Last Saturday was “Bitcoin Pizza Day” – the 11th anniversary of the day someone bought two pizzas with 10,000 Bitcoins. It was the first ever transaction using a cryptocurrency.
That day, May 22, 2010, was 19 months after Satoshi Nakamoto published the white paper that started it all, entitled Bitcoin: A Peer-to-Peer Electronic Cash System.
And by the way, the pizzas were family-sized and cost $US15 each, so the transaction valued each Bitcoin at 0.3 cents.
Ever since then, on quiet news days a journo will often work out what those pizzas cost at the current value of Bitcoin and write a funny little story about it. For the record, as of the time of writing, it was $US187.5 million per pizza.
Crazy, right? And that feeds the narrative that it’s a bubble about to burst, and Bitcoin’s price has already fallen 50 per cent in a month, so maybe this is the crash everybody’s been waiting for, except that Bitcoin has crashed twice before, and bubbles are usually like aircraft – they only crash once.
And the Bitcoin price held up pretty well on Wednesday after South Korea clamped down on the country’s 200 crypto exchanges, so that many are facing an “existential crisis” according to the Financial Times.
The thing that’s missed in all the bubble talk about Bitcoin is that there is no “normal” or intrinsic value against which to compare the price, as there usually is when a market goes crazy.
One Bitcoin might be worth 0.3 cents or $US1 million, as a lot of its true believers think. There’s simply no way of knowing.
The crypto traders are engaged in a kind of mass collusion with the exchanges that make money by facilitating the trades, and none of them has any interest in seeing it all disappear.
It’s a subculture that has a vested interest in sustaining itself and attracting new members, so they buy the dips in price and send it back up.
It’s not so much a religion or a cult as a mutiny that became a revolution, one that will likely become a vast transformation.
There is far more to cryptocurrencies than playing pass the parcel with a speculative asset, hoping you can sell it to a greater fool for more than you paid, and that was clear from the beginning, in October 2008.
Here’s what Satoshi Nakamoto wrote: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
In other words, he was creating a new payments system that didn’t rely on governments, central banks or commercial banks.
The genius of blockchain – for that’s the engine under Bitcoin’s bonnet – is that it gets around the need for a third party like a bank by having a transparent, unalterable record of all transactions. Proof creates the trust that is usually supplied by third party verification.
The nine pages of the white paper describe nothing more than a payment system, not a new form of money or a “store of value”.
But a tradable token had to be invented to make Nakamoto’s system work and his big mistake, in my view, was that he called it a coin.
Words and labels matter, and that one gave the impression that Bitcoin is a new kind of money or a collectible, rather than the idealistic, anti-capitalist, anarchic payments mechanism that it is.
You might say that’s just semantics and that a payments system is money, but it’s not. The system is not the money, just as my Visa card is not money, just a way of transferring it.
But it didn’t take long for the idea of using Bitcoins to speculate with began to catch on.
As discussed, in May 2010 the value of one Bitcoin was 0.3 cents. A year later it was worth a dollar – a 300-fold increase in 12 months.
Over the same period, the US dollar fell 15 per cent, the American sharemarket rose 15 per cent and the price of gold, which was in the midst of a huge rally at the time, rose 28 per cent. A little 33,000-percenter named Bitcoin got noticed.
So Bitcoin became a speculative collectible and the revolutionary genius named Satoshi Nakamoto was, and is, nowhere to be seen.
Maybe he snaffled a million or two of them and retired to a private island.
Three bubbles and crashes later (2013-14, 2017-18 and 2020-21) and Bitcoin is still with us and is now worth 36,000 times what it was a year after Pizza Day.
Even Amazon shares are only 17 times what they were then.
And the original idea has been lost in the gobsmacking wealth creation and pure frenzied greed of it all.
Nakamoto’s creation is still a fast, low-fee payment system, and businesses are starting to use it for that, and blockchain is starting to be used for storing all sorts of data.
Bitcoin is also a terrible consumer of energy, as Elon Musk has pointed out, prompting the most recent crash, and that might end up bringing about Bitcoin’s death.
But there are 4500 or so other cryptocurrencies, and a few of them, apart from Bitcoin, are also a way to participate in the future.
Now we even have things called non-fungible tokens (NFTs) conferring ownership of virtual digital “assets”, including art you can’t touch and the things you buy in computer games.
Calling them currencies is misleading: None of them is money and never will be, but they are not nothing.
Will crypto prices crash again?
Yes, of course, and it’s also true that the crashes are becoming dangerous because of the amount of money involved now and the debt that a lot of traders are using: The crash under way now, or perhaps the next one, could bring down other markets as well.
But it’s also a bit like it must have been when Copernicus and Galileo were telling everyone about the cosmos, and Darwin explained evolution.
We’re being confronted with entirely new ways of thinking about finance and money that are very hard to get our heads around.
What’s more, it comes at a time when the old ways of finance are visibly fraying.
Global central banks have printed about $US30 trillion of fresh money to prop up governments that are no longer able to tax their citizens sufficiently to fund their spending.
And it’s not just the pandemic – this has been going on since the GFC.
Note: I don’t own any Bitcoins or other cryptos. I’m very happy to marvel from the sidelines.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news