Friday, June 17, 2011

Today's fake: Speculators pursue the Bitcoin, but ... whaaaat?

Last decade's virtual-goods mindfuck was the gold farming industry, in which American entrepreneurs went to China, hired educated but out-of-work tech grads, and put them to work for 12 to 16 hours at a time on repetitive tasks which generated virtual goods in the World of Warcraft game -- goods which could be sold for real money to game players who didn't want to put in the time and effort it took to accumulate those goods within the game. (These goods, such as a "magic sword" object, enable players to play the game at higher levels more successfully.) China made the practice illegal, but that hasn't stopped provincial prison officials from employing prisoners as gold farm slave laborers. So that's still going on.

Then there's the Zynga empire, which essentially turns all its games' players into slave laborers for the company's profit. In a way it's much simpler than the gold farming scheme, which is essentially a parasitical practice on a much larger operation (the WoW platform); Zynga simply creates an addictive product 1 with no raw ingredients and a potentially worldwide customer base. Zynga is equivalent to a tobacco company which claims cigarette smoking isn't addictive, except it doesn't have to go to the trouble of buying raw materials, manufacturing cigarettes, and shipping them to wholesalers. It simply creates a compelling internet experience and collects an almost unlimited profit stream. It's like putting a video slot machine in everyone's home, only it's a slot machine that never pays out but simply provides its user with the mind-numbing experience of playing.

So it's one thing to create something of value out of nothing, or rather, out of electrons and human sweat. How could you go one better? How about creating nothing out of nothing, putting a value on it, and then having the unlimited greed of speculators do all the work for you? Well, it's happened. Behold the Bitcoin, a virtual currency with no meaning, no tie to any governmental or corporate entity, much less a game or virtual world. It is simply a computer algorithm (no doubt copyrighted) which permits licensees to generate units of valuation.
Bitcoins are snippets of code that use encryption to prevent counterfeiting and double-spending. Complex algorithms control the money supply, in theory replacing the need for banks or a central regulator. Right now Bitcoins can be generated -- or "mined" -- by running a program on a powerful computer. This task requires exponentially more time and processing power as the number of Bitcoins grows, and the absolute number of Bitcoins is capped at 21 million, mimicking the scarcity of gold.
Yes, you too can buy the code and generate your own Bitcoin, but notice that caveat about the "exponentially more time and processing power" needed to do so at a meaningful scale. Indeed:
One college student sustained permanent minor brain damage due to heatstroke after he dozed off in his room next to four computers furiously mining Bitcoins. "I wish I was joking," he said in a forum post that was reposted on the website
Yes, there is a website devoted to "Bitcoin mining accidents"!! It's at this point you wonder what the world is coming to.

Certain cynics and libertarian critics of the monetary system -- the kind who yearn for a return to the gold standard -- would say this isn't much different from the current state of affairs in which we endow pieces of paper, some printed with "1" and others printed with "100," with value simply because we agree to. And they would also point out the similarities of limiting the total number of units of exchange and the ability to produce it. (Only the government can print money, and it controls the supply; in the same way only those holding the code for Bitcoin can generate it, and the code contains a self-limiting feature which will prevent more than a certain amount of Bitcoin to be "mined.") To them, our whole monetary system is a similar hoax.

I see this trend continuing. Last week lots of people were transfixed by the "fake lesbian bloggers," and there are still postings and articles being written on its implications for identity politics, online activism, and the whole question of online identity. At root of this issue is the question of whether or not there is substance behind what we value. The fact that Bitcoin exists and that apparently rational people are investing in it calls this into question even further.

Meanwhile, on Gawker just now: A virus that scans computers for Bitcoin and steals it.

1 The piece on "my Farmville addiction" is not that informative, but notice the article's raison d'etre: the writer is explaining to his readers why he disappeared for two weeks. In other words, he went into a k-hole, or rather an internet hole, and didn't come out for weeks. Because he was playing Farmville. And couldn't stop.


voncookie said...

Life is infinitely less stressful and more enjoyable post-Farmville. While it makes an effective alarm clock, it really is a waste of time... and obsession.

Anonymous said...

Mark -

A couple of comments.

Bitcoin does not use IP restrictions to profit. The software is open source, released under the MIT license, which is similar to the Apache and BSD licenses (and not similar to the GPL - the difference being that someone can take the Bitcoin code and make proprietary software, unlike the Linux kernel or Emacs.) To the extent that people are making money off of it, it is on transactions. It really isn't much different than what the bankers are up to with 'real' dollars. Basically, if someone is selling and someone else is buying, there's endless opportunity to "help". I don't think it matters if it is dollars, euros, strings of bits, magic swords, or what.

It reminds me of a bitter joke. You like art? Make a lot of money, and buy it.You like to make art? Join a monestary. You want to be appreciated for your art? Make enemies.

A key difference between magic swords and bitcoin is that BC is not centralized, and a database administrator can clone a thousand new swords, whereas the authors of the BC client can't make new money, except in the same way anyone else can. You have to understand the crypto behind it to see why this is true, which isn't easy. But it is true. Basically, whereas dollars depend on special paper and chemical pens to detect forgery, BC depends on an audit log that is ruthlessly democratic and accretes honestly as a byproduct of using it.

Bitcoin does seem ludicrous. But so does any currency, until it is normal. The only way to judge a currency's value is to look at everyone else - will they take it in exchange for useful things? So, by this metric, it currently fails. That could change, though. It has happened before. If you're curious about currency, reading Isaac Newton on the topic (yes, really - he turned around England's currency problems) is vital.

Bitcoin has some issues. I don't think the wild nuttiness of the first movers is one of them. The exponential effect in 'mining' is, maybe - I can't really tell if that is a bug or a feature. It does guarantee deflation. This makes speculators want to get in early, giving it a pop. It also reinforces the worst aspects of the monied class, leading to a conservatism that will get messy when the security of the underlying system has problems. Which always happens.

BC probably will fail. But people value it, at least enough to steal it. I guess I don't spend a lot of time trying to understand why people value what they do, which leads me to not get a lot of pop culture references, for instance. But I don't see any reason to trash BC because it is made out of math. Frankly, it reminds me of conversations about the value of Usenet I had with my mom, in about 1990. "Why would I want to buy a computer to answer other people's questions? Seems dumb." She now pressures me to use Facebook, which I categorically refuse to do.

A virtual currency that doesn't involve third parties is going to happen - people always want cash. It probably won't be bitcoin, but it will happen.


Mark Pritchard said...

Thanks for the info, Jamie!

I guess it's not currency per se that I'm interested in, except to the extent that it feeds into the conspiracy theories of collapsitarians and gold speculators. I'm more interested in how people ascribe value to all sorts of things, and how this ascribed value, whether it's generated as a result of scarcity, a marketing campaign, or laws, contrasts with the object's real value. The interesting thing about Bitcoin to me is the contrast between this ascribed worth and its real worth, which would have to be non-existent. If the Big Collapse does happen, never mind those who "possess" Bitcoin or other virtual currency; there are going to be a lot of hungry people holding big fat gold coins that are useless for anything in the post-collapse world except, maybe, ballast.

I myself live in a San Francisco house whose value has more than doubled since we bought it, due almost entirely to real estate price inflation. Fortunately we like it and don't want to sell it, but even if the real estate market in San Francisco collapses, at least we can live in it. Unless, you know, it literally collapses, like, in the Big One.

Anonymous said...

I sometimes feel like I'm autistic, not that I am, but just that I tend to look at systems like this on their own terms, without looking at them from other contexts.

I guess I'm curious as to what other's value, but don't trust myself, because I'm consistently wrong. I'd be rich now, if I had gotten that people value Twitter.I don't get why people like to read grocery store magazines. One of the most visible names on the planet sells diabetes-inducing sugar water, which my relatives suck down endlessly while wondering how I can 'like' to drink water, and then go to the doctor for the problems.

I do get the millennialist thing, at least a bit. Growing up poor with one smart parent, I saw a lot of blue-collar dismay at 'the system'. I think there's a cultural echo of our rebellious past here - we restarted society once, founding the country. That's cliche, but it is powerful. The slavers wanted to do it again, and failed. There's a lot of liberation theology, self-help academic stuff, revisionist history, and so on, that promotes this sort of thing. It isn't right or left - we're soaking in it. So nuts that castrate themselves before the mothship arrives may be outliers, but I don't see them as all that different than people I know who stockpile.

Sleep, food, and sex. Everything else is indirection.