Halfway through 2011, I came across the phenomenon of Bitcoin, and my head went into a tailspin. This was a revolution. I felt it in my bones. But I was reluctant to buy in and profit from it. At the time, it had the aura of an elaborate, hi-tech scam.  The ultimate in electronic pyramid schemes. And the amount of hacking going on against the Bitcoin exchanges (run from servers in people’s garages) didn’t help things either. I felt it was never intended as an alternative currency. Who in their right mind would trade commodities online or shop with them?

Sure, it (kind of) bypassed third parties and fees,  and it seemed easy to use. But once you send off a bitcoin to some address that is it. It’s irreversible. There is no redress. Online fraud using bitcoins leaves no paper trail to physically follow. Although there is an electronic trail, how does one place trust in such a new system?

Even drug dealers would be hesitant to use this nascent technology. Imagine Tony Montana rocking up to a meeting with the Colombians with a laptop.

Then imagine him having to wait for the transactions to be confirmed. Chain saws. Fun and games. Even gangsters rely on strong banking institutions to keep their wealth safe. And even then these same institutions are prone to nationalisation, or bankruptcy.

This technology has yet to find a proper use, yet punters poured millions of dollars into the “early adopters” pockets. Go to their forums and you’ll find rampant spruiking and fever-pitch excitement each time some Gordon Gekko forks out money to buy these things. Try being negative on these forums and they ignore you, or you get labelled a troll.

This is the mindset I used not to go diving in.

• If it feels like a scam or Ponzi racket. It probably is. Why? Because the market is a mechanism for people to store value and generate income. In theory anyway. Speculators using the market as the ultimate roulette table may in fact be a healthy thing for a market, guiding investors to where to park their capital. Bitcoins don’t have intrinsic value. They don’t earn anything, and by the time they become useful in the mainstream economy as a currency, the game will have changed. Traded solely for profiteering on people’s greed and fear, nothing influences the value of Bitcoin except speculation (and hackers). At best, this is a form of gambling. Add early adopters to the mix, and you get the perfect pyramid scheme. So if it’s too good to be true, it is.
• Bitcoin is also a technology that can be easily duplicated. It can be modified and developed, rendering the original blockchain, redundant.
• Power rests with those who control the client software protocol. So you’re in fact swapping Bankers for Programmers.
• Hackers. The digital wallets where the value is stored are so easy to lose, destroy or steal. One lapse of personal electronic security and your wallet is gone. One hard drive failure, one catastrophic digital error (i.e. caused by an index finger on the return key) and the bitcoins are gone.

On the plus side.

• Bitcoins are a good way for kids to learn about trading on the market.
• The potential for investment in new technology. Potential, since, apart from the exchanges popping up everywhere, there has not been significant investment in anything else. I’d rather invest in a start-up that is actually building a way to make cryptonium useful than speculate on the gambling habits of other speculators.

That was then. The case remains the same today. I see nothing has changed.

The current problem we have with fiat money is hoarding. Existing in a dual state, as a medium of exchange as well as a store of value, fiat currencies are vulnerable to hoarding, which starves the lifeblood out of economies. (which is another story.) Yet fiats are trusted by citizens (or forced upon them, since governments don’t give anyone much of a choice) and are at least designed to “stabilise” economies, Keynesian style. What are bitcoins designed to do? They are perfect for hoarding! They are easier to hoard than fiat cash or gold. At best, P2P crypto-currencies are designed to rob governments of their ability to collect taxes, so no hospitals, roads, and God forbid, no social security. Perhaps governments will find a way to get the early adopters will pay for such things. Fiat currencies are also backed by governments, by law or by force. What will back bitcoins when early adopters decide to cash in, flood the bitcoin casinos and send those Gekko’s screaming for the door? As long as Bitcoins remain deflationary they will be hoarded more zealously than gold or government bonds.

The Future of Cryptocurrency

Right now it’s all about fooling enough punters to part with their fiat cash so it can be redistributed to some other punter. In the future, the technology behind these crypto-currencies will eventually find a way to complement society. Key factor. The technology can be duplicated. e.g. Litecoin, Namecoin, Ixcoin. ppcoin. All corporations have to do is start their own blockchains. e.g. Google Money. Facecoin. Retailers could convert their own rewards and loyalty programs into tailor-made cryptocurrencies. Music and movie corporations could use the same peer-to-peer technology that nearly wiped them out, to create a system of distribution using cryptocurrencies. Sonycoin. Applecash, AmazonDollars. Hell, even governments could start their own bond market and social security blockchain. UScoin, Auscoin. Eurocoin.

In fact, there is no doubt in my mind this will happen. It may be too late to profit from Bitcoin right now, (since I missed out on buying them at 5 cents), but expecting Bitcoin’s value to hit a million dollars per unit is tuliptistic. Once cryptonium currencies enter the mainstream economy in numerous manifestations this whole argument will become trivial. And even then, once quantum computing hits the scene, everything we understand today will become anecdotal. Unless cryptographic hash functions become so large and complex, they start grinding down machines running at light speed, since the speed of light is indeed finite and numbers are… well, infinite.

But that’s also another story.