Digital currency is real money’s best defense

Ben D. Kritz

Ben D. Kritz

The first couple of months of 2014 have been an unpleasant time for supporters of alternatives to the global monetary system we’re all supposed to believe is on the brink of collapse.

Back in January, US authorities arrested 24-year-old Charlie Shrem, the chief executive officer (CEO) of the Bitcoin exchange BitInstant and at the time the vice-chairman of the influential Bitcoin Foundation, on charges of money laundering in connection with the infamous Silk Road online marketplace. Then at the end of last month, the spectacular collapse of the largest Bitcoin exchange, the Tokyo-based Mt. Gox, resulted in a loss estimated to be in the neighborhood of $335 million, which not only included the loss of all of Mt. Gox’s customer deposits, but also a considerable amount (the equivalent of approximately half a million dollars) the exchange was holding in escrow for a US court handling a liquidation case of another failed exchange, Bitcoinica. Mt. Gox’s 28-year-old CEO Mark Karpelès became the second of the Bitcoin Foundation’s three-member board to resign in less than a month, and went into hiding after being pursued by angry investors.

Last Tuesday (March 4), less than a week after Mt. Gox imploded, a smaller digital currency exchange called Poloniex announced that hackers had stolen about 12.3 percent of its bitcoin deposits, and that it would have to “temporarily deduct” the equivalent percentage from remaining customers’ balances in order to make up for the losses and protect itself against an anticipated rush of withdrawals. Just a day later, Canada-based Flexcoin, an online Bitcoin bank, announced it had been rendered insolvent and was immediately closing down as a result of a theft by hackers of all the bitcoins—896 of them, worth approximately $600,000—in its “hot wallet” (a ‘hot wallet’ is a storage for digital currency that is connected to the Internet, as opposed to a ‘cold storage’, a server with no Internet connection).

Last Thursday, a bizarre incident in Los Angeles saw a reclusive 64-year-old physicist named Dorian Nakamoto, and identified as the inventor of Bitcoin, pursued from his home by journalists in a chase that ended when Nakamoto took refuge in the offices of the Associated Press. Bitcoin’s inventor identified himself as “Satoshi Nakamoto” in the seminal 2008 research paper that launched the digital currency “revolution”; while it is widely believed the name is a pseudonym and might even represent a group of people rather than an individual, Nakamoto happens to work in exactly the same field as the paper’s author(s), happens to have changed his name to “Dorian” from his original first name “Satoshi,” and apparently let it slip to a Newsweek reporter that “he was no longer involved in” Bitcoin and had turned all the work over to other people. At about the same time Nakamoto was being chased across Los Angeles, law enforcement officials in Singapore announced they were investigating the mysterious death (the cause of which was changed from ‘suicide’ to ‘unknown’ by Singapore’s medical examiner) of Autumn Radtke, the American CEO of Singapore-based digital currency exchange First Meta, who was found dead in her apartment last February 26.

Still think Bitcoin and the hundreds of imitators it has spawned is the wave of the future, and the inevitable replacement for evil, government-controlled fiat currency?

Backers of the concept stubbornly insist the rash of crises suffered by Bitcoin (which is still really the only digital currency with any ‘real-world’ value at this point) are merely “growing pains,” and that most of the problems can be traced to bad human behavior rather than inherent flaws in the system. In the case of Mt. Gox, for example, evidence is growing that the exchange’s collapse was due to a bold, if not particularly sophisticated, Ponzi-like scheme being run by its boss Mark Karpelès, rather than an exploitation of security flaws by others.

All of that may very well be true, but if anything, the fact that Bitcoin—and if they were worth more, other cryptocurrencies would undoubtedly attract the same attention—has been far easier to exploit than its proponents believed only highlights how the entire concept has gotten off on the wrong track. As designed, the concept of digital currency is unavoidably a pyramid scheme; creators of digital currency and early adopters reap large returns at the expense of later adopters, which is partly why so many new cryptocurrencies are created—for those who have the resources to generate units of cryptocurrencies (through processing transactions in what is called ‘mining’) the point of diminishing returns is reached at an increasingly faster rate.

And the expenses involved in “mining”—which is the only way, apart from investing a large amount of “real” money to directly purchase a stake of digital currency, to actually accumulate enough cryptocurrency to make trading in it worthwhile—are formidable; a “mining rig,” a computer equipped with multiple high-end graphics processing units (they work faster than a standard central processing unit), which also requires a heavy-duty cooling system and a LOT of electricity, sells for an average of between $1,800 and $6,000, and given the pace of increasing complexity in digital currency transactions (another inherent flaw in the concept), will be rendered obsolete in four to six months.
In attempting to create an alternative to fiat currency, the proponents of digital currency in its present form are stubbornly trying to convince the world that a system which is inherently socially and economically inequitable, unacceptably insecure, extremely volatile in value, and progressively deflationary is just suffering “growing pains” and is really a better option in the long run. Fiat currency has a long list of flaws, too, but none of them are addressed by digital currency in its present guise, and worse, the new monetary concept creates new problems. A system of money that doesn’t have to physically exist and whose validity is based on an objective mathematical proof rather than “faith” in an issuing government is a good idea, but the replacement based on Bitcoin is not. Sooner or later, the smart people who invented it and caused it to grow—if they are actually sincere in their motives and not just practicing an admirably clever bit of self-interested capitalism—will figure that out, and maybe then we can hope for something better.


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