An appropriately gnawing feeling is triggered in the pit of my stomach when I am reminded of the film The Wolf of Wall Street. It is a brilliant retelling of the story of a real-life individual, who, with abandon, seized upon the opportunity afforded him by the way the global financial system is set up to rip off all and any investors by using their own greed against them. The discomfort the film gives me, as entertaining as it might be, is rooted in the thought that the veil has been lifted and that, rather than it being a cautionary tale of how one motivated bad apple can ruin the barrel for everyone else, The Wolf of Wall Street is actually indicative of broader realities. And that is that the sprawling network of banks, brokers, payment processing companies, money exchanges and institutions that make up the conventional financial world keeps me, by accident or design, at a distance, never really allowed to be a part of it, only permitted to make use of it on their terms and for a fee. This is a system made not for the end user to access services, but for those within it to maintain the illusion that it is equitable. This feeds into the basic human instinct to trust. Otherwise, we would never make a single investment that wasn't hoarding gold or cash under the bed. There are many libertarians who feel seemingly just as exasperated as me. Unlike me, they have attempted to find a better way. What they did was grab hold of an idea designed to make an electronic cash payments network function between individuals without the need for a centralised system to run it. That concept was bitcoin.
The frenzy has lifted the price of bitcoin from US$1,000 each, at the start of last year, to more than $13,000 yesterday, on Coindesk’s bitcoin price index.
Hearing Jamie Dimon talk out the side of his mouth, calling bitcoin a “fraud” in September, less than a month before the bank he runs, JP Morgan Chase, said it was investing in the technology behind it, blockchain, gives the impression that Wall Street’s top dogs are trying to stay at the head of the pack in order to steer its future. The European Union also jumped into the fray last month, saying that it planned to tighten rules to stop cryptocurrencies being used for terror financing and money laundering.
That follows the seeming watershed last month of bitcoin futures being traded on regulated US exchanges. The rush by investors, institutions and governments to get some kind of handle on the cryptocurrency last year lends weight to the idea that the bitcoin experiment – and that is what it is – can be subject to an effective reverse-takeover by the mainstream. This misses the entire point. To understand its original intent it is worth going back a few years to a pivotal time in this most modern of centuries.
While trust right now might seem to be in short supply, it was almost obliterated a decade ago. About a month after Lehman Brothers collapsed in 2008, sparking the last financial crisis, these words were published online: “We have proposed a system for electronic transactions without relying on trust.”
That word: trust. What a loaded term it had become by September of that year following the failure of one of the world’s most prestigious financial institutions. The response from government officials in the United States and around the world from then on would have implications that still affect us today and could still have unseen consequences. Quantitative Easing, or QE, effectively the printing of immense amounts of money to pump back into the system to keep it from eating itself, also destroyed any notion of money’s scarcity and, more importantly, psychologically, the belief in its fundamental promise was eroded.
The original bitcoin white paper was authored by ‘Satoshi Nakamoto’ (whose true identity still remains a mystery) and published in October 2008. It offered an idea for tackling the weakness in any peer-to-peer electronic cash payment system: namely that it would not have a trusted third party to process transactions, mediate disputes and tackle fraud. The bitcoin concept takes as read that the absence of a third party, such as a bank, is desirable. Following on from this was tacit acknowledgement that the system should not be based on any kind of trust.
“What is needed is an electronic payment system based on cryptographic proof instead of trust,” the nine page ‘Satoshi Nakamoto’ white paper says.
The coin aspect of bitcoin was meant as an incentive to keep those working on the blockchain of transactions honest. The point of generating coins, as blocks are added in the chain, was that it would mean that it would be far more profitable to play by the rules and create more bitcoin than expend time and energy defrauding, or attacking, the system. The coin was not the main point of bitcoin. However, the conventional approach to how we invest and seek value has made the coin central to the experiment and the result is that a bubble has been created around it. In the early years, following the white paper’s publication, those claiming to be 'Satoshi Nakamoto' had to work hard to recruit others to the project and a bitcoin had no value.
The world has a currency – it is the US dollar, the greenback, a buck – but that isn’t set in stone. The Chinese Renminbi could replace it one day. Many radicals have tried to break away. Most recently, Bernard von NotHaus, the notorious creator of the private gold/silver-backed Liberty Dollar, wanted to be free of what he saw as the manipulated government currency and tried to replace the US dollar, albeit on a small scale. Things did not go well. He had been facing a possible 20-year prison sentence for federal crimes related to the counterfeiting of legal tender. Convicted in 2011, for several years he was in limbo, awaiting sentencing. He is now free. So Von NotHaus is not mainstream. Barefoot and bearded, he is never too shy to take a toke of cannabis, which he believes expands his consciousness.
Meanwhile, bitcoin hysteria is taking hold of the mainstream consciousness like an addictive substance, and there have been no arrests for counterfeiting. Not a single official criminal investigation into how it came about or who is behind ‘Satoshi Nakamoto’ has been instigated (the shutting down of the Silk Road dark website not withstanding). The list of countries that have banned it outright is short – Bolivia, Ecuador, Kyrgyzstan, Bangladesh, Nepal and Pakistan. Chinese authorities put restrictions on activities related to it in February, according to reports, which did nothing to halt its rise. A string of dire warnings from financial luminaries such as Warren Buffett and Black Swan author Nassim Nicholas Taleb have similarly had no effect. As of writing this no one knows for sure who or what 'Satoshi Nakamoto' is. The mystery is part of the appeal, it seems.
Van NotHaus was typically philosophical, in the documentary The End of Money, in 2014: "Bitcoin has become so popular that the government realises it is almost impossible to put the genie back in the bottle."
Yet the bitcoin universe is not the domain of cranks and shaman, even if it is really an experiment. Dr Cathy Mulligan has exactly the right calm demeanour required to explain to someone like me exactly what is going on amid the surge in bitcoin’s popularity this year. The genial co-director of the Imperial College Centre for Cryptocurrency Research and Engineering is reassuring when I open on the subject of the technology behind bitcoin and admit that I have no idea how it works. The good news, she says, is that “not understanding blockchain does not mean you are an idiot. It is really counter intuitive”.
Dr Mulligan and I sit in one of the quietly humming and expansive rooms of a World Economic Forum gathering in Dubai last month, surrounded by gaggles of experts from around the world who are congregating to agree what the future will look like in a wide range of fields and sectors including financial markets. The setting feels appropriate for discussing bitcoin and its impact.
Essentially, the blockchain is underpinned by a competition to see who can solve a mathematical puzzle first using cryptography. 'Nodes' – basically, computers – take part in the competition. The puzzle is finding a random number from 'hashing' bitcoin transactions. Those that find the number first, create a new block in the chain and get a bitcoin as a reward.
“A ‘hash’ is like a ‘hashtag’?” I ask. Dr Mulligan is, I assume, characteristically patient as she answers my very dumb question. The 'hash' is basically the time-stamp on the transaction and each new time-stamp includes the previous time-stamp, thus forming a chain that cannot be undone without redoing all the work up to any single point. The time-stamp is distributed peer-to-peer rather than via a centralised third party. As long as honest "nodes" control the majority of the computing power working the blockchain, it can be protected from any kind of attack because the verification of transactions requires at least a 51 per cent consensus. The longest chain wins and the longest chain will always be the one that the majority of "nodes" agree contain correct transactions. And the only way to be able to determine if a transaction is incorrect or missing is to be able to see all transactions.
“What you are doing with a blockchain is creating trust through radical transparency,” Dr Mulligan says.
She has concerns however with talk about this being "a radical, bottom up, movement for people to get access to currency".
“I fundamentally disagree with that because of this very question that you need a certain level of technical skill in order to be able to buy and sell bitcoin, even on your mobile phone. If you want to mine bitcoin you need to have access to a very reliable, high-bandwidth connection because of the number of transactions. You need access to reliable, steady electricity. More importantly, many people talk about blockchain creating digitalised trust and removing the need for intermediaries. Actually what it does is it places the trust in the coders, for me that’s a different type of intermediary. These are the kind of things that need to be carefully thought through,” says Dr Mulligan.
Which brings us to the Bitcoin Foundation, initially a handful of individuals who were the elders of the blockchain, if you like. Their developers are the only individuals who have access to the live code in the heart of the blockchain. They have taken responsibility for its upkeep. The foundation these days has evolved into a non-profit dedicated to making bitcoin mainstream. Its manifesto says:
“We believe that every human has the following financial rights which should not be impeded by governments, regulators, financial institutions or other humans.” And its vision states that “bitcoin will be a globally accepted method of exchanging and storing value which will operate without the need for third parties”. Yet the original bitcoin whitepaper did not state any kind of vision for bitcoin to become mainstream currency.
Okay but is it a bubble?
Bitcoin has had a bumpy ride over the years with, for example, 2013 marking big gains before its value more than halved by mid-2015. Sentiment was rocked throughout its annus horribilis when the Silk Road site, used by criminal elements transacting in bitcoin, was shut down by the FBI at the end of 2013 and exchange Mt Gox filed for bankruptcy less than six months later. Last year's rise in value was unprecedented though. The market cap of all cryptocurrencies passed $200 billion at the start of November, the bulk of it bitcoin, from $40bn at the start of 2017. There has been little of note in terms of fundamental developments to drive this increase, rather the news driving its rise has been about its growing popularity. Like a self-fulfilling prophecy.
There are over 1300 digital currencies today and each has a different feature set. Some of the best known, apart from bitcoin, include ethereum, stellar and ripple, and are, to different degrees, attempts to take the original bitcoin project forward to where more real-world applications can utilise its advantages - such as not needing an authoritative intermediary and the unique mix of privacy, transparency and security that it offers. These iterations are very much in their early stages and are unproven. Yet the digital currencies associated with them, such as ethereum's 'ether', are enjoying the same wild ride as bitcoin.
The economist Paul Krugman says bitcoin is “evil”. If it is, then it is a product of its environment, created as a response to the weaknesses and inefficiencies of the financial system, starkly revealed during the crisis.
“Bitcoin fever was and is intimately tied up with libertarian, anti-government fantasies,” Krugman wrote last year.
The underlying appeal may well be a “fantasy”, but what is clear is that we are making sure that it remains on the discussion board, no matter what. Friends, family and colleagues are messaging and talking to me about it almost on a daily basis. Boiler room style brokerages are cold calling me and pushing bitcoin and other cryptocurrencies in a heavy-handed way. My SMS and email inboxes are evidence-lockers of bitcoin-mania related spam. Also, tellingly, the other digital currencies such as ethereum – up 14,500 per cent last year - and litecoin - up 4,000 per cent year – have shown similar hyperinflationary tendencies. Volatility is very much present too, with double-digit daily price swings a regular feature of bitcoin.
“It doesn’t matter if it is a bubble,” Meltem Demirors tells me, matter of factly.
The young, charismatic New Yorker of Turkish origins is a director of development at the Digital Currency Group, which invests in start-ups involved in digital currencies or the blockchain, including Dubai’s BitOasis exchange. The Digital Currency Group also trades in bitcoin and other digital currencies for itself. Basically, it has all kinds of skin in the cryptocurrency game.
“What we have seen with this boom and with all these other digital currencies emerging this year and gaining market share [is that] we now have over 12 digital currencies that have a market cap of over US$1 billion. Collectively the top ten digital currencies share over 95 per cent of the total market cap of digital currencies,” says Ms Demirors.
Amid this growth has been a lot of experimentation at the protocol layer, she says, but little being done to build the infrastructure needed at the networking layer to distribute these systems across millions of devices.
“It is foolish to believe at this point we could see the future. We categorically believe that digital currencies will transform every aspect of human society as we know it and so we are all very invested in that idea and it is not a question of if, but when that happens. We have no idea what is going to win,” she explains, freely conceding that she and others in her industry are riding a wave not of their making, right now.
Trump and bitcoin
“I just want to be left alone,” Craig Wright, the Australian entrepreneur who in 2016 staked a claim (as yet unverified) to be bitcoin’s inventor ‘Satoshi Nakamoto’, said to the BBC in a highly revealing moment.
He was indignant about Australian government efforts to make him pay taxes related to his bitcoin holdings, thought to be significant.
Wright’s entire posture was one of rebellion against normative behaviour. He railed against modern celebrity culture, obsession with awards and recognition and the media’s appetite for stories like his. It was a deep roar of individuality that would have resonated strongly with those fed-up libertarians.
It is difficult to separate bitcoin mania from the rising political tide of populism, the anger following years of austerity and the failure to truly deal with the implications of the financial crisis. This is, ahem, the other side of the same coin and it has Donald Trump’s head on it. His rise and bitcoin’s share something.
Certainly analysts had been quick, earlier this year, to attribute bitcoin’s initial price surge to uncertainty in the wake of Trump’s inauguration and his various mooted economic and tax plans.
However, the Yale economist Robert Shiller said that the drivers behind the rise of bitcoin mirror the same anxieties that helped elect President Trump.
“Somehow bitcoin fits into that and it gives a sense of empowerment: I understand what’s happening! I can speculate and I can be rich from understanding this! That kind of is a solution to the fundamental angst,” Shiller said.
So the question of whether bitcoin is a bubble or not could end up having the same answer as the debate over whether Trump’s ascendancy is a blip or a sign of things to come.
Ms Demirors says: “We are living in a techno utopian fever dream, there are a lot of people who are technologists, who have read a lot of sci-fi books, who are very motivated by this end-vision of self-sovereignty and permission-less, borderless finance and they don’t operate in the real world that you and I live in.”
When all is said and done, however, I can't shake the thought that this year’s rush for bitcoin seems less about the broader themes and more about simple greed, the fear of missing out that typifies human behaviour when asset classes rise inexplicably as bitcoin has done.
Jordan Belfort, the real life person behind the titular character in The Wolf of Wall Street, told the Financial Times in October that those pushing bitcoin as an investment to “everyone and their grandmothers” were worse than he was in his heyday.
“I’m not saying there’s something wrong with the idea of cryptocurrencies, or even tulip bulbs. It’s the people who will then get involved and bastardise the idea,” he said. “It is the biggest scam ever, such a huge gigantic scam that’s going to blow up in so many people’s faces.”
If, or when, it does, will the bitcoin experiment disappear with it?
Arguably it still very early days, with possibly the most important phase of the bitcoin project still to come. This will not be in our lifetimes; the maximum 21 million coins will only have been mined by 2140.
“Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free”, the original white paper published by ‘Satoshi Nakamoto’ says.
Imperial College’s Dr Mulligan matches the quietly optimistic tone struck in that line of the bitcoin whitepaper. She argues that perhaps bitcoin might actually be an indicator of a change in the way we manage our economic system.
“I don’t necessarily 100 per cent believe that it will be cryptocurrencies as we understand them today. I think something is going to evolve, will come forward, will come out of it. What is very interesting about the cryptocurrency technology is that it is the world’s first truly digital economy technology. It is the first time we have seen technology and economics come together deeply embedded.”
Technology has thus far been able to both cover for and amplify our weaknesses, so it would make sense that bitcoin would too.
Perhaps the rise of bitcoin this year should just be seen in hopeful terms, that the bubble is natural and almost necessary. Bitcoin could be viewed in the context that for a new approach to be taken up, with regards to our financial system, then the solution should present itself loudly and begin to become something that the mainstream of society can get its collective head around. Without this hysteria, driven by our natural - and greedy - curiosity, bitcoin and the blockchain, in all likelihood, would have remained esoteric. While there is now the very real risk that bitcoin becomes as infamous a cautionary tale as The Wolf of Wall Street, I would prefer to keep a hold of some optimism. This time, I believe, the weaknesses of our current system, which promulgate the boom and bust cycle which we often contrive to find ourselves in, will not also make us blind to the solution to these shortcomings that this new technology offers. I am just going to trust in the idea of bitcoin and leave the rest.