Bitcoin, zealotry, credibility and wealth
The recent MtGox hilarity has kicked off all sorts of commentary about the concept of wealth and credibility. Whose pogs are more valuable; the Govt’s, or a cryptographer’s? The Govt will let you use theirs for “legal tender”, yet the zealots declare this not to matter – who’s correct? And how will you know?
Anyway, for me, the argument goes as follows.
Bitcoin is a method for secure anonymous trading and payments. It isn’t a store of wealth, except just insofar as anything is a store of wealth if you can convince someone of its non-transitory value – e.g. piglets, magic beans, or some random drawing on a sheet of A4, or a piece of paper – a dollar. So you wouldn’t “invest” in Bitcoin in the same sense that you wouldn’t “invest” in PayPal.
However, it is also, currently, rather valuable. I’m using “valuable” here in the deliberately naive sense that if you Google “bitcoin value” you will see numbers like, say, $500/BTC, rather than ones like $0.0003. Why is this significant? Well, look at it from Grandma’s point of view. Grandma likes the idea of secure anonymous transactions in an “oooh, that sounds nice, dear” sort of sense, but she doesn’t actually understand what it means. She doesn’t understand, for example, that the PayPal window she sees with numbers in is not the same as the Bitcoin-Qt client window that also has “transactions” and stuff. Nonetheless, because she senses something is different and she’s not an idiot, Grandma Googles “bitcoin value” to try and understand what her new numbers mean; and she thus, inadvertently, makes the error of confusing a transaction method with the nominal and temporary value of its particular tokens. (As an aside, the sub-error here is confusing the concept of cryptocurrencies themselves as a trading mechanism with the particular random value of just one or other of their member’s tokens).
Compounding this error, though, and making it into a problem for Bitcoin itself, is the (say) $500/BTC number that Grandma is going to see. This, looks significant to her. It’s not pennies; and furthermore, a link or two down the Google page are stories from (say) the New York Times like “Wild variations in Bitcoin again due to arrest of exchange proprietor”. This, and the $500 number, make Grandma think “feck! me Christmas will be ruined!” (she’s Irish). So Grandma holds off; she doesn’t understand what the gains might be, she’s nervous because of the numbers that appear to be involved, so she just holds off. She’s not right, obviously, but she’s also not unreasonable; she’s simply ignorant. But, critically, at this stage in the whole cryptocurrency concept, ignorant or otherwise she – the people, as it were – holds the power and the wealth. Wild speculations in the Bitcoin value are a problem not despite the nominal high $ involved but because of it. If something is pumped to an obviously absurd and arbitrary price it’s simply a credibility problem.
Because the problem for Bitcoin, especially its zealots, is that it’s not enough merely to be technically correct. Technical correctness will not entice Grandma to pass actual wealth through a new system. I follow a number of people on Twitter whose view on all this is simply “well it doesn’t matter if Gox went tits-up because the technology is sound!”. And whilst being an entirely correct view, technically, it’s simply not relevant. The real world doesn’t work on SHA-256; the real world depends on people who don’t understand things, who have worked hard for their wealth, and believe, rightly or wrongly, that the Govt is more likely to honour its paper than a Latvian script kiddie is to honour a trading contract on some strings of numbers. Even if “the technology” is indeed adequate to keep security against the kids.
I’ve also had various conversations with people on mining pools whose objective, it appears, is simply to see numbers increment on a screen. The argument is essentially “My numbers [$ per guffcoin or something] are going up! w00t! If the coins can’t be transferred easily into goods or services then it doesn’t matter at all because TECHNOLOGY!!”. I believe, and it took me a while to grasp, that the cryptocurrency community in general genuinely doesn’t understand the difference between nominal $/coin values on an online exchange and actual $ (wealth) in your pocket. There’s a good ongoing story http://buttcoin.org/easy here from Buttcoin; see also my last blog post about the ridiculous un-anonymity required to get your trading cards anywhere near any actual wealth. And this leads into the obvious piss-fight about unregulatable Bitcoin only becoming truly interoperable with the world of actual wealth via regulation. Until Bitcoin rules the world. Which it can’t until it means wealth in its own right. Which it can’t until it rules the world.
So the actual value of Bitcoin will depend on either (a) it becoming a genuine form of transaction up to and including the point of actual wealth in your pocket, not merely numbers on a screen on an online exchange, or (b) it becoming intrinsically valuable in the sense that gold is intrinsically valuable, i.e. a store of wealth in its own right. These are linked to a degree; but in any case, they’re the only things that matter. All else is merely speculation and hubris.