It never existed, and now it might have vanished.
This week, the world's largest bitcoin exchange, "Mt. Gox," suddenly stopped working. Based in Tokyo, the transfer service closed its doors, ceased all operations and closed its website. Quite possibly more than $300 million worth of bitcoin disappeared with the closure of the website – and there appears to be no way for the account holders to get their imaginary money back. What's worse, nobody seems to understand what, exactly, triggered the collapse of Mt. Gox. The uncertainty over the future of bitcoin (already troubled by an outright ban in Russia, law enforcement scrutiny in the United States, rejection by Apple's AppStore, and the arrest of a bitcoin exchange CEO on money-laundering charges) has triggered a sell-off. Instead of achieving mainstream acceptance, bitcoin may, in fact, collapse. If it does, it will take with it millions of dollars transferred to and through its exchanges.
Bitcoin is an online currency conceived in 2009. Things move fast in the online world; in the last few years, bitcoin was poised to become THE currency of the future. You can't cram dollar bills into your computer; online payment systems, such as PayPal, still require that you put real money into them from somewhere in the non-virtual world (unless you're the direct-deposit type and you never actually see your own paycheck).
Created by programmer Satoshi Nakamoto, Bitcoin makes it possible to send money quickly to any point in the world with Internet access, and at no additional cost. It is accepted by websites such as Wikileaks, the Internet Archive and the Free Software Foundation. In the case of Wikileaks specifically, bitcoin was one of the few options left to the controversial site after it became persona non grata with the commercial banking industry.
What's important to remember is that bitcoins exist on a peer-to-peer network. They are only virtual, a finite number created by Nakamoto and traded through virtual wallets. To cash out your bitcoins in the real world, you've got to convert this virtual currency to some other kind of currency. This is done through a bitcoin transfer service, in much the same way American dollars are changed to Canadian coins and back again at border exchange sites. Bitcoin is the world's first truly digital currency. Unlike, say, the gold coins in your World of Warcraft account, or the Linden Dollars you've amassed in Second Life, bitcoins aren't simply tied to some other medium of exchange. They ARE the medium of exchange, and if you lose the computer that contains your digital wallet, your bitcoins don't exist anywhere else. Once they're gone, they're gone.
As previous explained by Erik Voorhees in Technocracy, "Most 'digital currencies' are not really digital currencies at all." Voorhees was, at the time of that writing, director of marketing and communication for Bitinstant (a bitcoin transfer service). "[Other online currencies] are pegged to standard currencies," he goes on. "Credits in your PayPal account are really just USD-backed – they are not a unique currency themselves. Other 'digital currencies,' such as Facebook Credits, can be created out of nothing and without limit, so they are not serious money. Ironically, the U.S. dollar is more like Facebook Credits than Bitcoin, because both USD and Facebook Credits can be created out of thin air, whereas bitcoin cannot be [because there are a finite number of them as created by Satoshi Nakamoto]."
Also in Technocracy, the rise of digital funds transfers and the imminent "death" of cash money transactions was described in ominous terms. "The ability to track your purchases," reads that previous column, "to build a database of what you buy, to compile a profile of information about you, what you do and what you like is the establishment of some amount of power over you. ... The death of cash represents the death of freedom in our society. Where previously those who wished to buy goods or services without a record of the transaction could always pay cash, it is now increasingly difficult to do so. We are willful participants in this trend toward tracked, electronic commerce, too: Very, very few of us even pay with actual cash anymore."
But the widespread use of electronic commerce does not only increase the dangers of, and our vulnerability to, hacking, identity theft and cybercrime. Your credit card is protected against unauthorized transactions, often at no expense to you. Your debit card, linked to your actual checking account, is similarly protected. But what happens if it is not the transactions themselves that are vulnerable? What happens when the very currency you are using to buy and sell is what is vulnerable?
Such is the case with bitcoin. The rise and possible fall of bitcoin is a cautionary tale to those investing in a digital, arguably imaginary money that only exists in the ether of the virtual world – and which can be wiped out by damage to your computer, failure of computing infrastructure ... or the sudden and mysterious collapse of a bitcoin transfer service.
This is the real danger of investing in any currency that is, at its inception, completely imaginary. There IS no bitcoin. It is code in a computer. Arguably, the same could be said of many currencies, but there is one critical difference: There are few if any protections over the loss of bitcoins through transfer services. Pour all your money into one world currency or another and you have the chance to recover it should your bank be robbed or your hard drive crash. The loss of your computer doesn't annihilate your bank account. But bitcoins are ephemeral. They are ones and zeros, their total number (and thus their perceived scarcity) created by a single man and distributed through individuals whose credibility you will never truly be able to know.
This is not a formula for a groundbreaking future medium of exchange. It is a blueprint for loss and disaster. The real irony of these losses is that they start and end with something that was never there in the first place.
Media wishing to interview Phil Elmore, please contact [email protected].
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