On the other hand there are those who think that cryptocurrencies are another type of tulip mania or South Sea bubble: just another irrationally exuberant event that will end with a resounding crash. The standard retorts are “Bah, humbug!” and “This time, it’s different!” A more thoughtful retort is that Bitcoin (and other cryptos) are works of genius, based on the innovation of the blockchain (a sort of distributed ledger where every anonymous participant gets to verify every transaction) and the “proof of work” principle by which Bitcoin is “mined” using computers. In essence, instead of putting their trust in governments (which print money) and central banks (which really print money), Bitcoin users put their trust in algorithms, which are open source and defended through lack of public acceptance of any modification that might compromise them.
Cryptocurrency fans sometimes go on to say how cryptocurrencies are all about liberty and anarchism, cutting out the middlemen—the bloodsucking bankers and governments—and allowing people to trade one on one, simply by rubbing their digital wallets together and trusting the clever algorithms to sort it out. This sounds good, until you examine some of the details.
First, bloodsucking bankers and governments are unlikely to be defeated by an algorithm, no matter how clever, because they use far less technical means to enforce their interests: security agencies, criminal investigators and prosecutors, tax auditors, courts and prisons.
Already, any use of Bitcoin is, under US tax regime, a potentially taxable transaction: if you got paid in Bitcoin and then bought something with it, and if its price went up in the meantime, then you get to pay 20% capital gains tax on the difference. With its promise of anonymity and its ability to transcend borders and circumvent fiscal and monetary authorities, Bitcoin has become a magnet for drug dealers, narcotraffickers, human traffickers, hackers/extortionists and other bad actors. If you use Bitcoin, you automatically end up on the radar of those who hunt for them.
And at a very simple level that should be easy for everyone to understand, if some government decides that Bitcoin is not its friend, it can simply ask you, nicely at first, to relinquish your cyberwallet to it. I doubt that too many of the Saudi princes that were recently disencumbered of much of their net worth while being tortured by Prince Mohammed bin Salman at the Ritz-Carlton in Riyadh ended up playing coy with their Bitcoin stash. Remember, Bitcoin is a popular instrument of extortion, and governments are the biggest extortionists in the world.
Worse yet, if a government decides that Bitcoin is its friend, it can ask, nicely at first, that all Bitcoin transactions be disclosed to it in a timely manner, complete with the tax ID of the party at each end of every transaction. This would be a clever way for a government to shift to using digital cash without having to pay for any of it. All it would have to do is order “compliance”; Bitcoin’s developers would then have to bring their architecture into compliance or risk prosecution for noncompliance. This seems like a cheap and cost-effective way to move closer to financial totalitarianism, placing every single transaction under the government’s microscope.
Second, few people have the technical savvy to understand all the intricacies of the protocols, and as the old saying goes, “A fool and his money are soon parted.” Your digital wallet can be stolen (hacked) or become corrupted, and there is no accurate estimate of the number of Bitcoins that will never be heard from again, making the current market capitalization claims less than reliable. Any world-savvy grandmother can sew a few gold coins into the hem of a grandchild’s coat as a safeguard against unforeseen expenses; but how many grandmothers, or grandchildren, would know how to do that with crypto?
Third, there is the matter of durability and access. Gold does not rust or tarnish. It can become lost, but then it can (at least theoretically) be recovered. A digital wallet, once corrupted, cannot be recovered. A single electromagnetic discharge from a sun flare or a stratospheric nuclear explosion from one of Kim Jong Un’s rockets can wipe out a huge amount of cryptocurrency. Network outages render cryptocurrencies inaccessible. How much Bitcoin trading went on in Domenica, Barbuda or Puerto Rico after the recent hurricane? Unlike a physical pot of gold, cryptocurrency is invisible and cannot be validated without special equipment connected to the internet.
Finally, one feature of cryptocurrency is its essential uselessness as a substance. Gold can be made into wedding bands and communion chalices; it can be pounded into ultra-thin sheets that are used to guild picture frames and onion domes; it is an excellent electrical conductor used for plating contacts and for semiconductor bonding wires; a thin, transparent coating of gold produces window panes that keep out much of the infrared radiation; the list goes on and on…
Cryptocurrency has none of these useful properties. A Bitcoin is a predetermined string of digits appended with another, arbitrary string of digits, called a nonce, that has a certain “useful” property: for example, that its SHA-256 hash starts with some specific number (the SHA-256 hash is a mathematical function that turns a string of digits into another string of digits in a way that makes the original string of digits impossible to compute). Once you’ve come up with it, it is trivial to verify (most computers can compute millions of SHA-256 hashes per second), but coming up with it takes “work.” The difficulty of the work is automatically adjusted so that no Bitcoin miner can produce valid “work” faster than once every 10 minutes, on average. Currently, this “work” is taking up less than 1% of the world’s total electricity consumption, but it’s growing. Gold mining (of ores that are now below 3 parts per million gold) is a huge waste of energy too, but it produces a substance that’s actually useful.
Bitcoin’s one useful property is that at the moment numerous people around the world are willing to treat it as valuable. But what if they are all idiots? Is it your theory that lots of people can’t be idiots all at once because there’s, you know… a lot of them? That’s not a theory—that’s a hypothesis, and it’s been disproven countless times. Yes indeed, large groups of people can and sometimes do behave like idiots.
Back when I was in school I temporarily belonged to a certain
And it would appear that some of those kids, both the cool and the not-so-cool, grew up to contribute to the following phenomenon, which I believe lays out the issue in some detail. Over the past few days a phenomenal amount of real money has been spent on the game CryptoKitties, which allows you to invest in “virtual kittens.” The kittens are priced in Ethereum (a Bitcoin-like cryptocurrency). A few kittens were sold for 50 ETH (around $23k), while the most expensive kitten so far went for 246 ETH ($113k). Prices are rising rapidly, and currently the cheapest kitten is going for $140. People are buying up kittens in order to “breed” them—to produce very “rare” kittens and sell them for even more outrageous sums. The trading is done using Ethereum “smart contracts.” Users interact with the game through their own Ethereum address, via MetaMask, a Chrome browser plug-in. Currently, 15% of all Ethereum traffic is related to the CryptoKitties game.
All of this reminded me of another, much older game. While growing up I spent quite a bit of time playing a card game called Durak, which is the Russian word for “fool.” Unlike most card games, in which the object of the game is to win, the object of Durak is to identify the loser. Cards are valued high-to-low as A-K-Q-J-10-9-8-7-6 (all cards below six are discarded). Higher-value cards beat lower-value cards of the same suit, except for the trump suit, which is determined when cards are initially dealt out. Six cards are dealt out to each player. The next card is flipped over and identifies the trump suit (trump cards beat other trump cards of lower value and all other cards) and the rest of the deck is placed on top of it face down. The game is placed clockwise. The player who holds the lowest-value trump (to be shown to others) goes first, attacking the player on his left. If nobody has a trump, the hands are discarded and the cards are dealt again from the stack. In each turn, the attacker starts by serving a card. The defender has to beat that card using a higher-value card of the same suit, any trump card, or a higher-value trump in order to beat a trump card. The attacker can continue to serve more cards of the same values as any of those already in play, and the defender has to beat them all. If the defender fails to beat them all, he has to pick up all of the cards in play and misses a turn. If the defender succeeds, all the cards in play are discarded. After each turn, players pick up cards from the deck, clockwise starting with the attacker, until there are six in each hand, or until the deck (including the trump card at its bottom) is depleted. The game continues until there is just one “fool” left who is still holding cards. The game can result in a tie if the final attack fails and all the cards are discarded. Variants of the game include: “pitch-in”, where other players, in addition to the attacker, can lay down cards; “shift”, where the defender can shift the attack over to the next person by serving a card of the same value, thus contributing to the attack; and “partners”, where there are four players and those seated across from each other cooperate and may examine each others’ hands in order to strategize. Variations on the variants include being able to “shift” at any point during a turn rather than just at the beginning, “partners” where the partners can exchange their hands at will (though generally not in the middle of a turn), “piling on” where attackers can “pitch in” in any order rather than going clockwise, and quite a few others. Although the rules are supposed to be agreed upon prior to each game, this rarely happens; instead, somebody tries to get away with something, and then the rest of the players take a vote, generally by acclamation, as to whether that’s allowed or not. A special case is when the final, successful attack that ends the game is made using a six of trumps; the “fool” then has to wear it as a badge of dishonor.
I believe that cryptocurrencies share an important property with the game of Durak. “Mining” is not much different from picking up cards from the deck. The way each turn is played is superficially similar to the blockchain. And the person left holding some very valuable cards at the end of the game is identical to the person left holding some very valuable cryptocurrency at the end of this bout of madness. The only really notable difference is that in the game of Durak there is just one “fool” while the game of cryptocurrency is much more “scalable” because there can be arbitrarily many fools.