Bitcoin: It's not just loopy tulip land, it's worse

Bitcoin's erratic value and irrational cheer squad of speculators are proof this digital currency is unlikely to ever be workable for everyday transactions.
Written by Stilgherrian , Contributor

Congratulations, libertarians, your clever little digital currency based on nothing but arithmetic, arrogance and faux-revolutionary Kool-Aid has been smeared in US Senate-love and slid all the way up to the US$1200 mark. Bitcoin is being taken seriously in serious quarters, it seems. Well done. So now it's time to build some structure and regulation around it.

Cue the sound of a million crypto-currency fans screeching a thousand well-parrotted slogans that "explain" why every other monetary system will soon collapse and nations-states will crumble — and why anyone who disagrees is just an ignorant slave to outmoded economic thinking.

Actually, the "why" is never explained, it's just asserted.

Back in April I discussed how Bitcoin is more ideology than trustworthy currency, noting such fun facts as Bitcoin's value seeming to track the number of people searching for it on Google, and that even boosters like Pirate Party founder Rickard Falkvinge consider it "still far from ready for prime time".

The comments in reply were a fascinating jumble of ideas, admittedly not all of which were completely loopy. But you'll get a much better idea of the effervescent assertions emanating from the Bitcoin wonderland by following the Twitter account @bitcoin_txt, which picks out the highlights.

These recent examples illustrate the image problems Bitcoin needs to overcome before ordinary non-geek folk can start taking it seriously.

Bitcoin as magic: "BitCoin will end ALL Hunger & Poverty (at last) through humanities caring and sharing, by instantaneously providing funds to those in need" and "BitCoin heralds the end of the misuse of money and other ponzi schemes including, pensions, copyright, patents, insurance, etc."

Bitcoin is for real men: "The Rise of Bitcoin: Why I for one welcome our new Neckbeard Overlords and how it will lead to Game-Over for Feminism" and "You cannot suppress the free currency. Go back to your clan of ugly, hairy, women" and "Feminism will suffer if crypto currencies take off simply because of reduced tax receipts; no more feminist suckling at the State teat." and "Not only are men going their own way, but they're starting their own currency and economy separate from the feminist system."

Bitcoin as infinite money: "Sigh. Bitcoins are worth at least 126k dollars each." and "a lot of assumptions are made, but i think eventually the bit coin might be worth 1 million or even more."

Bitcoin as alternate history: "THIS IS HUGE! The stuff we are working with is what scared Bill Gates into retirement!"

OK, it's easy to ridicule an idea by focusing on its loopiest supporters. But if Bitcoin wants to be a serious contender for an everyday digital currency, it doesn't need any more of this over-the-top rhetoric, it needs stability and trustworthiness — and while its monetary value may have been soaring on the back of rampant speculation these last few months, those two key attributes haven't exactly been keeping pace.

Bitcoin's wild price swings represent a risk factor that should prevent any sane business from entering into contracts based on the currency. But even if that risk can be hedged against, there's the core issue of trust — not trust in the integrity of Bitcoin's seemingly robust cryptographic protocols, although researchers have warned of fundamental flaws, but trust in Bitcoin's financial community.

When young Australian TradeFortress had a million dollars worth of Bitcoin stolen last month, he didn't report it to the police. "The police don't have access to any more information than any user does when it comes to Bitcoin," he told ABC Radio, seemingly oblivious to all the news stories about law enforcement's access to network data and his own responsibilities as a good-faith custodian of other people's money — although perhaps he was also worried about what the police might think of some of his other online activities.

When some $100 million worth of Bitcoin was stolen from the Sheep Marketplace a few weeks later, we see a few lone hackers trying to track the bandits, but once more no professional law enforcement activity — but given that Sheep Marketplace was a successor to Silk Road, we can guess why.

People accept the risks inherent in handling physical cash because they can mitigate against them with appropriate security procedures. There are specialists to help them, and when cash does get stolen the police are generally brought in to help.

But with Bitcoin, at least so far, the balance seems all wrong. The computing power devoted to transaction-verification and mining is now 256 times the power of the world's top 500 supercomputers combined — does that strike you as efficient? — but rather less effort seems to go into building a trustworthy community.

Meanwhile the speculative Bitcoin bubble continues to inflate. Hard-core Bitcoiners are presumably getting sick of it being compared with the tulip mania of 1637, but the parallels are obvious, what with the constant hype about the ever-soaring value of some random commodity — because Bitcoin is generally being treated as a commodity rather than a currency.

But personally, I'm with former president of the Dutch Central Bank, Nout Wellink, on this one. "This is worse than the tulip mania," he told students this week. "At least then you got a tulip."

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