Riding the bitcoin wave is nothing short of wild

03/15/2014 5:54 PM

03/15/2014 5:54 PM

Every time I see the word “bitcoin,” I think of tulips and housing bubbles and the kind of multi-level marketing schemes that push overpriced cleaning agents and nutrition supplements onto friends and neighbors with hyperactive, quasi-evangelical fervor.

Call me cynical, but recent events in the bitcoin world appear to signal the whoosh of a bubble bursting.

Bitcoin, you ask? This is the cyberspace currency developed in recent years that creates global commerce through a devoted but mysterious network of exchanges and repositories rather than commercial banks or other government-supervised mechanisms.

The bitcoin is the digital darling of anarcho-libertarians, or garden-variety libertarians, and others who prefer to operate outside the reach of Big Brother, or the Man, or other forms of dark authority.

In January, a 24-year-old operator of a bitcoin exchange, Charlie Shrem, was arrested in New York on a money-laundering charge.

Of the bitcoin phenomenon, he told Forbes: “This is something completely new in the history of human communication, and bitcoin is one of the largest socio-economic experiments human kind has ever seen.”

Uh-huh.

Last Sunday, a Japan-based bitcoin exchange called Mt. Gox filed for bankruptcy in a Dallas court after its financial collapse in Tokyo. The company earlier announced that it had lost some 750,000 of its customers’ bitcoins, worth hundreds of millions of dollars, attributing the failure to anonymous hackers.

Late last month a 28-year-old American woman, CEO of a virtual-currency exchange, was found dead outside her apartment tower in Singapore, where police were investigating the death.

Late last year a bitcoin was valued at more than $1,000. After the Mt. Gox collapse, the rate had fallen below $600. Clearly, it’s a wild west and possible gold rush for true believers as well as a bucking bronco for those who are playing the game.

And it does resemble a game. There’s a treasure-hunt aspect that many people engage in like so many stock market day traders. When the bitcoin first appeared, its creator, a reclusive Japanese American, “buried” an untold number of the units. Bitcoin “miners” can retrieve blocks of those buried bitcoins by solving complex mathematical puzzles.

Digital “server farms” around the world, reportedly including one in Kansas City, Kan., operate around the clock, crunching the searches of countless bitcoin miners. New bitcoin mining products can attach to your home computer like an automated slot machine.

In the U.S., banking regulators are scratching their collective heads.

“The Federal Reserve simply does not have authority to supervise or regulate bitcoin in any way,” the Fed’s chairwoman, Janet Yellen, told the Senate Banking Committee recently. “This is a payment innovation that is taking place entirely outside the banking industry.”

But some kind of regulation likely looms, says Braden Perry, a Prairie Village lawyer whose firm represents clients in the bitcoin world. He notes that the state of New York plans to enact licensing rules involving crypto-currencies, possibly a model for other states to follow.

“This doesn't need to be a centralized currency,” Perry told me. “For everyone involved, a well thought through regulatory scheme would not be bad.”

And about those recent setbacks? Perry says his clients remain “cautiously optimistic that there’ll be some resolution of the hiccups and there’ll be a future for bitcoins.”

I’m willing to go along with the notion that this digital genie has been unleashed, yet let’s hope as it evolves not too many more people get hurt.

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