Boom and bust
The recent surge of media-driven interest in Bitcoin has, however, shown every sign of becoming a speculative bubble. Come 10 April, the exchange value of Bitcoins plummeted by 60% from a brief high of $265 to around $150. These are numbers that belong more to a volatile commodity than to a currency, and that emphasise an uncomfortable paradox noted by Reuters finance blogger Felix Salmon at the start of April: “The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.”
As a currency, then, failure is already in the air. Yet this does not mean that the Bitcoin effect can be ignored, not least because it can be divided into two halves. On the one hand, there’s the computerised mining of a commodity strictly limited to a certain number of units. On the other hand, there is a genuinely trans-national medium for payment that is free of almost all the friction of a traditional financial system – and that brings with it a promise of security more transparent and verifiable than any bank or government can match.
Bitcoin’s software is entirely open source, and this means that its security algorithms have been subjected to just about the most rigorous testing and attempted cracking the world’s geeks can come up with. The consensus is: they’re extremely secure. Moreover, should the cryptography at some future point be found wanting, its flaws will almost certainly be identified and updated far faster than with any private system (a major software issue in March was resolved within six hours).
Interestingly, your Bitcoin wealth becomes most vulnerable the moment “real” currency gets involved. The central software may be secure, but online exchanges have been hacked – or closed up shop completely – at an alarming rate. Similarly, users’ computers can themselves be unsafe places to leave open digital wallets containing hundreds of thousands of dollars worth of virtual assets.
What’s needed is a way of taking advantage of the system’s astonishing openness and transactional security while evading its incentives towards illegality: something that opportunistic start-ups like OpenCoin are trying to tap into, under the tagline “committed to a simple, global and open currency system”.
It may sound outrageously ambitious, but it isn’t the first time we’ve seen the birth of a new monetary concept. During the Industrial Revolution, banks eager to fund booming trade and industry began issuing their own private currencies, a system whose booms and busts led to many of the centralised regulations we enjoy (or not) today.
Some economists, certainly, would welcome further disruption. Writing in 1976, Fredrich Hayek argued in The Denationalization of Money for the removal of the legal obstacles preventing people from using any kind of money they wanted, thus creating a kind of global battle between different rival systems.
“We have always had bad money,” Hayek argued “because private enterprise was not permitted to give us a better one.” No government has yet has acted on Hayek’s faith in the power of the open market. The world, though, may already have embarked on just such an experiment. Betting against Bitcoins is one thing. But the change they represent packs quite a punch – and, with conventional finance on the ropes, it’s still anybody’s fight.