The glorious Bitcoin freakout of 2013

Eric Garland Currency Trends Leave a Comment

The world’s Very Serious Financial Media had an amusing freakout yesterday about the relative importance of the rise in value of a novel digital currency scheme called Bitcoin. Their message is very clear:

Look you monkeys, stop paying attention to this Bitcoin thing which is a big joke and also not significant of anything, and also very dangerous. Now. Just stop. Right now. Go look at housing starts. Also, it’s a recovery. Stop looking at alternatives. Now. Because things are great.

Of course, if you think the global economy includes several people who aren’t named Warren Buffett, Jeff Bezos and Jamie Dimon, things are not that great and alternatives seem like a way out of some intractible problems. But then, the Very Serious Financial Media is not especially interested in people not named Buffett, Bezos or Dimon.

The event that unleashed such interest in alternatives was *sigh* yet another small country Eurozone meltdown involving people that speak Greek, megabanks, oligarchs and bailouts that take money from the locals to repair damage done by a handful of really terrible financial engineers. Cyprus’ banking system is unstable (likely resulting from too much Greek-speaking) and the government came up with the Very Reasonable Proposal of simply seizing money in the deposit boxes over a certain amount. There, all better!

What? What? Why so angry, bro?

The results have been two-fold. On the island of Cyprus, bankers and policy makers have no doubt been receiving phone calls from angry, angry men with Russian accents – men who employ various former members of the Spetsnaz. There have also been exasperated calls from Brussels, London and Frankfurt and the predictable scripts about capital requirements and austerity, responsibility, et cetera.

And in the rest of the world, something very interesting happened. Nobody bothered to go to some park in Manhattan to sit around with bongos. There might have been a protest in Paris – what with it being a day ending in “y” – but not about this issue. Even the Cypriots themselves seem to be handling the events with a certain poise. Yet around the world, a billion dollars of market capital has shot into an anonymous, stateless currency system called Bitcoin.

I’m not recapping what Bitcoin is; you can Google it yourself for technical details. And if you want an overview of the alternative currency movement in general, you can peruse Transitionistas and also check out this television program I did with Al Jazeera’s The Stream last year.

I’m most fascinated by yesterday’s paleo-media freakout on the subject of Bitcoin.

Telltale emotion

The telltale sign in any social system is when public-facing people imbued with authority suddenly become unhinged and begin showing umissable signs of emotion in their supposedly dispassionate analysis of world events. Now that Bitcoin passed the one billion mark, people who were ignoring the project a week ago now have very strong feelings about it!

Yesterday, Felix Salmon burst forth with 5000 words on the subject, as a piece of expository writing on why this novel payment scheme is such a bad idea. The essay goes from pillar to post, from discussing the role of deflation to saying that the people who have bet on bitcoin will be bitterly disappointed, to saying it smells like cabbage – the pseudo-analytical kitchen sink. Note that in not one of these 5000 words does he explore why this is happening, the growing lack of faith in the authority and reliability of dominant financial institutions. His only analysis of the emergence of Bitcoin is:

Bitcoin has become suddenly popular in Cyprus for obvious reasons: no government can confiscate your bitcoins, or prevent you from transporting them out of the country.”

Of course, he makes no mention of the interest in Bitcoin in Finland or the United States or Australia – just countries in trouble, like Cyprus, Belarus and Ukraine. Is he asserting that only people in a state of panic see the use of this technology, and Clear Eyed Journalists At Major Publications like he are the only ones with the intellectual capacity to see past the fraud? Interesting assertion.

But Felix is concerned about the effect of Bitcoin…on democracy!

…it turns out that financial-services companies are a very important part of any democracy.

It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust. Money, in other words, is a key ingredient in the glue which keeps the social compact together. (What we’re seeing in Cyprus is in large part a demonstration of what happens when that compact starts becoming unglued.)

Bitcoin, in that sense, is anti democratic.

Banks and central banks can be held responsible for their actions? Excuse me while I clean the coffee I just snorted through my nose. Is this guy for real? Bernanke and Geithner were in charge of central banks prior to the greatest meltdown in history, and they were held accountable? No, they received promotions and fawning praise.

And responsible banks? In the age of Lanny Breuer, the head of criminal enforcement for the USDOJ who stated in public that he decided – in his personal wisdom – not to prosecute banks because of his own beliefs that the system would collapse if the law were to be upheld on matters of billions in fraud…that’s your system of responsibility?

To promote his stream of consciousness piece Salmon wrote:

It’s fun to watch the bitcoin bubble, but it’s also important to understand that almost no one actually wants to live in the kind of world that bitcoin enthusiasts are looking forward to. Thankfully, the rising price of bitcoins is not some kind of market signal telling us that we’re closer to that world. But at the same time, it’s certainly not something to celebrate.

You kids have had enough fun! Mr Salmon is not curious about what it all means, but he’s very certain that he knows how it will come out, and that you will prefer his vision of the future. It’s a very humble analysis, really.

Even though I don’t understand this, I’m still right

Izabella Kaminska from the Financial Times Alphaville took to writing a piece of Bitcoin based on utterly false technical understanding, mostly coming from an analyst at France’s largest bank, who – quelle surprise – is not a fan of alternative currency that bypass his institution. Exposed by another financial blogger who does understand the technology, Kaminska piroutted gracefully past her failed analysis to admit that – pax – sure, she could have done her homework – but that of course her conclusion is still correct. Because Bitcoin is risky!

I love Ms. Kaminska’s mastery of the media’s favorite technique when caught in a lack of rigor: Be quick to admit your mistake on a technicality, then immediately proceed back to claiming that your argument is still correct. Just once I want to see somebody say “You know, I have more work to do on this issue, and I’ll get back to you.”

Then again, you don’t require concise arguments or technical understanding or deep sociological insight to arrive at the conclusion to which the financial media must arrive: Any threat to the status quo puts me out of a job one day.

Why such opposition over a billion-dollar thing?

Can we have a quick reality check? We’re only talking about a billion dollars so far, which is the post-tax profit Exxon Mobil puts up in 22 days. So why the panic mode from the press?

Perhaps we can see the biases inherent in being employed by the very institutions that are on the way out. If you’re sitting in London, financed by ads from the banks themselves, the description of this group of innovations must only be seen from a negative point of view. And that is likely why otherwise decent writers find themselves stammering in the face of an undeniable trend.

By way of my own opinion, I am not a Bitcoin “enthusiast” looking to smash ideological enemies to make way for a Pirate Party-run, Bitcoin-financed global utopia. I don’t own Bitcoins and don’t care one way another whether the world turns its back on this innovation next month. I’m merely curious as to why a group of people agreeing to exchange value in a novel – and risky – way elicits such an instantaneous and inchoate response from otherwise professional analysts?

Perhaps they suspect that this story will proceed far beyond this initial billion dollars. I know I do – because this isn’t the last institutional crisis, either.