“Bitcoin, an online-only currency scarcely four years old, is breaking out to new highs this week and now sports a total value of $2.8 billion. Just a few months ago, it looked like this economic experiment as the world’s first decentralized technology-based form of money would crash and burn. Since then, ConvergEx’s Nick Colas points out that the U.S. government has shut down a large drug website which accepted bitcoins and promised further scrutiny of its uses; and omputer science experts have warned that bitcoin is neither especially private – one of its notional values – or especially well constructed. The market doesn’t seem to care, with incremental demand from U.S. citizens (through Second Market) and Chinese nationals leading the path higher. Could bitcoin still fail? Sure. But, as Colas notes, its success to date speaks to how much the world is changing… Technology – properly packaged – can engender enough trust to develop a new asset class.
Bitcoin will eventually have to develop a lot more infrastructure to be a useful global currency, to be sure. But there’s close to $3 billion of real money to help back that transition.
Via ConvergEx’s Nick Colas,
Bitcoin – The Lazarus Currency
Every great religion, or company, or country, or rock band has a dramatic ‘Creation myth’ – the story of its birth. The Judeo-Christian tradition has the story of God creating the world in seven days. Google has the grad-student thesis story. American culture is still informed by the Revolutionary War. And where would the Rolling Stones be if Keith hadn’t chatted up Mick on the train, just because he holding some new R&B albums from the States?
Bitcoin, the online-only stateless currency, has its own creation myth and it is purpose-made to appeal to exactly the kind of people who would find value in it. The highlights are:
The original design for bitcoin comes from a 2008 paper published by a person named Satoshi Nakamoto. Who, by the by, doesn’t actually exist.
Bitcoin’s basic architecture is decentralized – no one is “In control.” People with fast computers and some coding skills compete to solve a puzzle created by the algorithm described in Satoshi’s paper. Simultaneously, they track all the transactions in the bitcoin universe – people and businesses exchanging value for goods and services. Every ten minutes, on average, some lucky coder – or group of coders – solves the puzzle, gets a few new bitcoins, and validates the transaction list. Then the whole thing resets and everyone gets to work on the next puzzle.
In principle, this process leaves everyone exchanging or “mining” (cracking the code gets you 25 bitcoins currently) anonymously in the system. Everything in bitcoin is identified with a nearly-impossible-to-crack coding of letters and numbers. No names, phone numbers, or addresses needed.
Now, who do you think would find this creation story appealing? A few candidates:
Tech savvy people, who by their nature and high-functioning professional skills tend to have a few shekels lying around? Yep – classic early adopters.
Then there might be independence-minded older white males in the U.S., ticked off by the Federal Reserve and government in general. Yes, they like the story as well.
And then there are the criminals – drug dealers and so forth – who might not know a creation myth from crystal meth, but appreciate the potential for secrecy.
Offshore millionaires from essentially anywhere in the world, looking for classic diversification and a liquid investment. All you need to access your bitcoins is that long alphanumeric key and a local bank account which links to a ‘Wallet’ – an online repository to hold the currency. Deposit money in China, write down the key, fly to Monaco and go into an Internet café. Easy-peasy.
The basic appeal of this “Genesis” creation story lit a fire under bitcoin, starting at the beginning of 2012 at around $5 and ending up in a spectacular bubble top at $240 in April 2013. The cause of that peak – overwhelming tulip-bulbish demand for bitcoin – was its undoing. Exchanges where people went to trade dollars or euros for bitcoin couldn’t keep up with the volume. Accounts froze or moved very slowly, and confidence in the currency dropped, along with the price. Just a few days after the $240 high, bitcoin was trading for less than $60…..”
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