Virtual Folly

The mania goes on. Perhaps the most bizarre and disturbing symptom is the proliferation of so-called digital currencies like Bitcoin and Ethereum.

At best, these are virtual commodities, not currencies. Bitcoin, perhaps the most visible, clearly attempts to emulate gold. New bitcoins are generated by executing a complex computation which requires considerable computer time. This is intended to limit the supply, just as the increase in the supply of gold is limited by mine output. There is also a hard limit on the number of bitcoins that can exist, just as there is with gold (once it has all been dug up, there is no more until we start mining off Earth). Ethereum has something similar, but the limits are weaker.

There is, however, a genuine and valuable innovation here and that is the blockchain. The blockchain is, notionally, the global transaction log of a distributed database that allows multiple un-trusting writers. Unfortunately, AFAIK, all the implementations of this comcept so far are slow and unreliable, as is seen by the various reported (and doubtless un-reported) thefts, frauds, crashes and service outages.

Last I saw, there were some 80 or so competing “digital currencies”. We now see new ICOs (Initial Coin Offerings) on almost a daily basis. Each of these offers some variations on the basic concepts. For example, take Tezos which has raised $200 million in four days. Tezos is run by an ex-Goldman HFT trader. Draw your own conclusions.

So far, the primary applications for these systems are speculation on the money value of the digital commodities and, as a payment system, supporting money transfers by avoiding capital controls and facilitating anonymous commerce, such as in illegal drugs.

I am reminded of the old adage about gold mining; A gold mine is a hole in the ground with a liar on top.

Lasciate ogne speranza, voi ch’intrate” Inferno, Dante Alighieri

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: