Bitcoin has been back in the news in a big way. In February the Mt. Gox trading site, which handled 80% of the trade in Bitcoins, collapsed, taking 850,000 Bitcoins with it, worth an estimated 450 million dollars. Though CEO Mark Karpeles bowed in shame, it remains unclear if these were stolen, or lost, or never existed to begin with. On February 14 the semi-legal web trading site Silk Road collapsed after someone stole more than 2.7 million dollars worth of Bitcoins. More recently Bitcoin dealer Flexcoin collapsed after a theft of more than half a million dollars in Bitcoins. The loss in each case is being blamed on “hackers” and not on any flaw in Bitcoin itself. Today the news reports the apparent suicide of Autumn Radtke, who ran “First Meta,” a small firm trading Bitcoin. (It’s not yet clear if her death had anything to do with Bitcoin)
Just to review, Bitcoin is a virtual commodity being imagined as money. Some unknown person, or persons, possibly Satoshi Nakamoto, invented bitcoin around by writing open source computer code back in 2009. The code generates or “mines” bitcoins. You could start a computer to work crunching numbers and eventually it might produce some bitcoins. Mining them is extremely CPU-intensive though, and the production rate slows down over time. Bitcoins are also produced as a reward for transacting bitcoins. That reward rate will also be gradually reduced over time. There are now about 11.5 million bitcoins extant. But the key thing here is that there is a limit to the number that can be mined–21 million total. After 2140 no more bitcoins can be produced: they will all have been “mined.”
Bitcoin is presented as an alternative currency, and as such is attractive to libertarians. It’s beyond the control of government, because it’s not issued by any government. It’s not part of any tax system; it’s not much encumbered by law. And it can’t be “inflated:” you can’t just produce more without limit. So it should be stable.
But of course, nobody buying Bitcoin wants it to be stable–they want it to go up in price. Mr. Nakamoto alegedly has several million of the things he invented, which were worthless at creation, but are now worth over a billion dollars. Or, Bitcoin buyers want Bitcoin to fluctuate, so they can buy low and sell high. See this company, for example, dedicated to helping you track the ups and downs of the Bitcoin market for a monthly fee. And the desire to have a currency outside of government control is also the desire to have a currency that makes illegal transactions easier. “Bitcoin Mogul Charlie Schrem” was recently arrested for money laundering and using bitcoin to facilitate drug purchases over the now defunct website Silk Road.
Bitcoin has a dual identity, and reflects conflicting desires. On the one hand, it’s a commodity, something you can speculate in which will rise and fall in price, and and on the other it’s supposed to be a more stable and reliable form of money. On the one hand, it’s touted for its stability; on the other, it’s useful because its price is unstable.
If this doesn’t make sense that’s because it’s a contradiction. it’s the contradiction at the heart of money itself. We want money to be something stable, and we want it to be something flexible. We want it to have a fixed and reliable value, and we want to be able to print more of it when we need to borrow it–we want it to be both cheap and dear.
Bitcoin is used as money at present, sort of. Overstock.com will accept Bitcoins in payment for a sofa, for example. This looks to me like a barter exchange, not a money exchange. Any store is free to trade you its goods for whatever you might offer, but no store is free to refuse dollars–they’re legal tender and you have to accept them. Bitcoins come with no such compulsion and so for persons of a libertarian bent they seem more free and more secure, despite the fact that more than 453 million in Bitcoins has simply vanished in the last month.
Bitcoin seems silly to me. There are obviously lots of things wrong with governments, lot of inefficiencies and they are obviously as likely to pose a threat to individual rights as they are to secure individual rights. But adopting a money in finite supply has never worked, ever, in human history. Governments don’t want it because most people don’t want it. A finite currency is capable of being monopolized, for example. Who has that 450 million in bitcoins? Do you really want to pay high interest rates because some guy has managed to monopolize an arbitrarily defined currency? And it tends always to deflation, and higher interest rates, and lower prices, which sound great in theory but turn out to be a disaster.
It’s basically the gold standard, with a tech gloss. It’s based on a desire to escape the cultural construction of wealth and reimagine wealth as a real thing. And as a world currency, it will prove as unworkable as the gold standard. Wealth is the product of human creative energy and labor, not the finite supply of some commodity deemed money.
Bitcoin is not going anywhere, though. It’s buoyed up by libertarian fantasies about end times, by techie insiderism, and by speculators who see a new thing to speculate in. So even though a series of Bitcoin trading firms have gone belly-up, and Bitcoin trading has been shown to be risky and prone to really massive theft, and associated with illicit activity, a single Bitcoin is currently selling for $636 dollars.