The future of bitcoins is very much up in the air. Scant months ago, bitcoins and other “altcoins” seemed poised to take over the world. You couldn’t open a newspaper or run a Google search or walk through an airport or have a quiet cocktail without hearing somebody ranting about this exotic virtual currency. Bitcoins were The Blair Witch Project of finance; they were going to make the existing infrastructure of commerce disappear overnight. Cash? Stupid. Credit cards? Dumb. Gold? A crude, metallic substance designed to be hoarded by idiots.
Bitcoins were different. Bitcoins were going to usher in the Iron Age of imaginary currencies and usher out the pathetic Bronze Age of dollars, pounds, euros, Swiss francs and the yuan. Bitcoins, we were ceaselessly told by bitcoin aficionados, were going to revolutionize the world of commerce, replacing cash with an online currency derived entirely from algorithms. The great appeal of bitcoins was that they could be moved directly from one account to the next, bypassing government regula- tion and cutting out the middleman.
Much like peer-to-peer file-sharing, bitcoins could seamlessly move from one owner to the next without any persnickety authorities getting in the way. Then all hell broke loose. First a number of governments became suspicious of altcoins, arguing that they might be used to launder money. Next, hundreds of millions of dollars’ worth of bitcoins—750,000 bitcoins, all told—disappeared from the prestigious bitcoin exchange with, Mt. Gox, that was the first one to start using white label exchange software. Now no one knows where the future of bitcoins lies. The insane hype of a few months back, hysteria aided and abetted by the media, is now making somepeople look very, very foolish.
But if people think alternative currencies are likely to go the way of Milli Vanilli, the DeLorean and the Newton, they had better think again. What the public does not realize is that the horse has already left the barn, that it is too late for Katy to bar the doo, for bitcoins are just the tip of the virtual-currency ice- berg. Operating far below the radar, many other exotic financial instruments derived from powerful algorithms are being stored in server farms anchored off the coast of Iceland.
Just as soon as the bitcoin furor quiets down, these instruments will rise to the surface and have their day in the sun. Here are two examples: Bitmunis are an exotic type of municipal bond that exists only in the abstract. They are derived from insanely complicated algorithms incorporating the Kondratieff Cycle, Fibonacci Numbers, Fermat’s Last Theorem and the annual rate of return on investment-grade bonds issued by the cities of Cleveland, Philadelphia, Detroit and Baltimore. Bitmunis can be traded directly among investors and need never be evaluated by ratings agencies because bitmunis are self-rating. Powerful sensors concealed in the bitmunis themselves instantaneously recalibrate the current price and yield on the units, making it unnecessary to ever consult Moody’s or Standard & Poor’s to find out what they are worth.
“You stash away bitmunis for widows and orphans and they never have to worry about money for the rest of their lives,” says Gisele-Aphrodite Saberhagen of the Reno-based Bitmuni Foundation. “It’s electronic coupon-clipping at its most abstract.”BitReverseCollateralizedMortgageObligations are another exciting new instrument. These securities can be cut into alt-tranches marketed by virtual brokerage firms that only exist on server farms hidden away in the forests of southern Romania.
“BitReverse CMOs are going to make junk bonds go the way of the dodo,” says Lee Kunstler, executive director of the Federal Virtual Deposit Insurance Corporation. “No one knows what they are, what they do, where they come from, what they look like or where they can be found. Other than that, they’re exactly like treasuries.”One final note: In recent weeks, there has been much speculation about who invented bitcoins in the first place. Some say it is Dorian Nakamoto, a 64-year-old engineer who lives in Southern California. Others insist that it is Eastern European gangsters associated with a shadowy organization called SPECTRE. But the latest evidence points to a rogue avatar in a popular video game who possesses extraordinary programming skills.
“Gangulon Moonterror, Wraith of Slikl, is smart, he’s funny, he’s daring and he’s unstoppable,” says Kuntsler. “He doesn’t exist, true. But in the world of virtual currencies, that’s generally viewed as a positive.”