Bitcoin: Digital Fool’s Gold?
Silicon Valley investors are betting heavily on the online currency. But is it a libertarian boondoggle?
Chris Lehmann
The next great digital frontier is money.
No, not the vast troughs of venture capitalist cash that have elevated Silicon Valley into a gaudy empyrean of wealth, but the idea of money — the tenuous social contract that underwrites economic life in market societies.
Bitcoin — which debuted a mere six years ago under the aegis of a mysterious, and presumably pseudonymous, computer geek known as Satoshi Nakamoto — is a digital currency distinguished by its lack of a central bank to keep track of who owns what, making Bitcoin extremely secure. Instead, Bitcoin valuations and transactions are managed by a peer-to-peer computer network.
When people lend their computer’s processing power to the network, they also “mine coins.” The virtual coins thus earned can then be used like any other currency — to purchase goods and services from participating vendors, to hoard, to underwrite black market exchanges or to fuel rampant investor speculation, which explains why Bitcoin is a big hit with the digiterati.
Silicon Valley investors are betting that Bitcoin’s technology will come to displace most routine financial transactions — from currency exchanges to legal contracts to stock trading — via a passel of coding functions, known in the Bitcoin world as “the blockchain.” One recent Bitcoin startup, 21 Inc., pledges to take the shadowy, often extra-legal subculture of Bitcoin trading into the mainstream.
But as Nathaniel Popper makes clear in Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, a chronicle of the Bitcoin insurgency, the virtual currency has a long way to go before it upends the old monetary order.
Ever since Nakamoto introduced the concept of a secure digital currency, Bitcoins have been catnip to libertarian ideologues and utopian anarchists. Because it’s accessed via a completely private key, Bitcoin is not only (in theory) a quantum leap forward in the security of digital money exchanges; it is also (in theory) a private medium of exchange, out of reach of meddling government regulators who have termed digital currencies the “Wild West of finance.”
Small wonder one of the earliest adopters of the currency was the online exchange for illicit drugs and other illegal entertainments, Silk Road. According to the FBI, the service was, at its peak, logging more than 7,000 daily transactions and earning more than $20,000 in daily commissions for its creator and operator, Ross Ulbricht. The Silk Road saga ended badly for Ulbricht, however, when American federal agents tracked him down. In February, he was convicted of seven charges, including money laundering and narcotics trafficking.
Over the course of Silk Road’s rise, Ulbricht had descended from his perch as a slacker-entrepreneur presiding over transgressive digital commerce into a Michael Corleone-grade study in paranoid sociopathy. By the time of his arrest, Ulbricht had allegedly put out six contracts to kill people associated with Silk Road. One was a vendor who attempted to blackmail Ulbright; another, a recently arrested Silk Road collaborator whom Ulbricht feared would divulge information about users. No actual murders seem to have occurred, but Ulbricht’s wan handling of these virtual killings is nonetheless chilling; a seized computer diary entry concerning one of them simply reads: “got word that blackmailer was executed / created file upload script / started to fix problem with bond refunds over 3 months old.”
Likewise, the central exchange for Bitcoins, the online clearinghouse known as Mt. Gox, came to an inglorious end last year. The site’s Japan-based proprietor, a French national named Mark Karpeles, managed to have all the site’s reserves stolen out from under him before going bankrupt, with tens of thousands of clients losing Bitcoin accounts valued at more than $400 million.
Thanks to the resistance to any sort of public oversight, Bitcoins have proven notoriously unstable — prey to panics over adverse news events, speculative runs, and price meltdowns at a moment’s notice. A 2013 study found that 45 percent of exchanges like Mt. Gox had gone under. The new wave of Silicon Valley boosters assure skeptics that the currency will stabilize as more big-ticket players (like them) enter the Bitcoin market.
The mainstreaming of the Bitcoin, however, looks like another libertarian boondoggle — not unlike the labor-soaking “sharing economy” or Alan Greenspan’s disastrous anti-regulatory tenure at the Federal Reserve. For the signature weaknesses of Bitcoins are nearly identical with those that already assail our conventional paper economy: the systemic vulnerability to unchecked speculative end-runs around regulation; the deep instability of debt-driven financial instruments; and the proliferation of bad actors, cheats and market frauds. After all the cheerful rhetoric of market conquest that now attends the ready-for-primetime Bitcoin industry, Digital Gold reminds us of how rapidly the libertarian Valhalla degenerates into a capitalist Hell.
