Beyond The Bitcoin Bubble

A few months ago, while visiting a hacker friend’s magnificent new San Francisco loft, he gestured to a little alcove stuffed with server racks and said: “And over there are the Bitcoin mines.” I smiled and nodded, thinking, Oh, right, Bitcoin. Is that still a thing?

Andy, if you’re reading this, I apologize. Is it ever, and how. Over the last few weeks the hype around everyone’s favorite distributed cryptographic currency has gone insane. It’s a Ponzi scheme; no, it’s the first instance of the third era of currency; no, it will spiral up and down forever; no, it’s the new venture-capital frontier; no, it’s an existential threat to the modern state.

No, possibly, conceivably, maybe, and no. But: I realized this week that Bitcoin actually is a really big deal — in a way that’s been almost entirely obscured by all the hype.

A rare voice of reason this month came from Felix Salmon, who wrote (in a post marred by some remarkable ignorance; for instance, Facebook Credits ceased to be a $1 billion market when Facebook discontinued them almost a year ago):

A peer-to-peer payments system, allowing anybody on the internet to pay anybody else on the internet without having to sign up with some financial-services behemoth first, could revolutionize global commerce … Bitcoin isn’t the future. But it has helped to light the way ahead.

I mostly concur. Of course, I would, since I concluded exactly the same thing two years ago, when Bitcoin was at its previous hype peak. I went on then to speculate that its real future might be as a national currency in a nation like Zimbabwe previously scarred by hyperinflation.

…And I don’t know what I was thinking. Bitcoin’s true long-term value was staring me in the face, and I missed it. It wasn’t until I read this superb Nyaruka post on the subject that it hit me.

Almost everyone else writing about Bitcoin is doing so from the perspective of a First World citizen living in a nation with thriving electronic payment networks and a strong, easily traded currency. But that’s not the context where it really matters. Where Bitcoin matters, where it’s important, is the developing world.

Ever tried to exchange Colombian pesos in Guatemala, or Tanzanian shillings in Zambia? I have, and believe me, it’s a Kafkaesque nightmare. Now imagine living in the developing world and trying to sell goods or services internationally. Talk about a pain point. Until Bitcoin. To quote that Nyaruka post:

Someone in Rwanda that builds a compelling service can instantly start taking payments from the rest of the world, without asking for permission, without filling out any paperwork and with the same fee structure as the biggest retailers … So Bitcoin is exciting to me not so much because it is a new currency, but because it has the potential to be a globally recognized, yet completely decentralized, form of digital payment.

Of course unofficial distributed international payment networks are as old as the hills. Our own John Biggs points out that Bitcoin is in essence much like a modern day hawala network; but it is to hawala as PayPal is to money orders sent by Pony Express. No ID required, no setup costs, no nothing: just send and receive. Bitcoin is no threat to the modern nation-state…but it is conceivably an existential threat to PayPal.

However, it’s not without its flaws. For one thing, Bitcoin’s “block chain” — the record that verifies all transactions — could conceivably be forked, as happened due to a versioning bug back in March. That wasn’t a significant problem, but now that Bitcoin’s collective value has briefly hit 10 figures (although it might be back down to eight figures by tomorrow…) you have to wonder if someone might try a brute-force attack on it. “If a user controls the majority of computational power in the mining network, they can manipulate this to their advantage by creating two diverging chains,” to quote a Cornell writeup.

In other words, if a true computing megapower (say, Amazon, Apple, Google, or one of a handful of national governments) really wanted to break Bitcoin, they could. In fact I’ve seen speculation that anyone willing to splash out a few million dollars on custom hardware would probably be able to hijack the block chain.

Furthermore, it’s not really all that anonymous, which is a highly desirable feature in a digital currency; and worst of all, if the last few weeks have proved anything at all about Bitcoin, it’s that it’s ridiculously volatile… which is exactly what you don’t want in a payments mechanism.

So I believe it’s Bitcoin’s successors — whether that be Ripple/OpenCoin, or the anonymous Bitcoin bolt-on ZeroCoin, or something else still being dreamed up — that will truly change the world. But not the First World. We don’t much need Bitcoin and its descendants, at least not yet. In the developing world, though, crippled by weak currencies and byzantine payment infrastructures, a simple, seamless, frictionless, reliable international peer-to-peer payments system could be a huge deal. But not until the volatility diminishes…which is to say, not until the hype here fades away. Here’s hoping that’s soon.

Image credit: Len Radin, Flickr.