Summer of Crypto

It began a bit like some spy-thriller novel. While in Lisbon, Portugal this July, I attended a meeting in a dark room with an international group of hackers and hedge fund traders to talk about cryptocurrency. I told the group about my background, after which I was approached by a young man with a proposition. His partner was a Chinese cryptocurrency expert, and he wanted me to write a book about cryptocurrency for them. I was instructed to use an encrypted chat app for any communication, and would be paid via international wire transfer.

I had no idea if any of this was legit, but I found it fascinating and agreed to take on the job. I had been wanting to get some hands-on experience with blockchain, cryptocurrencies, and more advanced trading strategies. And, I have always thought that the best part about being a researcher is that you get paid to learn about new things, not the other way around. So, strange as it was, after a Chinese wire transfer appeared in my bank account, I began work from a Copenhagen coffee shop using instructions received via encrypted message.

Over the next few months, I researched the murky origins of Satoshi Nakamoto, got into the weeds on the fine differences between proof-of-work and proof-of-stake blockchains, day-traded Bitcoin, was dazzled by the conceptual leap Ethereum offers over Bitcoin, and even set up a mining pool program in Linux.

I’m not going to get into the details of how cryptocurrency works here (but feel free to head to my client’s site if you want to learn more: I’m much more interested in thinking about the big picture implications of what I learned. In the gold rush to get rich on speculative investments, I think a lot of the really interesting technical innovation is getting trampled and minimized. There are also some really vexing issues that arise when moving from government control of currency to global, decentralized systems of storing and transacting value.

1. Is Bitcoin a bubble?

On the one hand, yes, Bitcoin is obviously in a bubble. Whether thousand-dollar tulips or million-dollar timeshare condos in a Florida swamp, the fact that someone is willing to pay 10x more for a thing today than they did yesterday says a lot more about timing than inherent value, and making money on a bubble is all about timing. Successfully betting on a bubble is not creating wealth, it’s stealing it from tomorrow’s sucker.

On the other hand, Bitcoin, like gold, is an arbitrary, scarce, universal method of storing value. It is as valuable as people think it is, and tends to be worth more when other stores of value (property, USD, stocks, etc.) go down in value. Who’s to say that Bitcoin makes less sense than gold as a store of value? If anything, it probably makes more sense.

The problem, however, is that while Bitcoin is scarce (there will only ever be 21,000,000 Bitcoin), cryptocurrency is not. Literally anyone can invent their own cryptocurrency, put it out there on the free market, and see what people are willing to pay for it. If I want to make TimmyBucks, I can organize an ICO (initial coin offering), or pay a service to do it for me, and I’m off to the races. And, whenever the mining community forks the Bitcoin codebase, it massively complicates the equation regarding Bitcoin’s worth. Imagine if California forked the US dollar; overnight, they gave everyone holding US dollars an equal amount of CaliDollars. If you had $500 USD in the bank, you now magically have a second bank account with $500 CaliD in addition. You can no longer spend USD in California, but you can still spend it anywhere else. Arbitrarily creating a bonanza like this creates a huge incentive to fork a currency, and so it logically follows that all the states would start making their own, increasing the total amount of currency in circulation by 1x every time. This is basically what’s happening right now. The whole point of Bitcoin was to have a single, scarce, universal currency, but when it’s this easy to create a new currency, how can any currency really hold its value?

2. Is the hype around blockchain bullshit?

Crypto is a uniquely paranoid world, with its initial growth fueled largely by anonymous transactions for illegal items. Thefts of millions of dollars worth of coins are so common that NSA-level security against hackers comes standard on any crypto wallet, it is the currency of choice for ransomware pirates, and many of the pioneers of cryptocurrency exchanges are in jail or wanted for fraud or money laundering. And yet, at its core, there is this pure idea: the blockchain.

The blockchain is simply a public database with very specific rules that make editing it fraudulently very difficult. Once released into the universe, a blockchain can exist outside of any government or ruling body, making it nearly impossible for any bad actor to mess with it, as long as a big enough group of people support it, and there is no large-scale collusion among that large group of people.

Blockchain is really a very simple tool. Rather than trusting one person or a small group of people to guarantee and safeguard your data, you put everyone in charge. Thousands, maybe even millions of users, all share the burden of safeguarding your data by making sure it stays exactly where you put it, in plain site of the entire world.

Personally, I think blockchain is worthy of hype, but that the wrong people are hyping blockchain. It seems like 90% of the much-hyped ICO’s I see are for ridiculous “Blockchain of X” solutions to problems no one actually has, because they have nothing to do with trust.

Where is the Blockchain of Gun Ownership, or the Blockchain of Real Estate Titles, or the Blockchain of Vaccinations? Why not store records of marriages on a blockchain and skip churches and governments altogether? These uses of the tech may create as many problems as they solve, but they do actually solve existing problems in radically new and transparent ways.

3. Will paying for stuff with cryptocurrency go mainstream? 

The first person to pay for something in the real world with Bitcoin asked a stranger to order and deliver him a pizza. The amount of Bitcoin spent on that pizza is now worth the equivalent of many millions of dollars. When the value of currency goes from pizza to millions over a few years, why on earth would anyone actually use it to buy anything? Any logical person would stuff it under their digital mattress.

And yet, I think that, like the switch from cash to credit cards, a move to virtual currency for day to day transactions makes sense. We are still in the very early, Wild West days of that move. There is opportunity in chaos, and many will opt to prolong the chaos as long as possible to grab as much cash as possible from gullible late-comers. Eventually, however, I think values will stabilize and governments will get behind a handful of virtual currencies.

While it’s tempting to jump on the anti-government bandwagon and say that I’d rather trust in a decentralized global system, participating in a black market economy of any kind almost inevitably leads to finding oneself working with organized criminals, and we all know how that ends. If some Chinese hacktivist mob manages to pillage Bitcoin before burning it to the ground, it wouldn’t surprise me one bit. While government control can be stifling and even fraudulent on a large scale, it is at least relatively predictable and stable. Without a coalition of governments backing some form of cryptocurrency, I have trouble believing that it will ever really go mainstream as a normal method of payment (as opposed to a form of speculative investment). Give it a few years though, and I fully expect to be offered my choice of global cryptocurrencies to pay in at the coffee counter.