Currency Backed by Bits & Bytes
The seizure of depositor funds from Cypriot bank accounts has shone a light on BitCoin, which is a fiat currency neither issued nor backed by any government.
And I’m increasingly convinced there’s one thing that Bitcoins do that’s genuinely interesting. They decentralize trust. Trust is hard to earn; verifying transactions is a brutal problem, which is why PayPal locks down your account when there’s too much money flowing into it. Creating trust is traditionally the work of federal governments and branding agencies. Trust is also an easy thing to squander. Just close a beloved service, à la Google Reader. Or allow your banks to fail, causing an entire country to suddenly realize that the value of their deposits, the fundamental integrity of their financial selves, was arbitrary all along.
Along comes Bitcoin, a currency in which every transaction is stored by the entire network and every coin has its own story. There’s nothing to trust but math. Suddenly an idea that sounded terrible — a totally decentralized currency without a central authority, where semi-anonymous parties exchange meaningless tokens — becomes almost comforting, a source of power and authority.
That’s where Bitcoin thrives: where people would prefer to throw in their lot with anonymous strangers instead of the world economy. It’s gold-bug thinking reinvented for an age of fluid transparency and instantaneous transactions. And as such it’s an excellent indicator of anxiety. Where you see Bitcoins in action you find a weird and heady mix of speculative angst, a fear of being left behind, and people who appear to have lost faith in institutions, who feel most left behind. These are people who’ll trade in purely arbitrary tokens, willing to forgo the comfort of banking systems for the weight of mathematics and the Internet behind it.
Bitcoin isn’t tied to any commodity — besides trust. As a statement on the global economy, Bitcoin is hilarious. As a currency for the disenfranchised and distrustful, it’s as serious as can be.
To the long list of asset bubbles — from tulips to the South Sea Company, from dotcom stocks to U.S. housing — economic historians may soon be adding a virtual “currency” called Bitcoin. But while it is bankers who are most often blamed for blowing up bubbles, the rise and rise in the Bitcoin price has taken place without any such intervention. A buying frenzy has sent the value of the total Bitcoin stock past $1.5bn and the price of a single Bitcoin has doubled in less than two weeks. Having passed $100 on April 1, it peaked at $147 in the small hours of Wednesday morning. Untethered to any real asset, the Bitcoin’s price is determined only by speculation on exchanges around the world, the largest of which, Mt. Gox, reported technical difficulties on Wednesday as interest rocketed. “Trading tulips in real time,” declared the veteran UBS stockbroker Art Cashin in a note to clients. “It is rare that we get to see a bubble-like phenomenon trade tick for tick, but all that may be changing before our very eyes.”
The currency was created four years ago by an unknown computer scientist and the limited stock of “coins” grows according to a predetermined algorithm. A small number of online services accept Bitcoins as payment but the value appears correlated less to their use than to talk on Twitter, blogs and in the media.