Bitcoin (Wikipedia) has all the ingredients to make it a wet dream for libertarians. A secure, open source, potentially anonymous cryptocurrency that’s sustained by a peer-to-peer network — that’s the kind of big idea that appeals to the net community. In the last couple of weeks, bitcoin mania has reached a peak, with largely positive articles in Technology Review, Techcrunch, and others (see those articles for a basic explanation of the system).
The bitcoin wiki, meanwhile, is abuzz with activity and enumerates many ways to earn/purchase and spend bitcoins. Currency exchanges sell individual bitcoins for more than $8 per coin.
I, too, would love to be excited about bitcoin. Although I’m not a libertarian and I see risks associated with unregulated new currencies, this is the kind of experiment that can really drive forward society’s thinking. Moving away from national currencies and central banks to a single, global medium of exchange is an immensely powerful idea. While managing the risks of such a new currency would be challenging, it could surely be worth it.
Unfortunately, once one looks behind the curtain of the system, one conclusion seems inevitable: it was deliberately designed as a pyramid scheme to enrich early adopters, not as a currency to trade goods and services. This Quora discussion explains it at some length, but basically, because a) the total currency supply is limited, b) it gets harder and harder to mine bitcoins over time, there’s now a small elite of bitcoin owners. The wealthiest own hundreds of thousands of bitcoins. Nobody will match them in wealth at this point without a prohibitive investment of money and time, and the gap between rich and poor will continue to widen indefinitely as a new bitcoin owner must spend dollars to purchase mere fractions of a coin (or contribute to its growing ecological footprint by becoming a “miner” who wastes computing cycles on the generation of coins).
Indeed, if exchange rates at sites like Mt. Gox (link deliberately omitted) are to be believed, there are already several theoretical bitcoin owners who would be dollar millionaires.
Unsurprisingly this has turned bitcoin into an investment and speculation vehicle above all else. An example of the fantasy about future wealth that bitcoin owners indulge in is this thread in the bitcoin forums, “The $1000 Bitcoin“. Simply put, the theory is that, as goods and services offered for bitcoins expand, while the supply remains almost constant, the value of coins will keep increasing, enriching early investors.
Bitcoin defenders argue, of course, that the early investors should be rewarded for their risks in trying out and promoting bitcoins, and that this is simply the normal growth of a new business. Even at face value, a global metacurrency that renews social inequity at an extraordinary scale should raise flags for anyone concerned about the promotion of social justice. Regardless, this is a tacit admission that bitcoin doesn’t serve first and foremost as a currency, but as an investment vehicle that’s designed to enrich the few at the expense of the many. The facade of a currency is part of the confidence trick, one which every investors is incentivized to help maintain. Meanwhile, Bitcoin’s elusive inventor is laughing all the way to the brick-and-mortar bank.
And while it’s important to not feed into fear, it does seem that one other group besides speculators and enthusiasts that’s likely to get excited about bitcoin is made of criminals who are looking for simple mechanisms to launder money or to trade in illegal goods and services. For money laundering in particular, the growing network of exchanges seems to offer plentiful opportunities for mischief.
To be sure, it’s a fascinating story to watch unfold, and likely one that will find its way into the history books. The real question to me is what’s going to be the first nail in the coffin of the bitcoin experiment: an internal economic collapse, a software failure, government shutdowns of exchanges, or the association with illegal activities? Whatever it is, I hope the idea of a global Internet currency will live on.