From Chapter 18 of The
Money Bubble by James Turk and John Rubino:
In the Internet's early days there was general agreement that one of the first
killer apps would be some form of cyber-currency. Since money was already largely
non-corporeal, existing as entries in bank accounts and ready to spend with
plastic cards, the next logical step would be to move the whole thing online
and dispense with paper and coins and their costly and burdensome infrastructure
of banks, regulators and printing presses. The emergence of such currencies
would, in this optimistic scenario, consign relics like the dollar and the
Fed to history's circular file and usher in an era of trust, stability, and
growth similar to what occurred under the classical gold standard.
But the digital liberation of money turned out to be easier said than done,
as the first wave of cyber-currencies came and went without much of an impact.
eCash, for instance, was an encrypted, anonymous payment system that allowed
anyone anywhere to send and receive instant payments. But it relied on the
existing banking infrastructure, and because "anonymous" meant "money laundering" to
the police, it faced extreme pushback from authorities who viewed such currencies
as primarily empowering drug dealers - and from banks that saw no point in
encouraging the competition. Only one small bank ever accepted eCash, and the
currency died a quiet death a few years after its introduction.
A larger impact was made by e-gold, which offered accounts denominated in
grams of gold from which owners could make and receive payments. It generated
some buzz, peaking at five million users and $2 million of transactions in
2009. But here again, the fact that much of this action was apparently money
laundering by parties with good reason to stay anonymous led to legal pressure
that eventually led to its failure.
James' company, GoldMoney,
was originally designed to operate as a gold-based payment system based on
several digital currency patents. It avoided the money laundering stigma by
requiring users to register under their own names, and also met with early
enthusiasm. But other logistical and legal barriers proved to be insurmountable,
and GoldMoney's payment system was deemphasized in favor of offshore gold storage.
By the late 2000s, purely digital currencies looked, to most observers, like
a near-impossibility in a world where governments and banks had the power to
prevent such competition.
Enter Bitcoin
In 2008, a mysterious person or group using the apparent pseudonym Satoshi
Nakamoto unveiled a new digital currency called Bitcoin that appeared to solve
some of its predecessors' problems. Without going too deeply into the technical
details, the Bitcoin system tracks each piece of currency from buyer to seller,
eliminating the possibility of one person spending the same piece of currency
multiple times before the counterparties catch on. The network is distributed,
with no central clearinghouse or bank holding everyone's money and imposing
rules. "Miners" create more Bitcoins by solving complex algorithms to add more
Bitcoin to the system, with the difficulty of the number crunching increasing
as the quantity of Bitcoin grows, thus keeping their supply rising at a steady,
predetermined rate until it reaches is a preordained limit of 21 million a
century or so hence.
Bitcoins, which are a long string of alphanumeric characters, can be stored
in a variety of places, from a digital "wallet" on a desktop computer to a
centralized service in the cloud, or even completely off-grid by being printed
on a piece of paper. And because it operates over peer-to-peer networks similar
to those used by techies and teens to download music and videos, it bypasses
the established banking/regulatory system, making it, at least initially, free
of government oversight.
Nakamoto, whoever he (or she, they) was, disappeared in 2010. But by then
the Bitcoin community had taken on a life of its own. Hundreds of users began
to mine Bitcoins with increasingly sophisticated computers, and the number
of merchants and individuals willing to accept, store, and transact in the
currency rose steadily.
As the buzz grew louder, the small community of techie/libertarian early adopters
was joined by traders sensing a serious momentum play. The dollar price of
a Bitcoin rose from 5 cents in early 2010 to 36 cents in November. In February
2011 it briefly achieved parity with the dollar, and when a Forbes Magazine
ran a favorable story that called it a "crypto currency," the price went parabolic,
to nearly $9. More breathless press ensued, sending the price to $27 and putting
the market value of Bitcoins in circulation at $130 million.
On the Internet's black market - the network of sites only accessible to computers
running anonymizing software such as Tor - Bitcoin was rapidly becoming the
preferred form of money. This drew the ire of the establishment, with US Senator
Charles Schumer demanding the closure of online drug emporium Silk Road and
describing Bitcoin as "an online form of money-laundering."
At about the same time, Bitcoin's Achilles heel became apparent, which is
that it has to be stored somewhere, and no place is 100 percent secure. Bitcoins
stored on a desktop can be wiped out by a crashed hard drive. Backed up on
other storage media, they're vulnerable to hackers. Kept in an online storage
service - which sounds like a bank but has no deposit insurance or even physical
reality - they can disappear without a trace. Traded on an online exchange
they can likewise simply disappear, with no recourse to former owners.
As Bitcoin rose in value the number of high-profile crimes and crashes rose
apace. A Tokyo-based exchange was hacked and lost numerous client accounts.
A Poland-based storage service accidentally overwrote its customer records.
A West Indian storage service simply shut down, and its owner disappeared.
And viruses aimed at Bitcoin caches proliferated. Newcomers, meanwhile, discovered
that working with Bitcoin required skills not yet common among the non-techie
99 percent. The press turned scornful, and a consensus formed that the concept
was fatally flawed and without much of a future.
The Comeback
Throughout that boom and bust, Bitcoin retained a core user base that saw
its possibilities and worked to overcome its flaws by developing point-of-sale
hardware and online merchant services while lessening its dependence on a small
number of exchanges.
And then, just when the outside world had stopped paying attention, Bitcoin
recovered. From under $20 at the beginning of 2013 it rose to $240, crashed
to below $100, and then in one dramatic arc soared to more than $1,000. In
early 2014 Bitcoin's market value exceeded $10 billion and the number of merchants
willing to accept it was soaring. The market appears to have spoken: Bitcoin
is for real.
Coming on Feb 5: Bitcoin: Revolution or Trap? Part 2. Read
it now here.
