Defenders of digital currencies seem to believe bitcoin and its ilk will continue to gain value forever. You know who also thought along those lines? Dutch people in 1637.
Bitcoin has reached an important milestone. The digital currency is renowned, or rather infamous, for its dramatic speculator-driven price surges. Only this week, its value plunged from US$700 to US$540 when a key exchange discovered a software flaw that could allow thieves to withdraw twice the correct amount — and not that long ago it was up at the US$1200 mark. Well, now bitcoin has been linked to another notorious source of irrational speculation: tulips.
The bitcoin community hates it when the supposedly ever-rising value of their darling digital disruptor is compared with the Dutch tulip mania of 1637, but for those who haven’t been drinking the Kool-Aid the parallels are obvious.
There’s the fact that we’re talking about the price of something that has no real value in and of itself — although that’s true of all fiat currencies. There’s the almost religious belief that the price will keep on rising. There’s the matching claims that any drop in price is just a temporary aberration. There’s the wild-eyed enthusiasm of first-time speculators.
And now there’s the extravagant evolution of varieties and cross-breeds — an almost Cambrian explosion of digital currencies that’s creating a gloriously exploitable dreamscape for speculators and con artists alike.
The computer software that supports bitcoin’s peer-to-peer transactions is open source, which means that anyone can copy it to create his or her own clone currency — or tweak it to create something with a slightly different dynamic, depending on your beliefs about monetary theory and inflation versus deflation.
As the rather pretty Map of Coins shows, more than 200 of these “altcoins” have evolved since the publication of the original bitcoin paper in 2008, and you can click through to their websites and their program source code.
Some, like Litecoin, are serious competitors to bitcoin — and presumably intended to give a new round of players the same early-adopter advantage that turned the initial investors in bitcoin into multimillionaires.
Others are, as during the tulip mania, purely decorative or even whimsical — such as Dogecoin (based on the internet meme of captioning pictures of shiba inudogs), and currencies featuring Kanye West and Kim Kardashian. Even the notorious website goatse.cx is cashing in on the digital currency boom — and it’s OK to click through today, trust me.
Others still must surely be nothing but scams. After all, we’re talking about communities that are already riddled with get-rich-quick enthusiasts, drug dealers, tax avoiders and other assorted criminals, and where anonymity — or at last pseudonymity — is pervasive.
Those elements create an environment that, at least for now, often overshadows more honest folk interested in the future of digital transactions and undercutting what by modern standards are the outrageous fees charged by the legacy banking and credit card behemoths.
Note the example of young Australian bitcoiner TradeFortress who, when he lost a million dollars worth of Bitcoin to thieves, didn’t bother calling the police. As I wrote at the time, the digital currency community has a trust problem it needs to address.
As former president of the Dutch Central Bank Nout Wellink said a few months back, “This is worse than the tulip mania … At least then you got a tulip.”
All that said, there have been signs from outside the altcoin community that these digital currencies are gaining more cred. For example, last month the Californian legislature introduced a bill to legalise bitcoin.
“This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments,” read the explanatory note.
This Californian bill, like various other moves around the world to legitimise the idea of a currency that isn’t linked to a central bank, will certainly help address the trust problem.
But it also brings the altcoins into the same legal framework as all other currencies, with all the rules about transparency and money laundering and detecting potentially criminal transactions and, yes, taxation. That suddenly makes the altcoins less attractive to their most ardent supporters — and that will surely decimate their value, no?