As usual, it’s been a bizarre and eventful week for Bitcoin, and for cryptocurrency in general. This week saw regulators become increasingly skeptical of Bitcoin, and a Texas state regulator issued an emergency cease and desist order against an energy company taking investments in Bitcoin. Even FINRA, the financial industry’s self-regulation body, a group known for being the watchdog that never barks, managed to tear themselves away from expense account lunches long enough to issue a warning about Bitcoin.
The Bitcoin world also watched, partly in horror, as Newsweek outed Dorian Satoshi Nakamoto, the 64-year-old engineer who almost certainly was the creator of Bitcoin. Mr. Nakamoto added to the general confusion, as he alternated between denying being the original developer of Bitcoin, and claiming he turned the project over to other developers and had nothing to do with it anymore.
This week also saw Bitcoin traders come to grips with the limitations of their cryptocurrency passion. Bitcoin is like a digital bearer bond, where possession is more than a nine-tenths proposition, it is the law. Digital currency in general is like a steep stairway with no handrails, a system with few safeties, where it’s possible to make a million dollars disappear with the errant click of a mouse. With Bitcoin, you can send too much money, or send it to the wrong place, or send it nowhere at all — and it’s just as gone and there’s no getting it back. Like any realm inhabited by those comfortable in the chaotic world of technology, Bitcoin operates without a safety net, something that’s just fine with the core of power users and developers. Fraud and theft are just part of the Bitcoin landscape. Digital currency is the ultimate Libertarian playground, where none of the slides have safety rails, and a long fall to the asphalt awaits the unwary.
Digital currency is the ultimate Libertarian playground, where none of the slides have safety rails, and a long fall to the asphalt awaits the unwary.
One might expect all the bad publicity, regulatory angst, and minefield nature of handling digital currency would have tarnished the luster of Bitcoins as a medium of exchange — but that’s not the case. Bitcoins have actually gone up this week, with the price at a healthy $637.49 for just one of the encrypted computer blips.
Even if the cost of a Bitcoin dropped to $0.25, a quarter, it would not deter the core of Bitcoin traders. Certainly Bitcoin’s digital fingerprint on the Internet and in the tech media would shrink, but Bitcoin will never go away. There are new digital currencies out there, and one or two of them are trading for around a quarter.
The resilience of cryptocurrencies does not come from their real-world value, which is exactly zero. Digital currencies cannot be exchanged for anything in a regulated market, even though it required an investment in computer hardware and electricity to create them. The reason people like Paul Krugman don’t understand the value of Bitcoin, is because they don’t understand the people who trade digital currencies.
The majority of Bitcoin traders grew up in a world where they spent the bulk of their free time, sometimes hours and hours a day, building up characters in virtual online worlds. They would make trades with other players, exchanging digital gold earned in the game for tokens and game objects that gave their virtual characters an advantage in the game. Many of the virtual world game players were people who worked in IT or other tech related industries; people who grew up in a world where the Internet was their primary connection to the outside world.
Those digital realms have names like Quake, World of Warcraft and Second Life, games lumped under the general heading of MMORPGs, or “Massively Multiplayer Online Role Playing Games.” For an entire generation of young adults, those worlds are as comfortable to them as their own skin. The significant technocratic core of Bitcoin consists of people who grew up trading digital gold; to them Bitcoin is a perfectly natural abstraction of real money.
To my grandfather’s generation, currency was something backed by something real, like gold and silver. My parents’ generation wrote checks, and currency was something you sent to the bank to pay your credit card bills. To my generation, currency is little beyond computer blips behind a plastic debit card. Today we can get buy without the paper, which is still convenient in some scenarios, but not totally necessary.
With the continued abstraction of currency to computer blips in a bank account, it’s not a huge leap to computer blips that are not backed by the government. That’s why people like Mr. Krugman will never accept Bitcoin — because that’s not the world they grew up in. To a greater or lesser extent, we’re all a product of our times.