Monetarists Anonymous - Morphic Asset Management


Dec 3, 2013 (4 years and 7 months ago)


Monetarists Anonymous

After a spectacular crash, an online currency makes a surprising

Sep 29th 2012

(From The Economist)

“GIVE me control of a nation’s money supply, and I care not who makes its laws.” So
said Mayer Amschel Rothschild, founder of the Rothschild banking dynasty. What would
he make of Bitcoin, an online currency with no issuing authority whatsoever? Despite
ing written off following a speculative bubble and crash last year, the online
cryptocurrency is still going strong, not least thanks to its ability to circumnavigate the

Bitcoin was devised in 2009 by a mysterious figure known as Satoshi Nakomoto. It

is the
world’s first, and so far only, decentralised online currency. Instead of a central bank,
Bitcoins can be issued by anyone with a powerful personal computer: it mints them by
solving extremely difficult mathematical problems. The problems are autom
atically made
harder to ensure that the overall supply of Bitcoins cannot grow too fast. They are
traded online, with transactions cryptographically authenticated.

These curious capabilities make Bitcoins a combination of a commodity and a fiat
currency (creating the coins is referred to as “mining” and they have value only because
people accept them). But boos
ters inflated a Bitcoin bubble. Shortly after the currency
launched, articles spread around the internet arguing that Bitcoins would protect wealth
from hyperinflation and that early adopters would make a fortune. The dollar price of a
Bitcoin currency uni
t climbed from a few cents in 2010 to a peak of nearly $30 in June
2011 (see chart), according to data compiled by Mt Gox, a popular online Bitcoin
exchange. Inevitably, the currency then crashed back down, bottoming out at $2 in
November 2011.

But in the
nine months since, Bitcoin has recovered. One unit now costs $12, and the
volume of transactions is increasing. Though the price still fluctuates against the dollar,
it is less volatile than it was, which makes it a better store of value. Its use as a mean
of exchange is also getting easier: an increasing number of online retailers take the
currency, and new smartphone apps make Bitcoins almost as easy to use as cash. A
proliferation of exchanges means that it is relatively easy to swap Bitcoins for
tional currencies.

Tony Gallippi, the boss of Bitpay, which processes Bitcoin payments for retailers, says
that his client list has increased from around 100 in March to 1,100 now. These are
mostly e
commerce businesses, selling things like domain names an
d web hosting. But
the list also includes a taxi
driver in Chicago and a dentist in Finland. “Credit cards
weren’t designed for the internet,” he says. Bitcoin transactions cost less and cannot be
reversed in the way credit
card transactions can be. This i
s important for firms selling to
customers in countries known for credit
card fraud, such as Russia or Belarus.

But another big reason for the currency’s success is its role in dodgy online markets.
Although tracing Bitcoin transactions to real people is n
ot impossible, the currency’s
relative anonymity and ease of use makes it a natural conduit for criminal funds. On the
website Silk Road, a sort of eBay for drugs hidden in a dark corner of the web known as
Tor, Bitcoins are the only means of transaction.
Buyers transfer their Bitcoins into an
escrow account where they sit until receipt of the goods is confirmed. Bitcoin
transactions on Silk Road are now worth $1.9m per month, estimates Nicolas Christin, a
researcher at Carnegie Mellon University.

This may
explain why users put up with a big drawback. Bitcoins tend not to be very
secure, says Richard Booth, a consultant at RSA, a cyber
security firm. As some users
have found to their cost, hackers can sometimes steal Bitcoins from users’ online vaults.
In th
e latest raid, on September 5th, hackers stole $250,000 in Bitcoins from Bitfloor, a
large American exchange, causing it to shut down its operation. But although the raid
caused a dip in the price of Bitcoins, it soon recovered. It turns out that a currenc
y can
thrive even when no one is making laws for it.