Baffled by Bitcoin: One Man’s Quest to Comprehend Cryptocurrency
By Robert Reed
If you ask me to stand on one leg and quickly describe what bitcoin is, I’d fall down.
Like the vast majority of people, I really don’t understand this emerging, digital alternative to cold, hard cash and what it’s ultimately supposed to accomplish, or why anyone would want it in their 401(k) retirement account.
Nonetheless, bitcoin is gaining popularity and notoriety with large and small investors, regulators and Chicago’s two global exchanges, which in a few days will start trading bitcoin futures.
It bugs me that there’s something big going on and I’m in the dark. In an attempt to overcome bitcoin befuddlement, I spent a day foraging for information about this exotic monetary newcomer and trying to get a handle on why we should care that it’s out there.
Where did my sojourn begin? Netflix!
No kidding, the movie subscription service offers a 2017 documentary titled “Banking on Bitcoin” that’s a pretty good primer on the birth of the cybercoinage and its subsequent travails.
The upshot: Bitcoin was concocted by a band of self-proclaimed cypherpunks, tech-savvy anarchists who in the early part of this century were hot to create their own computer-generated marketplace and currency system. They wanted to sidestep the U.S. and other governments’ centralized banking systems and regulations.
» Bitcoin now bigger than Buffett, Boeing and New Zealand economy »
In 2008, Satoshi Nakamoto, a pseudonym for an unidentified individual or individuals, wrote a white paper on bitcoin that set the wheels in motion. Apparently, Nakamoto vanished from the scene, giving bitcoin’s origins a continuing air of mystery that dogs it to this day.
Law enforcement repeatedly has claimed that gangsters, drug dealers and other nefarious types — the early adopters — embraced bitcoin to launder money and purchase illegal goods, including weapons, on the dark web. There are a fair number of news stories online on that topic, going back to bitcoin’s earliest days.
In September, one of the most damning private-sector claims against bitcoin surfaced when Jamie Dimon, CEO of massive banking power JP Morgan Chase, called bitcoin a scam used by drug dealers, murderers and outlaw government regimes.
Dimon’s not alone in his disdain.
Warren Buffett recently called bitcoin “a mirage”; Carl Icahn, a veteran corporate raider and no stranger to disrupting business models, concedes he doesn’t “get” bitcoin and is avoiding it like a plague.
» Before you buy bitcoin, read this »
Intrigued by these strong reactions, I asked the head of a cryptocurrency investment fund, on background, why such financial honchos are anti-bitcoin.
His take: They are behind the curve, as is the U.S. compared with some European and Asian markets like Hong Kong, Singapore and London that are already tapping into cybercurrencies on a recurring basis.
Eventually, the fund chief told me, U.S. businesses will overcome their bitcoin concerns and get into “blockchain” technology, a series of private, computer-network-based transactions that use digital currencies. Why? Lower fees and its quicker pace, I’m told.
Right now, it’s not saving money that’s lighting the fire under bitcoin. It’s making money and investor speculation.
When bitcoin exchanges began in 2010, a single bitcoin was worth just a fraction of a cent. Monday it was trading for over $11,000 — an all-time high.
That’s great for those getting in early, like the Winklevoss twins — best known for suing Facebook founder Mark Zuckerberg after claiming he boosted their idea for the social network site. They reportedly invested $11 million in 2013 and now are touted as the first bitcoin billionaires.
If you’re still confused about how bitcoin gets its value, so am I.
But I do understand supply and demand.
» Bitcoin surge stirs up worries about a bubble »
Best as I can determine, under the rules of the aforementioned Satoshi Nakamoto, only around 21 million bitcoins can be issued. Right now, there’s about 16 million in circulation, residing in digital wallets that make up the cybermarketplace. They bounce around there while demand builds for this limited supply.
There’s even a handful of ATMs in Chicago that dispense bitcoins — provided you put in cash to get them. No credit or debit cards accepted. By the way, anyone looking to spend bitcoin at a local restaurant, store or business is going to be hard-pressed finding someplace that accepts payment.
Meanwhile, the Chicago Mercantile Exchange and Chicago Board Options Exchange are getting their cryptocurrency operations up and running. They’re following the lead of federal regulators, who have given them a green light, but are also preaching caution. Using the exchanges, investors will be able to bet on changes in bitcoin prices without actually buying bitcoin itself.
With regulators and exchanges providing greater legitimacy, are concerns about a bitcoin bubble overstated?
Well, let’s just say a great big “POP” wouldn’t surprise me.
I am loath to give personal finance advice, but my brief expedition into bitcoin land has uncovered way too much hype, confusion and uncertainty. I’m hoping nobody bets the monthly mortgage on it, nor overstocks a retirement portfolio with this type of speculative investment.
There’s still much I need to learn about bitcoin. But, so far, here’s my one big takeaway: Watch out or you’re in for a fall.
roreed@chicagotribune.com
Twitter @ReedTribBiz
by 