Bitcoin is a digital currency that was launched in 2009 by Satoshi Nakamoto — and that’s likely not his real name.
I recently began reading about Bitcoin here and there over the past month, including a rather fluffy piece on it in MIT’s Technology Review. I was reminded about it again during the PowerPoint Karaoke session late last week. So I decided to finally look a little harder at it.
At first, I couldn’t tell whether it’s something to anticipate or something to avoid. After a little research, my opinion is much clearer.
Bitcoin isn’t like PayPal, which is a popular and secure way to electronically transfer money. Bitcoin is an attempt at creating a virtual currency — money without a clear economic basis. This fact alone appeals to some of its proponents while causing critics to scoff and issue dire warnings.
To use Bitcoin, you need a Bitcoin address, which also creates a wallet based on public key encryption. Because Bitcoin is decentralized and uses a peer-to-peer architecture, it has been “championed by cyberpunks, libertarians and anarchists who dream of a distributed digital economy outside the law, one where money flows across borders as free as bits.”
In one particularly breathless and widely circulated blog post issued recently by Rick Falkvinge, entitled “Why I’m Putting All My Savings Into Bitcoin,” the reasons offered for rapid adoption are:
- Bitcoin has performed well in its admittedly brief recent history.
- It’s easy to install and use.
- A lot of people will adopt it.
- The peer-to-peer architecture protects it from being easily shuttered.
Who is Rick Falkvinge? According to his bio on the post:
Rick is the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy. He is also a net activist, building tunnels and tools whenever and wherever.
Already, I’m getting a little worried about this example of Bitcoin’s advocates. But let’s put reputational affiliations aside for a moment, and consider a critique of Bitcoin, which also fits with Falkvinge’s logical analysis (it’s done well so far, it is easy to adopt, and it will be hard to stop through the use of authoritarian tactics), but reaches very different conclusions:
Bitcoin is a ludicrously bad idea. It is a scam. A Scam. It is not a currency. The economic assumptions underpinning the Bitcoin ecosystem are laughable, and ignore hundreds of years of accumulated understanding of how currencies work with each other.
The author of this critique is Adam Cohen, who works as a software developer for SeatGeek, an online ticket hub. Previously, he’s worked at Microsoft and Google. He also has a BA and MS from Stanford in economics and computer science. He’s a little more credible in my mind. Like Falkvinge, Cohen believes the main beneficiaries of Bitcoin will be the early adopters. In fact, it may be more like a Ponzi scheme than anything else. As Cohen puts it:
Bitcoin does not have a central bank capable of printing and lending bitcoins; it has an “algorithm” which through some convoluted mechanism allows bitcoins to be “mined”. Essentially it randomly allocates bitcoins to early adopters. This is a very good system for early adopters (free money!) It is a nonsensical system for a real currency . . . . To solve this second problem, the supply of bitcoins is algorithmically limited, which is again good for early adopters. But that brings us to . . . [d]eflation . . . the phenomenon where cash grows in value relative to everything around it (that is, prices go down). More specifically, deflation occurs when people expect the value of cash to grow in relative value to everything around it, and prices trend down consistently. . . . [A]ssume I own one bitcoin. I also have a dollar bill. I would like to purchase a Pepsi. Which one of those will I spend? Obviously the devaluing dollar gets spent before the skyrocketing bitcoin.
In the Bitcoin setup, early adopters gain from later adopters, so adoption occurs until the system sours in some manner. It’s here where Cohen has clearly done more thinking than Falkvinge. As Cohen writes when considering the convertibility of Bitcoins (the ability to reliably turn them into something else, like exchanging dollars for Euros — it’s essentially the fungibility of money that makes it superior to, say, chickens as a currency):
There is a common misconception among people that there is such a thing as an inherent value of money. There is no such thing. . . . my ability to turn a bitcoin into a dollar or a euro or a yen is no greater than my ability to sell my laptop on eBay. I can probably do it, but that doesn’t mean I’m going to start measuring my bank account in MacBook Pros, because one day I might not be able to find a buyer, and then what? Because of this, Bitcoin is not really a currency, it’s an asset [and a particularly useless one at that]. It is being marketed as a currency to appeal to people who are crazy, idealistic, or afraid, and it is a scam.
It may not surprise you that one of the earliest applications for Bitcoins can be found in buying illicit drugs. In fact, one site called Silk Road has been compared to Amazon.com — if Amazon.com sold drugs. A quick Google search on Bitcoin confirms the fact that most current users of Bitcoin are also seeking to buy or sell things they don’t want the government to know they’re buying or selling. And that’s another factor driving early adoption, and encouraging speculation in the Bitcoin asset market.
To me, Bitcoin seems like a virtual speculation bubble in the making — one that isn’t based on an economy in any known sense of the term; one that will collapse at some point; and one that is set up to benefit early adopters at the expense of late adopters.
My perspective on Bitcoin is a slight update on that classic line from Clint Eastwood’s “Dirty Harry” — You’ve got to ask yourself one question: Are you feeling lucky? Well, are you, cyberpunk?