There’s been much ado about Bitcoin lately, some seeing bubbles, some seeing opportunity, and apparently many more wanting to get into the act. So, I figured, what the heck, I might as well do a blog post of a different sort on what has been dubbed crypto currency, from a tech perspective since that is my area of expertise and then combine it with my macroeconomics hobby.
After all, the bitcoin phenomenon is sort of puzzling because down at the brass tacks level all it is is encrypted bits of some length based on an algorithm that has a matching key, not that much different than something like an S/MIME certificate that you’d get from a security vendor like Verisign or Comodo. It does have some notable differences though. The bitcoin infrastructure is really an interesting twist on cert issue where just about anyone who has the computational power to update the blockchain transition log can participate rather than having a central authority like a security vendor issue and keep track of who owns which cert. The puzzling part of it is that it has value simply by being dubbed a currency rather than a security cert, and the same musings about why paper money has value could be applied here minus the concept of government liabilities because all it is is encrypted bits; not gold, not oil, nothing that has another use, just digital characters scrambled in a specific way.
At first, when I heard about bitcoin several years ago, I was put off by it for a number of reasons, but mainly because its quantity is hard capped and a rigid currency isn’t very practical in a world with a growing population and that is full of economic inefficiencies. Lately, though, there have been many new entrants to the crypto-currency game and I’ve also heard that bitcoin now has variants, and the landscape looks to me to bear some similarities to the world of privately issued bank notes from the late 19th century. That would be a much better way for crypto to conquer the world, with lots of different offerings, if it ever were to do so in order to produce a more stable macro environment.
Of course, not all that glitters is gold. One of the notable things about bitcoin in its early days was that the blockchain ledger behind it wasn’t directly editable. In that state, there’s was some integrity there and you could pretty well be assured that the bitcoins you had in your digital wallet were indeed yours. But I remember reading a couple of years ago that someone had found a way to directly edit it without destroying the ledger itself which leads to some natural skepticism about the integrity of bitcoin’s ledger in its current state. Add to this that there are bitcoin variants out there and one can never really be sure about what one is buying or whether it is safe. I suppose that in general it is safe. But it would not be all that surprising to one day read about theft or abuse resulting from edits to the ledger, or that someone bought what they thought were real bitcoins, but got a knockoff instead. And I’d guess that since bitcoin has appreciated in value by insane amounts recently, the likelihood of such a story hitting the press has dramatically increased. I won’t be buying bitcoins for that reason, but I might try something cheaper that would amount to not a great loss if I happened to stumble into one of the more nefarious of situations.