The bank runs in Greece have been on my mind the past few days and in order to properly think about what is happening, I have been gathering my thoughts on the nature of bank runs in general.

• Network effects are powerful because they have momentum.
  • This momentum works in both directions: both when the network is growing as well as when the network is collapsing.
  • Since network effects can collapse on themselves just as easily as they can grow upon themselves, people often label the collapse of any network effect as a “bubble.”
  • But bubbles are actually the collapse of unsustainable network effects. Not all collapsed networks are bubbles.
• Money and, more broadly, credit are subject to network effects.
  • (Indeed, modern money derives all its value from the network effect.)
• Banks are systemically dependent on the network effects of money and, in particular, credit.
  • All money is credit, and credit is just another word for trust.
  • In other words: The more people trust a bank, the more trustworthy that bank becomes.
• Bank runs are simply the collapse of the network effects surrounding credit, as people lose trust that their deposits can be withdrawn.
• This is why, like all other network effects, bank runs are self-fulfilling, contagious, and very difficult to stop once they have started.
  • Because if everyone does withdraw their cash, there will not be enough cash to go around.
• And this is why the role of the central bank (which can create as much cash as it wants) as the lender-of-last-resort is so crucial to financial stability.

The European Central Bank has said that it will not act as the lender-of-last-resort to halt the Greek bank run. The interesting question now is whether the bank run will spread into Italy and Spain. And what the European Central Bank will do about it.

Ben Thompson today published an article on Bitcoin and the start-up company 21 Inc. I then somehow found myself in a twitter debate about Bitcoin and 21 Inc.’s business model with Walt French.

It turns out that it’s very hard to express your ideas on Twitter. So below I’ve outlined my thesis:

• Bitcoin is valuable for internet-of-things devices, allowing devices to algorithmically exchange property rights.
• Ideally, IOT devices should be convenient to use with a “plug and go” design, just as normal devices exist today.
• One solution to achieve this “plug and go” is for IOT devices to have access to bitcoins somehow embedded into its design, without the need for the user to “set it up” and link it to their own Bitcoin address. But how?
• 21 Inc. aims to solve this issue by embedding IOT devices with its bitcoin-mining chips.
• 21 Inc. will provide bitcoins on demand to the IOT devices that use its chips and in return, 21 Inc. will keep all bitcoins mined from those devices.
• This works because the amount of bitcoins each IOT device needs is small and with high frequency. On the other hand, the amount of bitcoins each IOT device earns is large but with very low frequency.
• Similar to a bank that borrows short-term and lends long-term, 21 Inc. will profit from the difference in bitcoins mined and consumed over the life of all the devices in its portfolio. This is also analogous to how insurance works by pooling risk.
• In the end, 21 Inc. will be providing users a way to “pre-pay” for bitcoins that their IOT device will use over its lifetime without the hassle of set-up.

I think that’s pretty much 21 Inc.’s plan at the moment.