Is it a scam? Is it a bubble? No, it's Bitcoin! I have been monitoring this new development closely over the last week and am genuinely excited. Not necessarily because I believe the strongest claims of its proponents - but because I see genuine uncertainty over the outcome. For every pie-eyed fantasist who thinks Bitcoins are about to cause, and then rise from, the ashes of the global banking system, there is a skeptical pseudo-economist who can reel off a dozen potential failure modes of the Bitcoin system. But then there is a pseudo-plausible rebuttal to each of those problems, and the debate rages on furiously.
Currencies have many features - liquidity, transaction cost, divisibility, durability, trust, confidence, decentralisation, anonymity, inflation, exchange rate volatility, legality... the configuration space in which currencies lie is huge and timidly explored. Some of the economic arguments for and against Bitcoin point to these features only in isolation ("Deflation will freeze the Bitcoin economy!" ... "Anonymous transactions are revolutionary!"), arguing by analogy with previous currencies or economic situations with those same features. However, the Bitcoin economy is a dynamical system distinct from any currency or P2P system that has existed before, and therefore the ultimate outcome cannot be predicted. History cannot repeat itself because this has not happened before.
Perhaps this is where I cross over from being a scientist to a mad scientist, but I'm a sucker for this kind of thing. I consider Bitcoin to be a grand and marvellous experiment which my weak libertarianism itches to perform. It may crash horribly. It may be a revolution. Either way, lessons will be learned, bugs will be fixed, and a new chapter will be written in the story of how humans have learned to get along with each other.
- The energy being expended on mining is worrisome. If the system succeeds in powering a revitalised global economy, it will surely be worth it, but I can't help wonder if there isn't a more efficient way of solving the same problem. I can't point to a better solution, but the code smell is strong.
- The market is currently moving at lightspeed. Who can tell the difference between irrational speculation and rational speculation? As the second law of thermodynamics implies, all value is just a bubble that hasn't popped - yet.
- If some event causes a dramatic loss of confidence in Bitcoin, or a regulatory airgap between Bitcoins and "real" currencies, the system will still exist. If it fails as a currency, my money is on it becoming the standard unit of online reputation.
- When the dust settles, the complete transaction history will be laid bare for analysis. A thousand papers will be born.
- Who is Satoshi Nakamoto? Likely a native English speaker who has posted elsewhere, and whose identity may thus be revealed by linguistic analysis and text mining.