Yesterday we covered the sudden spike in the value of BitCoin, a virtual, nation-state-free currency that is back by software instead of institutional fiat. I have been tracking it for around eighteen months in my study of emerging alt-economies, and in that time it has gone from an occult project for libertarian hackers to a market indicator that gets followed on Wall Street. As far the currency is concerned, this week will be of historical significance. BitCoin saw a parabolic jump in its trade with the U.S. Dollar following the financial catastrophe in the tiny EuroZone nation of Cyprus. Upon the mere mention of a proposal to seize bank deposits as a “bailout tax,” local Cypriots flooded toward ATM machines and (evidently) several Russian oligarchs began looking toward alternative locales to sluice their spare petro-bucks. Simultaneously, the value of BitCoin shot through the roof.
Is it because BitCoin is well designed as a replacement for the currency that currently operates enormous economies in seventeen industrialized nations? Could it possibly be used as a replacement for the currency that underlies trillions in financial instruments, corporate debt, sovereign debt and more? Not even close.
What does Bitcoin mean? What does all this signal? A crisis of faith.
The market is telling the world’s central bankers that their attempts to neatly control all of the world’s economic activity from a handful of cities (controlled by apparatchiks from a handful of universities) are a failure. Whereas in the 1990s and 2000s, globalization grew based on uniformity and “best practices” – almost always emanating from the West, it seems that One Size will not Fit All for the 2010s and beyond. We got our first taste of this failure in 2008 with the sudden announcement that if the United States did not agree to prop up its Too Big to Fail banks (while continuing to pay bonuses, natch) then Everything Would Blow Up. Within a year, that same crisis visited European shores for reasons of sovereign debt more than subprime mortgage paper. The root cause of the West’s problems are the same – corruption has been flourishing under these gigantic institutions that are proving unmanageable by even our most stalwart and confident technocrats. Whether it’s Paulson or Bernanke or Geithner or Monti or Juncker or Paris Hilton, there’s really nobody capable of managing the complexity that goes on under the smooth surface of these currency schemes.
Bitcoin is just one option that is finding renewed interest in the wake of managerial failure. Local currencies have been on the rise from Germany to the UK and beyond, usually accompanying a more holistic rebirth of local economic control. Irrespective of how sanguine Frau Merkel is about the EuroZone project, average Germans are getting sick of worrying about how bad a bunch of sunburned nap-takers are at managing their own bank accounts. They are looking closer to home for their economic future, in everything from what they buy to how they buy it.
For those looking to disparage the surge of Bitcoin because of its connection to illicit activity or its unlikeliness to replace the Euro, perhaps you are technically right. But the real story here is in a people getting closer to supporting brand new, and likely smaller, institutions that will carry their social values better than the current batch of risk-prone financial systems.