MY PROBLEM WITH BITCOIN

 

When the Europeans invented the Euro, the first thing they did was make certain that everybody could easily exchange their francs, Deutschmarks, lira and pesetas; and, get their hands on them; and, use them freely wherever they wanted.

When some anonymous guy invented Bitcoins, the first thing the folks behind this digital currency did was come up with some convoluted story about mining the coins; then assure everyone that this would be a world currency without governments, which means that transactions would be hidden from authorities; then go into all sorts of trials and tribulations about how you could speculate with them (ie, the Winklevoss brothers are buying into the concept so this proves Bitcoins are here to stay); and added, for good measure, that they were ideal for supporting Wikileaks, and since then, Edward Snowden.

Any wonder I have problems with Bitcoins?

To begin with, if this legit, and such a major advancement in the digitalization of the planet, how come the guy who invented Bitcoins is still anonymous? I’ve heard all the answers, and his modesty aside, none of them make sense to me.

Furthermore, speaking of not making sense to me, there is the explanation of how Bitcoins must be mined.

The business reeks of a bad-video game for acned geeks. Except that there appears to be huge sums involved. I say “appears” because, who knows? The Bitcoin Foundation talks about a finite number of Bitcoins. That’s their story. Why should anybody take their word for it? A lot of Bitcoin’s self-proclaimed credibility seems to stem from their own press releases proclaiming a rosy future, feature stories that say this could work — with lots of added “ifs” — and indignant responses to criticism. Stay tuned to what follows this.

Another thing that worries me is the old adage, if it can’t be explained in a simple sentence, don’t believe it? The story of the algorithms behind Bitcoins, why they’re mined and how you mine them disquiets me. I can’t help but think of a similarly tortuous and (deliberately?) confusing explanation given by Bernie Madoff when asked how he could guarantee huge returns in the face of a terrible market.

After years of investigating and writing about subjects like fraud, when I hear a long-winded, overly complex explanation of how something is guaranteed to work, and it doesn’t make sense to me, I ask myself, “Cui bono?” Who wins?

One answer this time is, obviously, the people selling the concept.

But is it snake oil?

With Bitcoin prices all over the place — to the point of looking, at times, worryingly unstable — it’s clear that some speculators are cleaning up.

But how about the people buying Bitcoins to use?

Like elixirs that grow hair, prevent appendicitis and keep alligators away, I have serious doubts. You can only use Bitcoins in very very limited ways. (Latest success – a washing machine that accepts Bitcoins.) Ah, they say, world domination is coming. Yeah, so is Christmas. Try tipping a New York cabbie with a Bitcoin. He’ll tell you what they’re worth.

As for the selling point of total anonymity, here too, I ask myself “Cui bono?” Who needs totally anonymous transactions? Not private transactions, but totally anonymous transactions? In reality, very few people.

There may be legitimate reasons for doing invisible business, but I can’t think of many. That said, the recent Liberty Reserve fiasco revealed a long list of clients for similar digital currencies. Among them, money launderers, drug traffickers, buyers and sellers of kiddie porn, arms dealers and terror funders.

Interestingly enough, in recent interviews with federal law enforcement officers — research for a new book on dirty money — they told me they haven’t seen Bitcoins showing up regularly in terrorism investigations. Hardly an endorsement, that says to me that even terrorists — who are always looking for the latest ways to move money anonymously — have doubts about Bitcoins.

Having written about dirty money extensively for the past 20 years (The Laundrymen, The Merger, The Sink and The Takedown; plus countless articles about it in magazines and newspapers; plus frequent comments about it on television; plus hundreds of speeches on dirty money) I ask that you forgive me for being innately cynical.

But, if you Google the latest news stories about Bitcoins, what do you find? Dozens of links to mining Bitcoins, dozens more to speculating in Bitcoins and plenty about the turbulent nature of their value. What you don’t find are stories about the biggest retailers on the planet accepting them.

Which leads me to wonder, how long will they last?

There have been alternative currencies before. In a sense, the first credit cards were that. So are American Express Travelers Checks. But they’re all backed by bricks, mortar and negotiable reserves. There has never been an alternative currency based on thin air and so shrouded in mystery and doubletalk, that has survived.

Instead, there have been tulips.

Go back to the 1600s when the world went crazy for tulips.

Their sudden and wide-spread popularity was inexplicable. Merchants, shopkeepers and investors couldn’t get enough of them. Prices went crazy, to the point of being preposterous.

A classic case study, Tulipmania took Europe by storm.

By 1636, so many people were speculating in — and gambling on — tulips that they were traded on Amsterdam’s Stock Exchange. That same year, they also showed up on the London Stock Exchange

Huge fortunes were made, the likes of which had never been seen before, and people everywhere were insisting that this would last forever.

Then, one day, just like that, it didn’t.

Do I see a difference between Bitcoin-mania and Tulipmania?

Absolutely. You can put tulips in a vase and admire them.

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