Last Sunday night, Dutch public TV had a broadcast on Bitcoin and Blockchain and I was curious about both subjects. Also as some of my former banking colleagues had been very enthusiastic about the future of Blockchain. The quality of this Bitcoin episode of VPRO’s Tegenlicht was mediocre but the topic on Bitcoin and Blockchain itself was fascinating.
Bitcoin is operating like a country’s Central Bank: it issues and controls the supply of its electronic currency. Apparently, the maximum volume is 21 million units. As Bitcoin demand has increased and supply did not, the price of a Bitcoin has increased dramatically. Early Bitcoin adopters try very hard to promote future demand. Many of these early adopters are now multi millionaires. Allegedly, its mysterious founder(s) still has/have a balance of 500,000 units which is almost 1/20 of the maximum supply. Attoday’s Bitcoin price of 325 dollar, this represents 162.5 million dollar.
Bitcoins are created by “mining” for them, a computationally intensive task which involves deliberately wasting processing power to prove that you aren’t an attacker bent on cheating the network. (Guardian) In fact, everyone can earn these free bitcoins by solving mathematical problems. Nowadays, only big server farms have adequate processing power to earn the remaining quantity of free bitcoins. This so called “mining” industry has become big business for companies. However, for some the operating cost (e.g., computers, cooling, electricity) already exceeds the “mining” proceeds.
Bitcoin is not only an organisation – or “shadow bank” – that issues an electronic currency, it is also the name of the currency (like Euro, $) , and the name of its payment network (like PayPal). The computers of the Bitcoin current account holders are interconnected and jointly operate a public Bitcoin ledger called Blockchain. Wikipedia: “Blockchain provides data on recent transactions, mined blocks [..], charts on the bitcoin economy, and statistics and resources for developers”.
Bitcoin attracts a remarkable group of people: libertarians, political activists, tech nerds, and bitcoin “mining” opportunists. Some of the opinions of the people featuring in this TV broadcast were plain scary. FT journalist Izabella Kaminska made several interesting statements: The Bitcoin price resembles a classic bubble (> 23min.), and also that Bitcoin is like a political belief (>39min.).
One of their core beliefs is that Money and State should be separated – similar as Church and State. In their view, not only Governments should have the (sovereign) right to “print” Money but “everyone”. In both “economies” we see price inflation: either in prices of goods/services (real economy) or in the price/value of the Bitcoin itself. Bitcoin volatility also creates pricing problems in the real economy.
In January 2009, at the introduction of Bitcoin, its price was (near) zero. On 29 November 2013, Bitcoin’s price hits an all-time high of $1,242 (e.g., Washington Post, Wiki). The continued price increase of Bitcoins is probably the main reason why the alternative currency has been plagued by hacks, Ponzi schemes and increasingly professional thefts since 2011. (Guardian)
Apart from being subject to Ponzi schemes, Bitcoin itself may well be a massive asset bubble, Ponzi scheme or pyramid fraud: Unknown identities, huge profits for early adopters, thriving on continued demand, value is based on Belief, etc. (e.g, Bloomberg, Huffington, TED, Washington Post).