Bitcoins are digital money ‘mined’ from satanically difficult mathematical problems. Madness, obviously. But five years ago, while the rest of us were saying ‘Huh. Geeks. Money in cyberspace’, or ‘Y’what?’ a young doctor I know bought a few quids’ worth for fun. Sold it later for £800. Now she’s out on a hillside in the driving rain with her hawk. Bitcoin paid for the hawk. As for cyberspace, that’s where all money is anyway. Bitcoins simply take it a step further. It might be the first step on one of the most important journeys in economic history.
It’s a strange, compelling tale, and three things lie at its heart. First, the belief that there is something fundamentally wrong with our money as we currently know it; that it’s the money itself that enriches the rich and impoverishes the already-poor.Second, the proposition that a transparent digital currency is a better system because it exists independently of banks, governments and middlemen scratching for their cut.
And the third strand is Dominic Frisby’s hunt for the identity of the cryptographer who calls himself ‘Satoshi Nakamoto’: the man who thought up Bitcoin.
Frisby is a columnist for MoneyWeek, but, more importantly, he is a stand-up comedian, which demands high intelligence, close observation, asking the un-obvious and finding memorable answers.
He does a magnificent job. Even the word ‘finance’ makes me feel queasy, but since reading Bitcoin I have been thinking about money — what it is, where it comes from, how it stores its value, where that value comes from, how it is exchanged — with the same sort of intensity that atheists reserve for their relationship with God.
As the stock markets were crashing in flames in November 2008, Satoshi Nakamoto posted on a cryptography mailing list that he’d devised a ‘new electronic cash system that’s fully peer-to-peer, with no trusted third party’. He was greeted with sceptical questioning from fellow cypherpunks
(libertarian-inclined anti-centralist crypto-graphers who don’t just talk but write code) and otherwise made little impact.
On 3 January 2009, while the Chancellor Alistair Darling was considering his second bank bailout, the first 50 bitcoins were released — or, as the terminology has it, ‘mined’. Again, little impact, but if you’d bought low that year, and sold on the high 11 months later, you’d have made over two million times your investment.Which focuses the mind rather.
In a little over a century, we’ve gone from the peak of the classical gold standard before the first world war to a ‘fiat currency’: money conjured into existence out of nowhere by governments declaring it so, or the magic trick of banks’ fractional reserve lending.
But it’s not like good money. Being limitless, Frisby argues, it inherently provokes the decay we used to call inflation. ‘In 1971 in the UK,’ Frisby writes, ‘there was £31 billion in circulation. Now there are just under £2,100 billion (£2.1 trillion). That is a 67-fold increase. Are we 67 times richer?’ No. Nearly 80 per cent of that new money goes into financial and property sectors. It still makes the world go round, but now, if it won’t quite stretch, we magic up some more.
The bitcoin mode, Frisby tells us, is more like the Rai stones of Yap in the South Pacific: sparkling calcite rock, quarried, carved into heavy rings, and fetched 300 miles to Yap by canoe. Many sank. One particularly huge stone was lost several miles offshore. You couldn’t get at it, but its location, value and ownership were known and accurately remembered.
Bitcoins — cryptocurrencies — are similar, though weightless. Rai stones and
cryptocoins both have to be mined. For bitcoins, it’s a complex mathematical problem, publicly available, ‘mined’ by computer programmes. Only once the problem has been solved does the bitcoin spring into being.
Ownership is transparent in both cases; bitcoins carry a mathematical ‘block chain’, vouching for both authenticity and ownership. And in both cases, there’s a limited supply. After the finite number of possible bitcoin seed problems, there’s no more, however much governments wave their wands.
But unlike the Rai stones, bitcoins are easily transferred via the internet or even mobile phones. Frisby plausibly argues that the bitcoin is a benign, libertarian currency, and inherently counter-inflationary. Transactions will be easy, and go peer-to-peer (goodbye Lloyds, hello 3.5 billion people in the developing world currently outside the banking system but with mobile phones or access to the internet). And, if not entirely anonymous, they are much harder to identify and track than our present system. Unlike the broad smear left by credit cards, bitcoins sweep away their footprints behind them.
Taxation and governments’ ambitions would need rethinking. Nation-state currencies would become fools’ gold. Wars would have to stop when the opponents ran out of bitcoins.There are, of course, problems.
Bitcoins have so far been much more volatile than, say, gold or the US dollar. Nor has anyone yet decided whether the bitcoin is a store of value or a means of exchange. Warren Buffett says it’s ‘a mirage’, which, given his vaunted technophobia, is probably an endorsement. And surely neither governments nor banks will roll over, supine, without a struggle.
A lot of early bitcoin exchanges have gone bust, been busted or just vanished with the loot. It may come to nothing. But it may not. Satoshi may just turn out to be the Man Who Changed Everything, and Frisby’s hunt for his real identity makes him a hopeful Stanley to Satoshi’s Livingstone. In any case, read the book. I imagine they take bitcoins.
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