Bitcoin: The Inherent Folly of the Internet's Cryptocurrency

consceptualized Bitcoin connected by wires.

In 2009, an experiment was conducted. Its intent was to determine the viability of a concept known as “cryptocurrency,” funds which could be traded for goods and services like traditional money but with complete confidentiality. In our current economic system that level of security is virtually impossible. Money is regulated by governments and as such anything you do with it will remain under some level of scrutiny. In order to trade money for goods and services identities must be revealed and sensitive information must be shared. In theory, cryptocurrency would eliminate those elements. Each transaction would be blind, an unknown party doing business with another unknown party for their mutual benefit. This idea had been entirely theoretical until the “experiment” of 2009. It was conducted by a “crypto-specialist” who went by the name of Satoshi Nakamoto. He invented the world’s first actual cryptocurrency, the Bitcoin, essentially just to see if he could. As you might imagine, the currency had no value at all. Nakamoto’s invention was entirely hypothetical, essentially imaginary. That would soon change.

Soon after their creation certain parties become very interested in Bitcoins. Some viewed their usage as an act of rebellion, a liberation from the control of their government and from the global economy in general. Some simply saw the emergence of Bitcoins as a potential opportunity. Why not buy them up for cheap if there was any chance at all that they would someday increase in value? The risks were low, the potential rewards high. Some businesses began embracing the Bitcoin as well, wanting as they did to look innovative and hip in a changing marketplace. While most of these businesses were entirely legitimate, others saw in Bitcoin’s emphasis of confidentiality a chance to sell illegal goods anonymously. In the wake of this interest Bitcoin’s value began to rise.

At first, the worth of each Bitcoin was low, just a few cents each, and very few vendors accepted them. A milestone was reached on May 18th 2010 when a user on bitcointalk.com named Lazlo offered to pay 10,000 Bitcoins, at the time worth about $25, for two “the Works” pizzas from Papa John’s. Within the week another user had accepted, and those pizzas became the first real world items ever purchased with Bitcoins, or at least the first to be widely recognized. After the transaction occurred Lazlo left the offer open, stating that he would trade a further 10,000 Bitcoins for two more pizzas, but a couple of months later the offer was rescinded, and with good reason. Within that short period of time the value of each Bitcoin had risen rather considerably. Now those two pizzas, which cost Lazlo approximately $25 in U.S. currency, would have cost him approximately $600. Suddenly, Bitcoin was starting to pick up steam. By the end of 2012, after Bitcoin had been in circulation for three years, the value of each unit had risen to approximately $11. One year later, each Bitcoin was worth $400. Later that month the value rose to an all time high of $900. 30 minutes after that peak was reached each Bitcoin had decreased in value to $650 each. At the time of this writing, each individual unit of currency has been valued at $770, but that will likely change within the month, if not the day.

Let’s measure those prices in terms of Lazlo’s pizza purchase:

  • May 2010: Pizzas are worth $25
  • August 2010: Pizzas are worth $600
  • November 2012: Pizzas are worth $110,000
  • November 2013 (All Time High): Pizzas are worth $9,000,000
  • November 2013 (30 Minutes After All Time High): Pizzas are worth $6,500,000
  • November 2013 (Current Value): Pizzas are worth $7,700,000

That’s right: if Lazlo had held on to those 10,000 Bitcoins instead of spending them on a mediocre pizza he would currently be a multi-millionaire. At this point, you probably have a few questions. I’ll try to answer them:

Question: Can Bitcoins make me a millionaire too?

Answer: Probably not. Right now the lucky people are the ones who mined or acquired bitcoins early when they were cheap. The important thing to remember is that bitcoins are very difficult to get. You can claim them one of two ways. Firstly, you can mine them yourself, but you’ll need to spend money to potentially make money. Mining Bitcoins requires using a computer processor to decrypt the security encryption of the master Bitcoin blockchain file. At first, Bitcoins were quite easy to mine, but with each “prize” found locating a new one in the multi-gigabite blockchain file which contains every Bitcoin is becoming more difficult. As such, you’ll probably have to purchase specialized hardware, and you’d better hope your computer is up to snuff. Secondly, you can buy them at an online exchange, but as previously stated they are worth $770 at the time of this writing, so that might be an option for you if you have a small fortune to squander. For some the gamble might be worth it, as Bitcoin has raised in value so astronomically in the past few months that there’s no real reason to think it won’t do it again, maybe, at least for a minute or two, but I certainly wouldn’t advocate such action as it would be extremely risky. Once you have the Bitcoins, you’ll need to find someone willing to purchase these Bitcoins from you, either privately or through a Bitcoin exchange. In other words, the worth of your Bitcoins is not guaranteed. When people refer to the “worth” of Bitcoins, they mean the last offer that was made on the popular exchange Mt. Gox, rather than the actual perceived worth of the Bitcoin.

 

Bitcoin Mining Accident 

 

Question: Wait, back up. What multi-gigabite blockchain file?

Answer: The one that contains every Bitcoin which could potentially ever be in circulation. Yes, every Bitcoin that will ever be created has already been made. They were buried in a sea of code to be unearthed slowly. Currently hundreds of computers all over the world are working to mine them. Approximately 12 million have been found, with another 9 million still buried. Once they’re unearthed, that’s it. There will never be more than 21 million Bitcoins on earth at any one time. However, unearthing them should take a good amount of time. Every time you unearth Bitcoins in the code you get a “prize”. At first that prize consisted of 50 Bitcoins. Four years later that number was reduced to 25. Four years from now the prize will be lowered to 12.5 Bitcoins. The number will keep reducing by half every four years until every Bitcoin is found.

Question: Will Bitcoin’s value keep going up, at least in the immediate future?

Answer: It’s very hard to say. Yes, since its introduction the overall value of Bitcoins has gone way up, but there’s no reason it couldn’t crash down to worthlessness. Between June and October of 2011 Bitcoin lost more than 90% of its value, and though it made it back another crash really could come at any time. At times, the value of Bitcoin has gone down 50% or more in a single day. Basically, investing in Bitcoin is a gamble. There’s really no indication of when the right time to sell might or might not be. Their value just kind of jumps around spastically with little to no rhyme or reason.

Question: Why is Bitcoin’s value so volatile?

Answer: Because it’s decentralized. Paying in Bitcoins really isn’t all that different from making credit card purchases or using Paypal to buy items online. There is one huge difference though: apart from controlling how many Bitcoins are in circulation at a given time the currency is almost entirely unregulated. Its value is essentially whatever value we ascribe to it at a given time. Essentially, each Bitcoin costs as much as the last one sold for. The harder mining Bitcoins gets the more desirable they become, and the more people want them the more their value increases. That’s just basic supply and demand. However, that still doesn’t explain the “smaller” fluctuations, for example how Bitcoin could have reached a peak price of $900 per unit only to drop 28% to $650 within THIRTY MINUTES. In the end, Bitcoin is volatile because there’s no system in place to regulate its worth. As long as that’s the case their value will remain in flux.

Question: Is Bitcoin a viable currency?

Answer: No it is not, not at all, though people have certainly been trying. In 2012 Bitpay began imploring merchants to join their site and offer their wares in exchange for Bitcoins. A year later more than 10,000 businesses have signed up. That may seem like a lot, but it’s really not as impressive as it sounds. Most of the businesses on that list are very small, with no major companies joining the lineup. In fact, chances are good that you haven’t frequented a single one of the companies listed on Bitpay or any similar sites. The VAST majority of businesses do not accept Bitcoins and they likely never will. It simply doesn’t make sense to at this point. Recently the Cups and Cakes Bakery of San Francisco generated some media attention by allowing customers to purchase cupcakes with Bitcoins in-store. Their cupcakes currently cost $3.25. Back when the store opened in 2009 it would have cost a few Bitcoins to purchase a cupcake. Now, the value of that same cupcake is 0.42% of a single Bitcoin. In fact, if the owner were willing and/or able to accept that coin for its current cash value a single Bitcoin would be able to buy you approximately 2,502 and a half cupcakes. You could probably buy her entire stock for a coin or two. In the end, Bitcoin really is most useful as a means by which to buy and sell illegal items, drugs for example, with anonymity, but that might well change soon. Recently a massive online operation which utilized Bitcoins called Silk Road, which Adrian Chen, writing for Wired called “the Amazon of drugs,” was shut down by the FBI, its owners standing trial before the senate. In the end, most Bitcoin-related purchases simply involve people buying Bitcoins themselves. Far more Bitcoins have been bought than have been used, and that trend is likely to continue as long as the huge majority of major businesses refuse to accept them as valid currency.

 

Beanie Babies on Display 

 

In the end Bitcoin is basically a sham: an unregulated commodity whose value is profoundly shifted on a day by day (if not a minute to minute) basis which is accepted as legitimate currency by very few businesses. If you bought Bitcoins when they were cheap and you’ve made a mint of selling them good for you. As a money-making scheme Bitcoin worked out pretty well for a select few. As an alternative currency it is a complete failure. Bitcoins have been used as a commodity; and intermediate in which the end goal is to always cash out in established, regulated currencies. Would the creator of Bitcoin agree? It’s impossible to say. Shortly after his “currency” took off Satoshi Nakamoto disappeared. Only known as an online presence, most believed that Satoshi’s name was in fact an alias, meaning that we have no idea who the inventor of Bitcoin actually is. Chances are good that his invention quietly made him a millionaire, so at least he benefitted from his creation. As for the rest of the human race, most of us would be best served by simply ignoring Bitcoin. Trust me when I say that doing so will not be especially difficult.