The rise (and probable fall) of bitcoin
See that image to the right? That’s a video game character’s “bag,” similar to the the backpack for one of my many virtual personas in World of Warcraft. Near the bottom you see the character’s “money,” denominated in gold, silver, and copper “coins,” roughly analagous to dollars and cents. Players earn that in-game dough various ways, looting the corpses of monsters or other players we kill, robbing hidden stashes, and completing quests. Just like in the real world, this in-game currency not only allows you to buy lots of cool stuff and services, but you can quite literally purchase the labor and loyalty of other players.
Earning money like this is a little slow, and that virtual money is so useful that given the chance, some players are willing to pay real money for larger amounts of the fake stuff. And so a weird new industry grew up quickly around selling in-game gold to other players for real American dollars, or real German marks, or real Japanese yen, or whatever. Central banks and regulatory agencies didn’t know what to make of this. They knew they didn’t particularly like it, but gold farming as it came to be called was small potatoes and wasn’t perceived as an immediate threat. Besides, there wasn’t much they could do about it, outside of shutting down highly popular video games. Gold farming and in-game to real-world currency exchange mostly flew under the radar and happened largely outside of their respective jurisdictions and area of operations anyway.
Naturally, that freedom from regulatory oversight and a decentralized currency appeals to some people for various reasons. Anonymous, pseudonyms, under the radar, dark … those all may sound ominous now. But just 15 years ago that was all not only common, it’s how we all operated online—regular law-abiding citizens and degenerate scumbag scammers alike. So in that environment some gaming geeks, perhaps those with an especially strong libertarian or anarchist streak in them, spent many long hours speculating on how great it would be if only there was a sort of virtual exchange unit out there, one beyond the control of video game developers and nosy national security agencies and corrupt bankers. It’s unclear if the creator[s] of bitcoin were gamers themselves or were motivated by this reasoning. But in-game currency and gold farming certainly set the stage for the idea of a cryptocurrency.
Enter Bitcoin: an open source, peer-to-peer process mostly consisting of anti-counterfeiting measures. In brief, bitcoins are mined when a user downloads a simple program that awards fractions of the cryptocurrency as the processor chugs along doing what processors do: adding and iterating. Think of a random magic number, and when a processor randomly hits that exact magic number out of billions, a tiny fraction of a bitcoin is awarded to that user. Over time they accrue. Thus, each bitcoin has a detailed history of creation consisting of many, many recorded processor events, and that along with any subsequent use is referred to as block-chain. That block of history is encrypted, distributed, and updated to devices all over the world. When a bitcoin changes hands, those devices are checked for that digital footprint, and if a majority report back that all is proper, if the history exists and matches in details with that distributed cached network data, the coin is validated as authentic.
As processors grew in power, finding that magic number has to get harder and harder. Otherwise, Moore’s Law would be a road to easy riches! What started as a random search for hundreds of “nickels” sitting somewhere randomly in virtual landscape the size of a city block is now a giant professional manhunt for a few “pennies” thrown randomly into a virtual landscape the size of Texas. It takes enough processing power now that the primary break-even parameter at this point is the cost of electricity. If you could get your juice really cheap or better yet, for free … well, let’s just say there are now even thumb drives made that plug into your work PC and look to any snooping sys admins, like any drive drawing a modest current. But they’re actually loaded with processors whirring away, trying to stumble on the proverbial needle of gold in a virtual haystack.
For several years bitcoin existed in relative obscurity, mostly used by gamers and computer nerds in smallish transactions between individuals. But beginning around 2010 the Dark Net began to rise from the ashes of a harsh world-wide recession. By 2012 they had come into their own: online markets where anything goes, where everything was available, narcotics, rhino horns, stolen goods of all kinds, etc. The most notorious is the now defunct Silk Road, but it wasn’t alone, and lo and behold, some of these alt-crazy networks accepted bitcoin. That’s when demand really, suddenly—seemingly out of nowhere—shot up dramatically, and bitcoin burst into wider public consciousness. Therein lies the source of its fame, and therein lies the rub.
To be a genuinely useful, practical new currency, a given kind of money has to be reasonably widely accepted, as reputable as possible, and ideally, relatively stable. Right now it’s debatable if bitcoin is any of these. It swings up and down wildly almost daily, it comes with a checkered past to say the least, and at best bitcoin is grudgingly accepted by a handful of medium-sized vendors. On the latter, think of it from the business viewpoint: big swings, limited supply, and uncertain liquidity are great for speculators willing to make bets and shoulder risk, but that’s all lousy for run-of-the-mill vendors and service providers who simply want to get paid in full and on time with minimum hassle. For these reasons and others, the future of bitcoin is as uncertain as the fading Wild West version of the Internet it sprang from—or the rate it will trade at tomorrow.
There are other cryptocurrencies out there and more to come. Navcoin and shadow cash are a couple that turned up when researching this piece. I don’t know enough about alternatives to bitcoin to form an educated opinion just yet. But ideally, a cryptocurrency would be lawful or at least not unlawful, and it would be accepted for enough goods and services that people would feel comfortable holding them without fear they’d be worthless tomorrow. And as long as we’re wishing, the New Money, for lack of a better term, would be readily exchangeable for dollars or yen or something that’s relatively stable, safe, and seen as intrinsically valuable. But until that time comes, we may have to keep lumbering along with old-fashioned cash in our wallets, and electrons dancing in our online bank accounts.
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