set of possible usages

Now what if a new entrant were to come in and by its specific characteristics create instant competition in people’s mind with established practices.

Sketch representing the concept that a new entrant (BTC) could potentially have attributes / use cases that would overlap a little or a lot with existing asset classes and some that would be outside of the existing corpus of known uses.

We went back to the drawing board and started listing the known characteristics of bitcoin and all the other asset classes we wanted to compare it to that seemed interesting in establishing our visualization, ending up with just over 20 categories. We then proceeded to determine whether the characteristics applied or not to each of the asset classes.

That was pretty much where we stopped at the end of our second day of work. We felt extremely excited by the direction this was taking us, we were relieved that the datacaring was well behind us and we started to get a real grasp of what data visualization was about. Now we were left with the final step: producing a visual.

How things fall into place — What our visualization leads us to think of bitcoin

We came in on the third morning knowing we had to work on the presentation we would give after lunch and we had yet to produce the visual. We knew what we were going for and as you will see the visuals do bear some resemblance to the rough sketches above, but part of the success of our experience was that once delivered the visuals did not illustrate a point, but did support a story.

What immediately struck us was how crowded the space currently occupied by gold, commodities and electronic money is. If you want to establish a presence here, you’re in for a good fight.

Conversely, cash occupied a very different space, demonstrating properties of anonymity that aren’t surprising when you remember that bitcoin was described by its creator(s) as digital cash or often described by early observers as anonymous.

Bitcoin interestingly presents a much different pattern, sharing space with both the east-west assets (gold, commodities and electronic money) and cash depicted here as the north south asset.

We also used the same grid — not knowing whether we would be using it or not during our presentation — to describe other assets that would not be considered as financial assets but that may present interesting similarities or differences. We obviously could not resist mapping drugs and crime knowing how much bad press bitcoin has received over the years and chose to represent two very digital assets, which unlike all the others, weren’t around centuries ago: electronic mail and an extremely wide asset we just called “internet protocol”.

This exercise was extremely helpful, as a “workshop format” type of drill, in helping to define rough profiles and uncover potential sources of development. Indeed, after carefully observing all our representations, we chose — and this can perfectly well be debated as other choices could be equally interesting or successful — to highlight seven specific areas of our visualization that we separated in two categories.

Characteristics which bitcoin must reinforce or continue demonstrating

Since its inception, bitcoin has grown tremendously in popularity and value. Thanks to its large network effect, it is steadily approaching the $30bn market cap, garnering even more attention and investors along the way. This financial performance is absolutely crucial in supporting bitcoin’s continuing growth and ultimately attaining mainstream usage. Thankfully, bitcoin has been on quite a run in the last half decade, posting better performances than any other currency in the world in three out of the past four years. As a matter of fact, if you compared bitcoin to other asset classes in 2016, such as gold or stock indices or commodities you would obtain the same result. Bitcoin has consistently outperformed other assets. While this performance has a lot of bitcoin investors screaming “moon” while waiting for the price to reach the next digit (and yes that means more than $9,999) another characteristic of the price has followed a very encouraging trend, as the historically high volatility of bitcoin has steadily declined over years. Finally, bitcoin must prove to the masses that it can be considered as a store of value, offering wealth preservation properties to investors through stable supply, international availability and intrinsic durability. Although the future paths we are describing in our posts are different, we found it extremely interesting to read Vinny Lingham’s take on bitcoin’s evolution and how he believed that being a store of value was indeed a necessary step in the cryptocurrency’s development.

Areas that bitcoin might wish to invest in, to differentiate from other asset classes, play on its strengths, gain market shares and avoid being dethroned as the king of cryptocurrencies.

One way of establishing its own place amongst the incumbents would be for bitcoin to demonstrate a specific competitive advantage, or bring characteristics that other assets are incapable of providing. Bitcoin has always been the first and most successful cryptocurrency, but there are now hundreds in existence that are all battling for a top position. Two of these coins, Monero & Zcash, have caught a lot of attention and aim to establish themselves as truly anonymous digital currencies, making anonymity & pseudonymity distinctive selling points, bitcoin only being pseudonymous.

Another feature that bitcoin could promote is the resistance to censorship, and more generally to power struggles stemming from concentration. We are not going to open that can of worms here as there is a lot to say about such a wide-ranging topic that will most certainly be the subject of a future post, but the recent debates that have flooded the forums and social networks have only highlighted how much a currency residing in cyberspace was suffering from real-world problems. Centralization of mining, and heavy concentration of chip manufacturers have become a thorn in the side of a global peer-to-peer currency that is not issued by a nation state.

Lastly, we chose to highlight a totally different type of characteristic that we believe holds great promise. While bitcoin is mainly known or discussed for its currency, it differs from all other typical assets we had compared it to as it relies on its own network, the Bitcoin network. Data anchoring in the bitcoin blockchain is one of the most straightforward examples of early usage the public could make of an emerging technology that partially relies on network effect to secure itself, helping people around the world understand its use, but not necessarily how it works.

Of course, we could have chosen other properties that bitcoin could / should focus on. But this strategic choice is probably better left to the terrific communities that focus on creating bitcoin’s future uses and success.

What comes next

We covered a lot of ground during those two and a half days, managing to come up with a different way of exploring bitcoin and blockchains, thanks to tools — data visualization — we had never used before and coming out of this experiment having covered more ground than we originally expected. Trying to determine what existing asset class bitcoin belongs to does not bring value to the discussion. Exploring the evolving contours of what bitcoin is today and what it can become will probably prove to be more useful in creating a thorough understanding of what strategic decisions should be taken for those heavily invested in the topic. In the meantime, treat bitcoin as “one” asset and add some to your portfolio. It is the best way to learn more about it, and who knows, it might take you to the moon…

This article is the first in a series to come, if you have enjoyed it, please check back.