Blockchain or Blockheads? Bitcoin Mania Mints Believers and Skeptics

Blockchain or Blockheads? Bitcoin Mania Mints Believers and Skeptics


Sometimes life shows you what absurd really is. This is one of those times. I’m talking about the phenomenon known as Bitcoin, a monetary system based on computation, complex algorithms and — let’s face it — communal delusion.

You’ve probably heard about this funny money, digital tokens that can be sent securely from computer to computer, with records kept through an online accounting system known as blockchain. (My colleague Nathaniel Popper has been writing great stuff about it.)

Millions of people now have accounts with Coinbase, the leading marketplace for digital currencies. And the rush into the market has helped push prices up. At the beginning of last year, you could pick up a Bitcoin (not literally, because they’re virtual, DUH) for about a thousand bucks. Its gyrations briefly brought its price near $20,000, according to Blockchain.info, which tracks such things.

So what’s the problem?

Let me answer that question with a question: What do you know about tulips? Yes, I am referring to the Dutch tulip craze back in the 17th century, and the speculative bubble that preceded the stock market crash of 1929, and the dot-com boom and crash that started in the late 1990s. Remember that last one, when learned analysts told us that advancing technology had eliminated the business cycle?

Good times. No bubble is too big to burst.

But hey, no regrets! Carpe Bitcoin! (But not literally.)

Signs of a bubble seem to be everywhere in the Bitcoin world today. Companies are trying to cash in by sprinkling themselves with a little Bitcoin fairy dust. Take the company called Long Island Iced Tea, which makes, you know, tea. The price of its shares nearly doubled one day last month after it announced that it would change its name to “Long Blockchain Corp.” The company’s announcement claimed it would “pursue opportunities” in blockchain technology. Which makes it sound as if some of those teas they brew are highly caffeinated. Or that people are indulging in that other kind of Long Island Iced Tea.

I called Christian Day, a professor at Syracuse University law school who has written about bubbles and panics. He said that comparing Bitcoin to the tulip craze was unfair to tulips: “The Dutch were not as crazy as they’ve been portrayed.”

For one thing, the tulip bulbs were real, he said, and the hybrids that were the subject of speculation could be extremely valuable. What’s more, much of the trading was done by people who knew their horticulture. With the modern techno-tulips, he said, “I don’t think there’s anything there.”

Some of the most skeptical folks are experts in cryptography and computer security. Steven Bellovin, an adept in computer security and a professor at Columbia University, told me that the technology is still too buggy, “a lab experiment that escaped into the wild.” It’s hard to trust a currency, he said, that’s “backed by the full faith and credit of software that has to be updated monthly.”

Another security expert, Matt Blaze, recently tweeted, “Cryptocurrency somehow combines everything we love about religious fanatics with everything we love about Ponzi schemes.”

Ouch, currency guys. Well, you can afford some very expensive salves for those burns. For now.

For another point of view — because I’m all about even-handedness, people! — I checked with Jim Harper, executive vice president of the Competitive Enterprise Institute. He served on the board of the Bitcoin Foundation and says the promise of Bitcoin is to create a payment system people can use anywhere in the world with privacy and security. He says its true value will be in commerce, not speculation.

Well, that hasn’t happened yet; the price is too unstable. He said the currency will move beyond some of the early notorious uses in illegal commerce. As for the tulip comparisons, he joked, “Laugh all you want: My initial coin offering for cryptotulips will be worth billions!”

I have discovered that the cryptocurrency revolution has reached my own family. My 22-year-old son told me that he had tried to buy a bit of a Bitcoin a few weeks ago and actually lost the money. It was his cash to spend, so there was no lecturing him about it. But I did ask why he had tried to invest in Bitcoin when he’s shown little interest in, say, mutual funds.

He said that he had been unaware of the speculation in Bitcoin. Instead, he said, he was trying to use it for precisely what Mr. Harper says it will be best for: currency transactions with vendors who do not accept, for example, debit cards or PayPal.

“What I was actually trying to do was buy porn,” he said patiently. “From Japan.”

As I said, he’s a millennial, full of that generation’s bracing honesty. I’m glad he told me, but I sure don’t need to know more about the particular transaction, except for the clarifying fact that this vendor would take Bitcoin.

He said he followed the instructions and created a “wallet” and went to an exchange and, after entering a great deal of personal information, bought a small fraction of a bitcoin — in fact, 0.005 of one, “the lowest quantity you could purchase” on the site. Then he found that he couldn’t figure out how to get to his money, grew frustrated and gave up. Well, I told him, losing 70 bucks is hardly ruinous; it’s more like the cost of an education.

As we discussed the aborted transaction, he grabbed his laptop and took another look at the exchange site.

“Oh,” he said. “I got in.” A calmer state of mind had led to success.

The result? “I’ve got 0.00545679 Bitcoin,” he said, reading off the screen, “which is now worth … $96.” In the time the money had been locked up, it had jumped in value by about a third. “This has been a profitable evening!”

Tell me about it. In sheer percentage terms, his little investment outperformed my 401(k)’s return for an entire year.

Now I am trying to figure out how to cash in on all of this, though without buying Bitcoin myself. It’s exactly the kind of market that a fool like me might be tempted to rush into, but I’ve learned enough over the years to know that by the time I finally try the hot new thing, it is already cold and old. I am the maker of markets, the loser who helps to create winners.

Instead, maybe I’ll just pull a Long Island Iced Tea and change my name to Blockchain Schwartz. It has a nice ring to it! But that’s just a start.

I think I’ll write all of my articles from now on in an encrypted form and publish them via blockchain. This means, unfortunately, that no one will be able to read them.

You may say that nobody can read your stuff anyway! You can be cruel, reader. But I say that the exclusivity and security built into my cryptoprose will make each article surge in value. Until I lose my passwords.

John Schwartz is a New York Times reporter and author of “This Is the Year I Put My Financial Life in Order,” coming in April. Follow him on Twitter: https://twitter.com/jswatz

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