First things first: if you’re reading this publication for investment advice about whether to buy or sell Bitcoins, you deserve whatever sorry fate befalls you.
“Cryptocurrency,” including but not at all limited to Bitcoin, is upon us. By one recent estimate, the two leading cryptocurrencies (there are hundreds) have a market value (though it swings by the minute) of about $500 billion. In his book Radical Technologies, digital network designer Adam Greenfield calls cryptocurrency the first technology that’s “just fundamentally difficult for otherwise intelligent and highly capable people to understand.” Whew! I thought it was only me.
Let me start by trying to explain it, in my own dumbed-down terms. You start by purchasing a very, very long number—that’s what a Bitcoin or other cryptocurrency unit basically is. You have some assurance (more on this later) that you are the only person who has this number. The fact that you have acquired this unique number is entered onto a list maintained simultaneously on a large number of computers around the world. It’s a very, very long list, called a “distributed ledger.” This part is important: the ledger is public information, and the entire world can see in multiple places that your identification number is now associated with this number. You feel special.
For some reason, other people would like to have this number in order to add to their collection (more on this later). They are willing to give you dollars, euros, or a certain amount of goods or services in exchange for it. You strike a deal, let’s say to transfer the number to your neighbor, in exchange for her used Volkswagen. She gives you the car keys, and the fact that you have transferred your number to her—i.e., associated it with her own identification code—gets tacked on to the same ever-growing ledger. The whole world can see that you did this.
In theory, the fact that your transfer shows up on the universally viewable ledger in multiple locations can create assurance that you never transferred this particular number to anyone previously. Your neighbor can check this out before she hands you the car keys, and be confident that she will be the sole owner of your special number once the transfer is recorded. This makes it possible for her to transfer the number later to someone else who can get the same assurance.
In theory, computers have grown so fast and so powerful that this master ledger can grow very long indeed and still be useable. Since “money”—one of humankind’s most brilliant and useful inventions—is defined as “an arbitrary unit of exchange,” if computers can truly handle these ledgers then these long numbers could be used as “money.” In theory, this kind of money could have a lot of advantages over the older-fashioned kind. Those advantages were summarized by one crypto-entrepreneur as “speed, cost, transparency, reliability, security, and independence.” Another adds that “This is the ENTIRE reason for cryptocurrency: avoid governments, borders, middlemen, extra transaction costs. As well as have high security and avoid forgery.”
Does cryptocurrency live up to its hype? No. You’ll notice that I say “in theory” a lot. Far from being secure, cryptocurrency has suffered repeated major hacks and thefts—a Reuters investigation concluded last fall that there have been “at least three dozen heists of cryptocurrency exchanges since 2011…more than 980,000 bitcoins have been stolen, which today would be worth about $4 billion.”
As for speed, cryptocurrency transactions are extraordinarily slow because they require copying an enormous, ever-growing ledger to multiple sites around the world and the continual testing of new transactions for accuracy. It can take hours, even days, to complete a simple transaction. A side effect to all this computation is a tremendous usage of energy. Some energy experts estimate that cryptocurrency transactions already consume as much energy as the entire country of Denmark, and the proportion of global electricity use devoted to them is bound to accelerate.
As for eliminating the middleman and reducing transaction costs, that definitely doesn’t happen. A Wall Street Journal article last year pointed out that the transaction costs for buying a pizza with cryptocoins were almost as great as the cost of the pizza. There are also heavy hidden costs of the so-called cryptocoin “miners,” who get paid in cryptocoin simply for processing transactions—steadily diluting the value of coins even for those who aren’t conducting any transactions.
As for reliability, almost everyone who’s looked at it agrees that hyper-volatility in the value of cryptocurrencies in relation to traditional money is a huge problem. Why would your neighbor want to accept $5,000 “worth” of cryptocoins for her car in the morning that might easily be worth only $4,000 in the afternoon? She wouldn’t. The value of cryptocurrency is utterly unreliable.
If the safety, speed, and reliability of cryptocurrency are so overrated, why then are so many people spending so much money to buy it? A big part of the reason is a pure speculative bubble, similar to the “tulip mania” of 1630s Holland. Still, there must be some underlying reason driving people to speculate in cryptocurrency, as opposed to, say, seashells or golf balls.
That reason, simply put: cryptocurrency is good for crime. Cryptocoin ownership is shrouded with military-grade cryptography. Everyone can see that coin X is owned by someone with a certain code, but it’s next to impossible to figure out whose code that is. Most people who buy cryptocoins are speculators, not crooks; but the ultimate “value” that makes them worth speculating in is the value of secrecy for criminals.
Cryptocoin crooks come in all varieties. Tax evaders are always happy to hide what they’re doing. Malware hackers who demand ransoms to unlock businesses’ frozen computer networks are big cryptocoin fans as well. Last year, a New York grand jury indicted a Russian for using cryptocurrency to launder some $4 billion of illicit funds from computer hackers and drug traffickers. Folks from places like North Korea and Iran, which are supposed to be subject to international sanctions, routinely use cryptocoins to evade them. White nationalist Richard Spencer says “Bitcoin is the currency of the alt-right.”
A thoughtful Forbes writer concluded last year that “Bitcoins have no uses other than allowing people to hide wealth, conceal (often illegal) transactions, and make and lose money by trading them.” Bill Gates, who knows a little bit about computers, calls cryptocurrency a technology for “money laundering and tax evasion and terrorist funding…that has caused deaths in a fairly direct way.” But I haven’t even gotten to the biggest worry yet. For that, you’ll need to check in next week.