In March, I was at a conference in New Hampshire when a few Bitcoin businessmen sat me down to lunch. It seems like the last thing one wants, a long lunch at which one is hammered by unrelenting geek-speak about the glories of some crazy software thing.
It turned out very differently. A developer suggested that I download a smartphone application called Blockchain. I did this. He then took at an image of my QR code — that funny square design that looks like a 3-D bar code. It looks like this:
Within a few seconds, I was the proud owner of my first Bitcoin. I felt the rush. Ownership changes everything.
My wallet lived on my smartphone. Only three years ago, some wonderful applications had already developed around the currency unit. Although I’m a bit of a “techy”, I’m not a rocket scientist, and I’m quite certain that I would have been out of my league.
But this is how digital institutions develop to become ever more user-friendly. At the same event at which I became a Bitcoin owner, I also used a Bitcoin ATM. I put in the green stuff, held my digital wallet up to the scanner, and then felt the buzz on my smartphone. Physical became digital. Beautiful.
But still I wondered what exactly I could do with these things. That’s when the consumer world of Bitcoin products appeared before me. We aren’t just talking about Silk Road — a website that became notorious for enabling the easy, anonymous buying and selling of drugs. There are Bitcoin stores everywhere. And there are services through which you can buy from any website with a Bitcoin interface. There was even talk of Bitcoin futures markets. Some companies were rumored to be going public with Bitcoins, thereby bypassing the whole of the Securities and Exchange Commission. The implications are mind-blowing.
Still, I’m a tactile kind of guy. I need to experience things. So I went to one of these sites. I brought the first product I saw (why, I do not know). It was a pair of pliers for crimping electric cables. I put in my shipping address and up came a note that said it was time to pay. This is the moment I had been waiting for. A QR code popped up on-screen. I held up my “wallet” and scanned. In less than two seconds, the deed was done. It was easier than Amazon’s one-click ordering system.
My heart raced. I jumped out of my chair and did a quick song and dance around the room. Somehow, I had seen it thoroughly for the first time: This is the future.
The pliers arrived two days later, and even though I have no use for them, I still treasure them.
Bitcoin had already taken off when the surprising Cyprus crisis hit. The government was talking about seizing bank deposits as a way of bailing out the whole system. During this period, Bitcoin essentially doubled in value. Press reports said that people were pulling out government currency and converting it, not only in Cyprus, but also in Spain, Italy, and elsewhere. The price of Bitcoin in terms of dollars soared.
Another way to put this: The prices of goods and services in terms of Bitcoin were going down. Yes, this is the much-dreaded system that mainstream economists decry as “deflation.” The famed Keynesian Paul Krugman has even gone so far as to say that the worst thing about Bitcoin is that people hoard them, instead of spending them, thereby replicating the feature of the gold standard that he hates the most! He might as well have given a ringing endorsement as far as I’m concerned.
Obsession and Resentment
My own experience with Bitcoin during this time intensified. I began to call friends on Skype and scan their QR codes and trade currencies. I began to rope other people into the obsession based on my experience: You have to own to believe. After one full day of buying, selling, and using Bitcoins, I had the strange experience of resenting that I had to pay a cab fare in plain old U.S. dollars.
How can you obtain Bitcoins? This can be a bit tricky, but you have choices. You can go to localbitcoins.com and find a local person to meet you to trade cash for Bitcoins. Usually, this takes place at high premiums, anywhere from 10-50%, depending on how competitive the local market is. It is understandable why people are reluctant to do this, no matter how safe it is. There is just something that seems sketchy about meeting a stranger in an all-night cafe to do some strange digital currency exchange.
A more conventional route is to go to one of many online sellers, link up your bank account, and buy.
This process can take a few days. And then when you set out to transfer the funds, you might be surprised at the limits in the market that exist these days. Sites are rationing Bitcoin selling based on availability. It could take 10 days or more to go from nonowner to real owner. But once you have them, you are off to the races. Sending and receiving money has never been easier.
As of this writing, a Bitcoin is trading for $139. Just three years ago, it hovered at 0.14 cents. Many people look at the current market and think that surely this is a speculative bubble. That could be true, but it might not be. People are exchanging an unstable, fiat paper for something with a real title that cannot be duplicated. Everyone knows precisely how many Bitcoins exist at any time. Anyone can observe the transactions taking place in real-time. Its price can go up and down, and that’s fine, but there is no real speculation going on here endogenous to the Bitcoin market itself.
Is it a pyramid scheme? The defining mark of a pyramid scheme is that more than one person has an equal claim on the same money or good. This is physically impossible with Bitcoin. The program is set up as a strict property rights regime with no exceptions. In fact, in early March, there was a brief hiccup in the system when some new coins were approved by one group of developers but not by another. A “fork” appeared in the system. The price began to fall. Developers worked fast to resolve the dispute, and eventually the system — and the price — returned to normal. This is the advantage of the “open source system.”
But what about the vague sense some people have that a handful of coders cannot on their own cause a new currency to come into existence? Well, if you look back at what Austrian monetary theorist Carl Menger says, this is precisely how gold became money. It was not at first used by everyone. Every new currency is at first used only “by the most discerning and most capable economizing individuals.” Their successful behaviors are then emulated by others. In other words, the emergence of money involves entrepreneurship — that is, being alert to opportunities to discover and provide something new.
The single biggest problem with Bitcoins right now is getting them. The exchanges are overloaded. They can’t sell them fast enough. The virtual Bitcoin trading floors of these exchanges are full and it’s becoming increasingly difficult to make a deal.
This is all part of the pangs of growing, but it can be extremely frustrating for users. What we need are more ATMs that are hooked directly into exchanges. When those come online, crazy things could start happening. We could be looking at the global unraveling of all government paper.
But what about a government crackdown? No doubt that attempt will be made. Already, government agencies are expressing some degree of annoyance at what could be. But governments haven’t been able to control the cash economy. It would be infinitely more difficult to do this with a virtual currency with no central bank, with encryption, with millions of users per day. Controlling that would be unthinkable.
There was a time when the idea that e-books would replace physical books was absurd. When I first took a look at the early generation of e-readers, I laughed and scoffed. It will never happen. Now I find myself looking for a home for my physical books and loading up on e-books by the hundreds. Such is the way markets surprise us. Technology without central planners makes dreams come true.
It’s possible that Bitcoin will flop. Maybe it is just the first generation. Maybe thousands of people will lose their shirts in this first go-round. But is the digitization of money coming? Absolutely. Will there always be skeptics out there? Absolutely. But in this case, they are not in charge. Markets will do what they do, building the future whether we approve or understand it fully or not. The future will not be stopped.