Bitcoin went on a rollercoaster ride last week, spiking in value on some exchanges just north of $5,000. Then J.P. Morgan CEO Jamie Dimon told the world that the cryptocurrency is a fraud, and that he’d fire any employee of his he caught trading it. Bitcoin’s price tumbled.
Then China shut down cryptocurrency exchanges, making it far more difficult to trade bitcoin. Close observers noted the irony – China hosts the world’s largest concentration of bitcoin miners, the computers earning crypto-credits by confirming transactions on the blockchain.
China may be an engine of economic growth just now, but it is still a centralized economy, and it wants to keep its currency at home, where its value can be more closely monitored and manipulated. Keep the yuans at home; close the border to capital flight in the form of bitcoin.
The one-two whammy left bitcoin trading as low as $2,972, a drop of some 40 percent. Repeat after me: bitcoin is volatile.
But its strength lies in the market composed of contrarians, and in a world gone increasing centralized and global, there will always be a market catering to those marching to drummers all their own. Do you really expect Jamie Dimon and Uncle Sam to come to your rescue when things get tough?
Bitcoin is but one of roughly 1,000 cryptocurrencies currently on the market, but it is the most well-known, with a market capitalization of $60 billion. (It is currently trading at roughly $,3630.) Not bad for an ethereal bit – no pun intended – of data.
If you’re new to cryptocurrencies, here is a crash course.
The primary functions of the money you carry around in your wallet is to serve as a medium of exchange, a store of value and a unit of account. What’s all that? The first is easy. Want a cup of coffee? It will cost you. You pay for it with a currency – a medium of exchange.
The market sets the price for the coffee. But what is the price measured in, and how do you compare items, deciding how best to spend limited funds at your disposal? If you know a cup of coffee costs $2 and a sandwich costs $5, you know you’re going to go hungry if all you have is $3. The items, incomparable though they are, are reduced to common units of account expressed in dollars.
Suppose you don’t want to spend anything at all today, but you want to hold your money for a rainy day? Fine. Money is also a store of value. You can deposit it in a bank, and maybe earn a bit of interest. Currency is magic, you see.
Bankers know the magic of currency, so do governments. Jamie Dimon and the wolves of Wall Street want to keep a stranglehold on your wallet. Bankers are intermediaries in financial transactions, making fees brokering the exchange of currency.
And governments not only milk the cash cow, they seek to monopolize the cow itself. A defining characteristic of what most of us regard as money is that it is backed by the government; in exchange, the legal tender requirement means that creditors must accept recognized currency in settlement of debts.
Pull a dollar out of your pocket some time and look it over: “You’re all that?”, you might say.
Cryptocurrencies challenge the centralized control of currency, and they do so, in part, by eliminating the need for trusted third parties either to broker exchanges or to police the system. Bitcoin does this by means of what is called the blockchain, a distributed ledger requiring confirmation by strangers of each unique transaction. Skip the banker and his fee; tell the government to dissolve itself. Distributed ledgers are an innovation that will change the world of things much like the internet changed the world of ideas.
This week’s turbulence in the bitcoin market was a necessary blip on the screen. Of course big banks and big government want it to fail – what vampire can live for long without the blood of those upon whom it preys?
I took heart in comments made by Antonis Polemtis of Nicosia University in Cyprus: what makes cryptocurrency enduring is its reliance on the distributed ledger, no particular form of currency is necessary. (Polemitis teaches as part of a free MOOC course on the bitcoin and the blockchain – some 4,300 people signed up for this fall’s course, me among them.)
I’m a dystopian at heart. Everywhere around me I see a crisis of legitimacy, and a lack of trust in traditional institutions. Banks, nations, even currencies come and go. But life goes on, and, so long as it does, there will be a need to broker exchanges. I have a whole lot more confidence in distributed ledgers and the blockchain than I do in J.P. Morgan or Uncle Sam.
Sure, I’ve got dollars in my pocket, but I’ve also got cryptocurrencies in digital wallets. So do an increasing number of folks, including, I suspect Jamie Dimon.