Now that bitcoin has subsided from speculative bubble to functioning currency
(see the price chart below), it's safe for non-speculators to explore the whole "cryptocurrency" thing.
So...is bitcoin or one of its growing list of competitors a useful addition
to the average person's array of bank accounts and credit cards -- or is it
a replacement for most of those things? And how does one make this
transition?
With his usual excellent timing, London-based financial writer/actor/stand-up
comic Dominic Frisby has just released Bitcoin:
The Future of Money? in which he explains all this in terms most readers
will have no trouble following. As you'd expect from someone who uses words
to amuse as well as educate, Frisby's prose is informal and fluid and occasionally
very funny, with lots of first-person anecdotes.
The message, however, is fairly serious: Bitcon is, just maybe, a new and
better form of money, an emerging homo sapiens to the dollar's Neanderthal.
As such it's potentially transformational.
So let's start with a little background: Bitcoins are created (or mined) when
computers solve certain kinds of mathematical puzzles. The number of bitcoins
outstanding is designed to grow at a predetermined rate for a predetermined
period, making its supply both limited and predictable (in contrast to fiat
currencies that multiply at the whim of central bankers and politicians). And
the currency can be transferred online quickly and cheaply, bypassing the traditional
banking/credit card nexus.
Frisby spends the first half of his book telling the story of how bitcoin
came to be, featuring the author's attempts to track down the currency's enigmatic
creator, Satoshi Nakamoto (generally believed to be either an individual super-genius
polymath or some sort of libertarian programmer collective). Frisby concludes
that it's the former and claims to have found him. You'll have to read the
book for that revelation.
He also profiles some of the early players in the bitcoin ecosystem. Silk
Road, for instance, was briefly the Amazon.com of online drug sales until it
was shut down by the authorities -- and then subsequently reemerged in various
forms around the world. Meanwhile, a lot of early adopters made and lost some
serious money during bitcoin's initial price spike:
One student from Norway bought $27 worth in 2010 while studying for his
degree. He forgot about them, and then remembered them three years later.
That $27 had turned into $670,000. He sold half through MtGox and half through
Bitcoin-24. He managed to get the money out of MtGox and bought a flat in
Oslo. But the German authorities seized Bitcoin-24. With it went half of
his fortune. 'I'm not so worried about that,' he says. Another coder from
Wales mined 7,500 bitcoins and then threw away his laptop. He spent many
hours trawling the local rubbish dump trying to recover his fortune - without
success. Martti Malmi bought a beer from his friend for 10,000 Bitcoin. His
mate would later use those coins to buy a prime residence in central Helsinki.
Lily Allen was offered 100,000 bitcoins to perform on 3D chat website Second
Life. She turned it down. That became, at one stage, a 100 million dollar
fortune on which she missed out. Olivier Janssens now flies from London to
his new home in Monaco by private jet - paid for in bitcoins.
Here's the promised chart of bitcoin's explosive rise and subsequent decline
to what looks like a stable valuation:
The second half of the book covers the impact of cryptocurrencies on the old,
corrupt financial order. Frisby concludes, rightly, that today's fiat currencies
are pale, dysfunctional shadows of yesterday's sound money and that this corruption
is the main cause of our descent into debt-driven chaos. Cryptocurrencies,
meanwhile, have the potential to usher in an age of high-tech sound money that
puts future governments and mega-banks in their (much more humble) place.
From the chapter titled "Why Bitcoin is a libertarian Utopia":
The ability for a government to fund itself through the manipulation of
money disappears. You can't obfuscate bitcoin supply. You can't 'quantitatively
ease' bitcoins. Governments - without a very aggressive and potentially impractical
bitcoin confiscation scheme - will struggle to use your bitcoins to bail
themselves out. Defcit spending becomes impossible - you can't spend bitcoins
you don't have. Central and private banks can't create bitcoins when it suits
them, and governments can't print bitcoins (they'd have to compete to mine
coins along with everyone else).
From Why "Bitcoin will end the war on drugs":
People are always going to want to buy drugs. Bitcoin is enabling them.
Unless the authorities launch a War on Bitcoin - which due to its decentralized
nature will be a very hard war to win - it seems they will lose the War on
Drugs once and for all. Bitcoin may be what ends it.
These are of course controversial predictions and before they come true lots
of questions will have to be answered. For instance:
When the empire inevitably strikes back, what will the world's central banks
and intelligence services do to squash and/or co-opt cryptocurrencies, and
how will these actions affect the functioning and value of bitcoin and its
peers?
Which cryptocurrency will win out? Besides bitcoin there are hundreds in existence
already and several, including Litecoin and Dogecoin, are gaining traction.
What would the emergence of one or two winners do to the utility and monetary
value of the others?
By decade's end we'll know the answers. In the meantime this is a great place
to start.
