Bitcoin — The New Believers

The British current affairs programme Newsnight on BBC television recently aired a report about the woes of Cyprus. Elderly sun tanned citizens clawed futilely at the barren cash machines while eager reporters goaded them on with microphones. It was a day or so before the island’s banks — or what’s left of them — were due to re-open after a forced closure of more than a week. So far so normal as far as TV reporting of this latest financial crisis goes. However, the film was immediately followed by a segment on Bitcoin with its new-fangled feature “zero external control” aka “no central bank”. The juxtaposition of these two items was clearly intended and a masterpiece of editorial sequencing: here’s the old — look where it’s got us. Behold the new — look ma no government! Any dejected Cypriots watching must have felt the same spirit of open-jawed awe as that young lad at the start of One Hundred Years of Solitude:

“The world was so recent that many things lacked names, and in order to indicate them it was necessary to point.”

And who would blame a Cypriot granny for immediately going online to download the software . . . so what if it takes over 13 years to mint just 2 of the things and they could be worth zilch by then anyway? Let’s be honest, if you’ve just watched your government steal up to 60% of your life’s savings in order to make good on its own debts then a virtual currency you barely understand starts to seem like a good deal.

I know better than to try and recap for readers just how Bitcoin works, suffice to say it is a rather elegant piece of cryptography, but if Bitcoin is the answer to our financial woes then I wonder if the question was right?

As I write the cost of one Bitcoin whooshed past $117 dollars and the very fact that I checked and almost simultaneously felt a pang that I was missing out confirms to me the whole thing has that whiff of a bubble about it. People are piling into a scramble scared to be the last. Alas it is human nature to obsess over the now even though we know it harms us; as wealth expert Spencer Sherman commented: “We want instant gratification. People cannot stand short-term fluctuations. It’s like me asking my wife every few minutes how our marriage is doing. I would be divorced by now”. So ask not if you are interested in short or even long-term gains but rather is Bitcoin itself in it for the long-term? We know thanks to mathematics — those lovely laws so much more inviolable than the discredited regulations of the SEC or EU — that decades from now there will only ever exist a maximum of 21 million Bitcoins. So we know the supply, but what does this mean for demand? No way to print money scream the Believers. But wait, aren’t there valid occasions when you need to do that? This week the press is full of praise for Japan’s decision to stuff new money into its system to stop “prices falling” (I thought low prices were a good thing!?). Meanwhile here in the UK the government battles forlornly like a child playing whack-a-mole in the funfair to keep inflation down. Are they both wrong? I’ve no idea but if the answer is only privy to those with advanced economics PhDs then I ask myself do I really want in? Tugging in the other direction however, is the strong urge within me actively willing Bitcoin to succeed. This largely stems from a desire to stick one in the eye of the current financial system which has done so much harm. But even the lamest Craigslist therapist will tell you spiteful banker-bashing and government mistrust is not a healthy motivating force. Right?

Not so according to F. A. Hayek (and I suspect most Cypriots would concur). This nobel prize-winning economist despised the very idea of government-issued cash and predicted the rise of something like Bitcoin way back in the seventies in a paper called “The Denationalisation of Money”:

As soon as one succeeds in freeing oneself of the universally but tacitly accepted creed that a country must be supplied by its government with its own distinctive and exclusive currency, all sorts of interesting questions arise which have never been examined.

In my view it’s the last bit that counts. Has Bitcoin really been examined? Yes, I know it’s open source and a gazillion eyeballs – we assume – have scrutinised the code for glitches and nefarious activities, but what I want to know are the long term effects. Is it vulnerable to manipulation? Can it be hoarded? What do we do when governments want to control or tax it as they inevitably will? What about confidence — could a wealthy Manhattan hedge fund boss short Bitcoin and talk its value down to near zero?

I suspect there is a future for Bitcoin and it will be far more mundane than the horror scenarios I just outlined – as a senior Reddit exec recently said: “new technologies are always over-rated in the short term and under-rated in the long”. Bitcoin’s future is likely to involve more and more people taking a far less cautious approach than me and jumping in feet first. But therein too lies a potential hazard. Anyone who makes their living from open source software will tell you there’s one word they dread: fork. A split development path has happened to a great many OSS projects and usually means a maintenance headache and some mild market confusion. Hayek was cool with this and reckoned competing money suppliers were just as valid and necessary as competing electricity suppliers. So what would it mean for Bitcoin if I got my act together and created another virtual currency: psst, wanna buy some PaulyPennies? Standby for a drop in Bitcoin value. I’d be surprised if angel investors in Silicon Valley weren’t already formulating such plans and in fact the more I think about it the more I reckon I should get going . . . I wonder if the founder of Bitcoin had the same glazed, watery-eyed expression and dreams of a yacht I’m getting right now?

Ah yes, Bitcoin’s founder. Introducing one Satoshi Nakamoto. At least that’s the name on the original white paper along with an e-Mail address but don’t try sending a message; it’s fake, the identity having been dreamed up by the real founders, although tantalisingly, my attempt to reach Mr Nakamoto didn’t bounce — raising the possibility that someone’s reading the mails. At Bitcoin gatherings the name is whispered in hushed tones lest you put a hex on the whole thing. This Keyser Söze-type figure adds a lovely frisson of mystery to Bitcoin which sends the hacktivists wild with lulzlust. To experience this yourself simply register on a Bitcoin forum and post the query: “Hey, I’m new to this game can someone put me in touch with Satoshi?” O my, what larks these Bitcoiners will have with you. However, it’s worth reminding ourselves what happens with Mr Söze at the end of The Usual Suspects (Sort-of-a-spoiler alert!): everything that you thought had gone before in the preceding hour and a half becomes totally irrelevant. When Mr. Nakamoto finally does decide to reveal himself as a 15-year-old script kiddie from Ukraine or — SURPRISE! — a CIA technician who dreamed it all up in his lunch break, we’d better pray that we don’t get a similar denouement. Especially those of us with $86K of Bitcoin in our retirement fund. As a 2012 report by the European Central Bank drily states:

“The fact that the founder of Bitcoin uses a pseudonym does nothing to help promote transparency and credibility in the scheme.”

Quite.

In many ways the financial world now is very much as Marquez described: recent and things don’t got names although by golly we’ve tried a few: Eurocrisis, Economic Meltdown, Sub-prime, Sequest-a-geddon, Toxic Debt . . . . all fancy terms for governments and individuals that have basically got more going out than coming in. So while we enter uncharted territory with flailing national and supra-national powers standing idly by grunting before being stung into action by angry hordes, permit me to haul my tired and by now very saggy Marquez metaphor over the finishing line for one last hurrah. It seems that Bitcoin is a neat mirror image of that author’s most famous novel: an impenetrable mix of complicated family ties, dynastic relationships and supernatural forces which everyone unquestionably accepts. I never really got the book but I love to claim I’ve read it and while I may not understand the point Marquez was making I sure remember the climax. The world ends. Everyone dies.

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