Popular narrative has it that bitcoin is the next big gig in town and an asset worth investing in. Seriously? What is this new game in town?
There are only 21 million bitcoins in circulation. Photo: Bloomberg
There are only 21 million bitcoins in circulation. Photo: Bloomberg
Charles Assisi
I feel compelled to opine on the bitcoin mania for three reasons:
- Over the last 10 odd days, I have been a mute witness to conversations where multiple opinions have been exchanged on whether or not bitcoins ought to be part of an investment portfolio. As things are, it is a hotly debated subject. Bitcoins are apparently coveted assets, and the least understood as well.
Why they are coveted is easy to see. Over the last year, the price of a bitcoin has moved only upwards—from $750 around this time last year to over $7,800 as I write this out on a Friday at the close of market hours in the US. The chart shows some wild fluctuations as well in preceding months when it fell from over $6,000 to the $5,000 region. The overall momentum, though, has been upward. A few people have asked me if I think it a good idea to add bitcoin as an asset class. Until now, I have refrained from uttering as much as a peep.
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Then there is the fact that earlier this week, the Supreme Court of India admitted a plea to regulate the flow of bitcoins into India. The SC has also sought a response from the central government. While I haven’t been through the submissions in the plea, I’m willing to put my neck on the line and submit that the plea must be a ridiculous one and the handiwork of a clueless creature that understands nothing about peer-to-peer (P2P) technology. If anything, the court ought to have dismissed it as a frivolous one and fined the ones who filed it for wasting their time. For the life of me, I don’t know why the SC should be dragged into this.
As ideas go, I think bitcoin is a fabulous one. Philosophically, it is a beautiful construct. This is where the problem and the paradox inherent to it lies as well. The current spike in bitcoin prices are being driven by those who believe in bitcoin as a political statement—an ideology, if you will. Their fight will continue even if they lose money. Gains from it are the last thing on their mind. I’ll come to that in a little while on the back of my notes from an encounter with the legendary Richard Stallman in an earlier avatar of mine.
As things are, my stated position is this: those who invest are inevitably pragmatic creatures. When looked at from their perspective, getting into the market on a spike driven by ideology is a bad time to invest.
That said, I think I ought to make an attempt to deconstruct each of my assertions here.
A history of contemporary money
What is money? At a very basic level, money is what you are willing to offer for something you may want. In the past, people used to barter goods for services offered. As societies grew larger, a compelling need for formal money in the form of promissory notes evolved. When demand for these notes increased, to keep track of who owes whom how much, banks emerged.
And what are banks? Dolled-up entities that can maintain large numbers of ledger books of debit and credit entries.
To regulate how banks in any country behave, a central bank (like the Reserve Bank of India) is the accepted norm. These are powerful bodies because they are mandated by governments and trusted by people to issue promissory notes—pieces of paper underwritten by the sovereign government. A holder of this note can use it to buy something as opposed to bartering in the past. It makes life easier.
The limitation with money of this kind is that it can be used only within a certain geography. Outside those boundaries, another sovereign has its own muscle and issues its own currency. But currencies can be traded. Their intrinsic values may differ though and depend on many economic variables. These variables are what those who dabble in the money markets play around with and earn billions of dollars as margins each day in speculating where may the future lie.
As for you and me, the more money we have, the better off we are. So, everybody wants more money. But because the dynamics of the money market are complex, the central bank has a crucial role to play. At any given point in time, it must ensure only a limited amount of money circulates within the system. And people have to compete legally to earn it. Anybody who tries to game the system must be penalized.
This also places a huge moral and fiscal obligation on the central bank. To keep the trust of people going, the authorities, led by its chief (in India, the governor of the RBI), must weigh in on complex economic issues to ensure the promissory note it issues contains an intrinsic value. If the bank prints too many of it, people won’t value it and a country’s economy can collapse. That a profligate central bank can drive an economy to collapse is the reason why Zimbabwe has now gone to the dogs .
While the happenings in Zimbabwe have not impacted the global ecosystem, most people are familiar with what can happen if the system is gamed as it was in the last decade. It eventually led to the collapse of the global financial order in 2008. Remember the excesses committed on Wall Street, the financial capital of the world? How it was done was meticulously documented by Michael Lewis in The Liar’s Poker and The Big Short. Between the book and the film, Lewis, a former bond trader on Wall Street, recounts in much detail how, on 15 September 2008, Lehman Brothers filed for bankruptcy and the global financial ecosystem collapsed. It was not because crucial people were in the dark, but because everybody who ought to have kept watch was hand-in-glove.
Hundreds of millions of people across the world lost their homes, jobs, savings and lives. But for all practical purposes, those who ought to have gotten indicted were let off with a rap on their knuckles. In a sane world where some semblance of morality exists, the billions of dollars a few thousand people earned to snort cocaine and peddle illicit sex while they destroyed the lives of others would have earned them death by the noose or the bullet.
But they were let off with a few raps, are back in business, being wooed again and earning more money. People continue to look at those from Wall Street, fancy financial institutions, rating agencies and Ivy league colleges in awe—when actually they ought to be looked down upon with disdain. But there is something strange about the nature of immorality. Humans are attracted to it.
What do we trust then?
This raises a question. Can overpaid book keepers like banks and sovereign entities like governments be trusted with hard-earned money? All evidence has it we ought to be angry. But we aren’t. But there were some who were and could see through the fog. They have always maintained the system is a fallible one and there was evidence on their side.
The collapse on Wall Street is just one case in point. Closer home, the rupee was demonetized. It was the kind of Black Swan event that in any other part of the world would have eroded people’s trust in a central bank. That people continue to trust it is a tribute to the power of storytelling.
To insure people against fallible entities, a new ecosystem is needed. To do that, Satoshi Nakomoto, an unknown person, or perhaps a bunch of people, who deeply understand technology and the intricacies of the money markets, had started work a long while ago to create a parallel universe. They were asking some simple questions.
• What if there exists a ledger where no bank is needed to maintain it?
• What if there is no government needed to underwrite a promissory note?
• What if there exists a system of notes digitally issued from one person to another person minus any intermediary and authenticated at once by multiple third-party entities?
If it could be accomplished, the global financial ecosystem could be dismantled and all intermediaries, including the government as we understand it now, can be done away with. That it cuts costs and intermediation is one thing—but it is the ultimate political statement any libertarian can make.
• At a more micro level, to ensure the authenticity of these notes, what if the ledger books were to be open? That means, at any given point in time, if I make a payment, that note will visible to many people who can vouch whether it is an authentic note or not in the bitcoin ecosystem.
• Strong encryption would ensure nobody can see who made the payment, who received it or attempt to change the value of the promissory note.
• It doesn’t matter where in the world you live in. It can travel digitally. To that extent, it is a global currency. This facilitates free movement of trade and capital—again, a libertarian ideal.
• Add to this the fact that this promissory note (or currency) will not exist on a single repository, but across multiple computers on a network spread across the world. If you are connected to the internet, you can access this network. So, it cannot be regulated by any government. This is P2P technology 101 and that is why I had stated upfront that whoever thinks the Supreme Court ought to entertain the plea, is wasting the court’s time. It is for the legislature to look into.
Technology enthusiasts are familiar with the idea of downloading movies and music from Bit Torrent sites. Governments have tried to clamp down on the more popular ones. But it continues to thrive.
In much the same way, trying to clamp down on a distributed network that is spread across the world is futile. China’s attempt to ban bitcoin is a case in point. It only appeases the hardliners because the idea of losing control is terrifying. But Chinese smart money knows how to rear its head from the unlikeliest of places—like Estonia, for instance. And there is no stopping over-the-counter (OTC) trading or critical technologies like Blockchain that have emerged out of the race to build more robust bitcoins.
• And finally, much like we understand that the amount of money in a system must be controlled, Nakomoto has created bitcoin as a finite resource. There are only 21 million bitcoins in circulation. You can choose to give away a part of a single bitcoin as opposed to an entire one. So, the universe is expandable, but in a finite way, not infinitely. To that extent, it is a carefully thought through ecosystem as well.
This is not to suggest it is a perfect ecosystem. Frailties exist. But that is in the nature of all technologies. But the thing with all technology is that it reaches a “tipping point” after which there is no stopping it. And bitcoin was beginning to get to that tipping point. More and more people were beginning to accept it as a mode of payment. If it gained significant traction, the ramifications could be enormous.
That is why, much like in China, for any government and financial ecosystem anyplace in the world, this is a terrifying thought. It holds the potential to pull the rug off the ground beneath their feet. As for arguments against bitcoin stating that it is a vehicle primarily used to procure drugs and pornography, I refuse to buy them. Because it is now well-established that innovations are first embraced by those in the pornography business. They are the earliest adopters of technology and it stands proven for at least two decades.
Then why not invest?
This is where the paradox begins and I must go back to the original question. How do you measure the intrinsic value of a bitcoin? On the one hand, we have a system that is broken. Then, on the other hand, we have a system that claims to be robust and there are indicators it is on the verge of take off
I was asked to tail him so that I could report on all of what I could see. And while at it, I admit to being totally smitten by the man and his passion for all that he brought to the table. For a young sod like me, it was easy to be enamored by Stallman and his idealism. It took some time, though, to figure out that while Stallman had all of the right ideas, I couldn’t live my life based on his principles. He was happy to stay single and frugal. I wasn’t. I now know he thinks in black or white. There are no shades of gray. I wasn’t ready for that either.
Some thinking and much talking to people later, I figured there were many like me who like Stallman, but either do not have the mental muscle to emulate him or choose not to. In my head, I parted ways with his philosophies. There is only so much idealism I can take. At some point, pragmatism kicks in. I have a mouth to sustain and mouths to feed.
While speaking to my friends embedded in technology, I could see the hardcore ones were as conflicted as I was. They appreciated him for staying true to his word, but couldn’t see their lives play out the way Stallman would want them to. It was time for everyone to part ways from the Church of Stallman to the more pragmatic worlds that Linus Torvalds pointed to without forgetting the best of what Stallman had to offer. We now know most of the world’s computing backend is powered by Linux.
Stallman hated the word “Linux”. He thought it a bastardization of his philosophy. I thought he almost pulled my skin off when I asked him about the future of Linux. It was a faux paux on my part. Because in his world, he insisted everybody refer to it as “GNU/ Linux”.
Be that as it may, there is no taking away from his multiple contributions. The world and the computing prowess we now take for granted would not have been possible without his idealism.
Then, on the other hand, Linux wouldn’t have taken off as it has if it were only a political statement. It needed to show its prowess off as a pragmatic alternative to the monoliths in the business. It did and much of it was possible because of evangelists like Stallman.
That brings me to back bitcoin. If I were to draw a parallel, it seems to me that the “Satoshi Nakomoto” school of thought, which wants to make a clean break from the current financial ecosystem and build a new world order, thinks of it as a political statement. This is not just a battle of technology. This is about worldviews. And much like the fissures in Stallman’s world were evident, I think I see some in the bitcoin camp.
Consider the debate among bitcoin miners on bitcoin cash versus bitcoin gold and the confusion in the ranks, for instance. Why, for instance, are bitcoin prices as high as they are now? My understanding is that it has to do with the recent Chinese clampdown on bitcoin. The immediate aftermath of the clampdown was a slump. But the flight of capital out of China has gotten the money back into the system and is now feverishly bidding for all the action it missed out on. Meanwhile, there are punters gaming the system as well as they would in any other market when they spot an opportunity. Between all of these, the prices have moved up. It is only a matter of time before prices come down.
The larger question on the mind and one I am deeply conflicted about is whether bitcoin as a currency has the muscle to withstand multiple onslaughts from various stakeholders in the ecosystem—whether it be governments, private players, regulatory authorities or those looking to make a fast buck.
What I do know is that based on what I have seen in the past, ideological battles in a marketplace can last as long as the money does. After that, an idea must stand the test of time. Until now, much good has come out of the race to find the ideal cryptocurrency. Blockchain technology, for instance, and the experiments at TCS around it, and how entities like Bajaj Electricals are deploying it to pay for material in real time, are cases in point close to home. Who knows what else may emerge? I’m sure much good will come.
Now, pushed to the wall and compelled to offer an opinion on whether to invest in bitcoin as an asset, personally, I would stay out. I’m willing to get into an all-night slugfest over an ideology. But let’s keep the money out of it. To that extent, I’d go with pragmatism as opposed to idealism. And yes, I know it sounds terrible.
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