Tuesday, October 13, 2015

Book Review: Popper's Bitcoin Book

Nathaniel Popper is the author of Digital Gold, an account of the short history of bitcoin. Bitcoin is a digital currency invented by "Satoshi Nakamoto," and released to the world in 2009.

The book is advertised as a business book, and no doubt some legitimate fortunes have been made and lost. A few of the characters are, indeed, entrepreneurs in the spirit of Sam Walton, Steve Jobs, or Aubrey McClendon. The name Wences Casares, the Patagonian founder of Xapo, comes to mind, though (apart from Satoshi himself) no bitcoiners rise to the rank of genius that one associates with those other giants of industry.

But two other less creditable strands are prominent, especially in the early years. First is a kind of crackpot libertarianism--a cross between Ron Paul and Occupy Wall Street. It's a paranoid world view that posits some grand conspiracy theory between the government, big business, and the Federal Reserve, among others. These are people for whom the dollar bill is an infringement on liberty, and the main object of activism is to protect one's privacy from the prying eye of government. Roger Ver, a longtime champion of bitcoin, who served time for illegally selling explosives and has renounced his US citizenship, is representative.

The second strand is outright criminality. The biggest use for bitcoin, even today, is buying and selling illegal drugs. The founder of the trade was a poor fellow named Ross Ulbricht, aka Dread Pirate Roberts. Along with belonging to the kooky Libertarian club, he also grew mushrooms in his basement and wanted to sell them. Apart from hawking them on a street corner, a bitcoin-enabled internet storefront looked to be a golden opportunity. And so Silk Road was born--the internet marketplace run along the principles of Amazon.com, but that used bitcoin as a cheap, relatively anonymous way to transfer money.

For this Mr. Ulbricht is now serving a life sentence without parole, a punishment which many (perhaps including me) think is excessive.

Other people got caught up in Silk Road, including an early bitcoin entrepreneur named Charlie Shrem. A born salesman and a natural champion for the new technology, he ran the first currency exchange facilitating bitcoin purchases. While great at raising capital, he wasn't a particularly good manager and had no interest at all in regulations surrounding financial transactions. So, despite likely having no criminal intent, he is now spending two years in the federal pen--a sentence that is surely unduly harsh.

And then there is Mark Karpeles, the French dude who bought Tokyo-based Mt. Gox, building it into the premier trading platform for bitcoin. Unfortunately his bookkeeping was not up to the challenge, and in 2014 Mr. Karpeles revealed that somehow the company had "lost" 750,000 bitcoins, worth as much as $500 million. That story is complicated (I don't think it is completely told in Mr. Popper's book), and some of the money has been recovered. Nevertheless, Mr. Karpeles is now charged with embezzlement.

Despite this, surprisingly bitcoin is still around. There are four reasons for its continued existence. First, successors to Silk Road have proliferated, and the technology remains today the best way to buy and sell contraband. This remains the biggest use for the currency and guarantees a market. Second, honest, non-ideological entrepreneurs have entered the market, of which Wences Casares is a preeminent example. He is looking for legitimate markets, and indeed, bitcoin is now popular in places where banks are unreliable, e.g., Mr. Casares' native Argentina.

Third, the dreaded establishment has latched on to bitcoin. Every major bank now has a research program on the technology. The blockchain (bitcoin) algorithm can be used to trade any number of things cheaply, e.g., stocks, bonds, and real estate. Blythe Masters, the lady wunderkind working for JP Morgan, actively disowns bitcoin currency, but is using the blockchain to trade derivatives. (Ms. Masters does not appear in Mr. Popper's book, but she is the first woman to play a significant role in any of the business books I have read.)

And finally, even the evil government is beginning to take notice. Much to the Libertarians' dismay, the gnomes at the Fed and the IRS have realized that bitcoin is not like cash. The latter is truly anonymous and can be used to evade taxes, among other things. Bitcoin is precisely not anonymous, but merely pseudonymous. Indeed, all transactions are a public record, just waiting for the police to figure out who hides behind the pseudonyms. That's how Mr. Ulbricht got caught.

So now some paranoid people are suggesting that the Fed wants to eliminate cash altogether and replace it with bitcoin or some similar system.

So what do Trotskyists think about bitcoin? I have absolutely no clue. My guess is that few of the papers on my Beat would know the difference between a blockchain and a cement block. If you're stuck in a 19th Century timewarp, then new technology becomes a mystery.

As for me, I'm cautiously optimistic about bitcoin. I took Mr. Casares' advice, which I paraphrase from memory here:  
Buy four bitcoins, which today costs about $1000. There's a good chance that you'll lose all your money--that the price of bitcoin will fall to zero. But there's also a chance that bitcoin will eventually be worth $1 million.
Paypal has about 200 million users in the world, and everybody acknowledges that Paypal is a success. But you need a credit card to use it, and only one billion of the world's population has a credit card. Bitcoin, on the other hand, only requires having a cell phone. Six billion people have a cell phone. So bitcoin has a much larger potential market than Paypal.
Today bitcoin has 13 million users. When it has 200 million (like Paypal) it will be a success. 
I bought the bitcoin lottery ticket. The most I can lose is a grand. But I might also become rich.

Further Reading:

1 comment:

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