As I See It: What’s In Your Wallet?
May 5, 2014 Victor Rozek
The Weimar Republic had a big problem and its name was inflation. But it also had a solution, and its name was print-more-money. Which it did with reckless abandon. So much so that its currency, which was valued at 4.2 Marks per U.S. dollar at the outbreak of World War I, hyper-inflated to over 1 million Marks per dollar by 1923.
Which is why a man who wanted to buy a loaf of bread could be seen pushing a wheelbarrow full of money to a bakery early one morning. When he got there the bakery was not yet open, so he walked around the back of the shop to get the baker’s attention. When he returned, he found the money scattered on the ground. The wheelbarrow, however, had been stolen.
What we choose to imbue with value, has been, and always will be, entirely arbitrary. The assignment of monetary value to an otherwise insignificant object like a scrap of paper with a number printed on it is just another form of mass hallucination, not unlike infusing religious icons with mystical power. Shells, barley, peppercorns, and obsidian were all precursors to what we now call money. But these days none of those items will buy you a latte.
The ascension of gold to worshipful status was equally arbitrary. It is sobering to realize that the backstop of the international monetary system is a chemical element (atomic number 79, to be exact) that just happens to be malleable and pretty. But at least it’s tangible. You can see it, touch it, wear it in the form of jewelry, hoard it in the form of bullion. Bitcoin, on the other hand, doesn’t actually exist.
Nonetheless, a concept that resides principally on computers can buy you a latte. After several unsuccessful versions of peer-to-peer currency, bitcoin burst onto the digital scene in January of 2009. And like the e-currency itself, its creator remains equally nebulous. Satoshi Nakamoto, the name credited with the invention, could be a single person, or a team of people, or Alan Greenspan, or Al Gore, or the CIA for all we know.
There has been much speculation about the identity of the inscrutable Mr. Nakamoto but, not surprisingly, everyone who has come under suspicion is quick to deny authorship. With good reason. Should it threaten to become successful, the invention of a monetary system is sure to spawn potent antibodies. As the inevitable fluctuations occur, there will be angry losers, opportunistic speculators, bubbles bursting, thieves thieving, regulatory agencies pressuring, disgruntled investors suing, and lawyers. Lots and lots of lawyers. And although the use of bitcoins is laughably far from universal, assorted governments are already mobilizing to regulate or outlaw their use. The creator(s) of bitcoin is/are wise to keep his/her/their head(s) down. There, I think that covers all the possibilities.
The idea was wonderfully simple and elegant: create a peer-to-peer electronic currency that bypasses the predatory proclivities of banks, or the need for centralized governance. In an honest world, such things are possible. But it wasn’t long before the vultures started circling. Encryption, in the form of private keys, was designed to safeguard individual holdings. But it didn’t take long for crooks and speculators to poison the well. Various bitcoin exchanges have been hacked and the currency that was stored electronically in digital “wallets” simply disappeared. And while government-backed banks are insured and can be robbed without affecting the balances of account holders, for e-currency losses there is little remedy.
In 2011, Bitomat, one of the major bitcoin exchanges, lost control of 17,000 bitcoins valued at $220,000. Oops. Later that year, MyBitcoin lost 78,000 bitcoins valued at $800,000. Sorry. The following year Bitcoinica, another trading venue, was successfully sued for $460,000 in real money, after being hacked twice, thus demonstrating a disregard for the safety of client accounts. Meanwhile, the sardonically named Bitcoin Savings and Trust was altogether abandoned by its owners, reportedly leaving behind $5.6 million in bitcoin debts. There have been a number of additional horror stories and their lessons are equally consistent and clear: the system is far from safe; invest at your own risk.
Having said that, the traditional financial system can hardly boast to be the model of safety and security. From the Savings and Loan scandal to the recent housing bubble, looting and manipulation are common features of the financial system. The scandals are so numerous as to blend in memory, but a few years ago during an incident lasting no more than minutes, a trillion dollars in wealth vanished as completely as D.B. Cooper. On May 6, 2010, the Dow collapsed when a coven of high-frequency traders, using systems programmed to make trades circumscribed in milliseconds, all decided to dump their holdings at the same time.
But perhaps the biggest difference between bitcoin and conventional currency is its instability. Volatility makes bitcoins tempting to steal but a gamble to buy. Its first discernable value was less than heady, set below $0.01. And the first recorded transaction took place when a user bought two pizzas for 10,000 bitcoins, (not counting the wheelbarrow). The pizza guy turned out to be an astute investor. A year later a bitcoin was worth $1. Five months after that, the price shot up to $31. But a few months later, it crashed back down to $2.
Since then the pattern has repeated several times albeit at much higher rates of exchange. In less than a year bitcoin’s valuation spiked more frequently than Jude Law’s hair. Up to $266, down to $70; up to $1250, down to $600; up to $1,000, down to $550. Last month values fluctuated from $339 to their present exchange rate of $456 per bitcoin. It’s a currency made for speculators, not for someone on a monthly budget.
With no central authority tracking transactions, bitcoin rapidly became what The Washington Post called “the currency of choice for seedy online activities.” Deep web sites offering illicit diversions from gambling to pornography to drugs embraced the anonymity of bitcoin, and also its facility as a vehicle for money laundering. The FBI closed several of these sites and confiscated bitcoin accounts, but new sites pop up like dandelions after the grass is mowed.
Late last year, a bitcoin-trading venue in Hong Kong went off-line. Along with it, 30 million yuan evaporated (about $5 million U.S.), leaving behind a slew of angry investors. In response, China dropped the hammer on bitcoin. Henceforth, it can be traded privately as a commodity, but it may no longer be used as legal tender. Nor are banks allowed to traffic in bitcoin. While authoritarian, the reclassification of bitcoin as a commodity seems more sensible than the continued pretense that it can function as a legitimate currency, especially given its history.
With all the problems plaguing bitcoin, I decided to invent a digital currency of my own. Shortly I will be offering stalks of virtual rhubarb. Buy 10 or more and get a free pie. Since value is arbitrary, I’m arbitrarily assigning a $1,000 value to each stalk. Here’s your chance to get in on the ground floor. Buy now before Wall Street speculators drive up the price. Send checks payable to Victoshi Rokamoto, care of IT Jungle.
And don’t worry. You can trust me.