Bitcoin Mania

Yoshikazu Tsuno/AFP/Getty Images
James MacWhyte at a bitcoin trading club meeting, Tokyo, February 2014

The first time I bought virtual money, in October 2017, bitcoins, the cryptocurrency everyone by now has heard of, were trading at $5,919.20. A month later, as I started writing this, a single coin sold for $2,000 more. “Coin” is a metaphor. A cryptocurrency such as bitcoin is purely digital: it is a piece of code—a string of numbers and letters—that uses encryption techniques and a decentralized computer network to process transactions and generate new units. Its value derives entirely from people’s perception of what it is worth. The same might be said of paper money, now divorced from gold and silver, or of gold and silver for that matter. Money is a human invention. It has value because we say it does.

In 2008, when a person or persons going by the name Satoshi Nakamoto published the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System,” bitcoins were worth nothing because they didn’t exist. Three months later, when the first version of bitcoin software was released by Nakamoto and the inaugural bitcoins were traded, they were essentially free. By September 2010, a single bitcoin cost about six cents. By June 2011, it was $22.59. And while the price had its ups and downs, the overall trend was up, up, up. By the end of 2013, as the idea of a currency controlled exclusively by computers running cryptographic algorithms created and traded without the intercession of a central bank, a nation-state, a taxation authority, or any kind of regulation began to take hold, especially among libertarians and those unsettled by the financial crisis, as well as among black-market criminals and terrorists, it was nearly $1,000.* The higher the price, the greater the interest of investors and speculators, which propelled the price even higher.

Because the software was programmed to issue a finite number of bitcoins—21 million—bitcoin’s spectacular trajectory seemed, and continues to seem, like a textbook case of supply and demand. (Nearly 80 percent have been issued so far through a computer-intensive process called “mining.”) How high will the price go? The Internet is full of prognostications—$22,000 by the end of 2018, $50,000 by 2020—that make bitcoin’s mid-December valuation at over $18,000 look like a bargain, which, of course, is driving more investment. And this despite warnings of a bitcoin bubble, predictions of a future crash, and an admonishment from Jamie Dimon, the CEO of JPMorgan Chase, who called bitcoin a fraud that will not end well for investors. Still, Dimon conceded that for people who reside in countries with unstable currencies and hyperinflation, like Venezuela or Argentina, bitcoin might be a useful option, as indeed it has turned out to be.

He also acknowledged its utility for the two billion people around the world without access to traditional banking institutions,…

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