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March-April 2018

Is cryptocurrency our money of the future?

Its mavens say it will get you rich quick. Others say it’s the way of the future. The reality of Bitcoin remains to be seen

Mark Mann

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In the 1951 animated film Alice in Wonderland, Alice was trying to find a party when she fell down the rabbit hole. Perhaps it’s no surprise, then, that this has become the favourite cliché for people struggling to explain what it’s like to enter the disorienting world of Bitcoin.

We’ve all heard stories about the mad crypto-party, and we’ve likely heard them from a glint-eyed friend, urgently trying to communicate why Bitcoin, the world’s first decentralized cryptocurrency, and its underlying blockchain technology are so important.

Bitcoin is digital money that solves the problems of reproducibility and security. You can’t copy-paste coins, save multiple versions, or make counterfeits. It’s generated by a computer program, not a government-backed bank. The program gives out bitcoins to people as a reward for using their computer processing power to solve the difficult math problems, or cryptography, that make Bitcoin virtually impossible to hack. The more secure Bitcoin is, the more people use it; the more valuable it is, the more incentive there is to secure it. Eventually, the computer program will stop generating new bitcoins. The finite supply is one reason why it has become so expensive, like gold. By all accounts, Bitcoin breeds obsession. And if you do find yourself tumbling down the rabbit hole of hype, you’ll quickly get the terrible feeling that what the rabbit told Alice was right: “I’m late.”

Consider the following: If you invested $100 in Bitcoin on June 1, 2011, the day gossip blog Gawker made the then-still-infant cryptocurrency semi-famous with its article on Silk Road—the notorious dark-web marketplace where early adopters could use their bitcoins, albeit mostly for drugs—your investment would be worth nearly $85,000 USD (at the time of writing). If you got in a year earlier, it would be $17 million. Feel that pang in your chest? It’s called “Fear of Missing Out,” and a great many people have been experiencing it. Binance, the world’s most active cryptocurrency exchange, is adding as many as 240,000 new users an hour.

The cryptocurrency market is frequently compared to the dot-com bubble in the late 1990s that eventually burst. The analogy has some merit, but blowing off cryptocurrency entirely because the market is overheated would be like rejecting the internet because a few hare-brained websites didn’t make any money back when people were still figuring out how to use email. The current speculative frenzy will thrill some and repel others. But the problem isn’t that it engenders greed or attracts scams. Instead, fevered speculation is obscuring and possibly hindering the true potential of blockchain technology to shift the balance of power from large institutions to individuals across many sectors of society.

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Cryptocurrency for dummies

WHAT THE HECK IS CRYPTOCURRENCY?

Cryptocurrency is a digital currency that secures its transactions with cryptography, a mathematical code. Bitcoin is the first cryptocurrency, created in 2009 by a person or group under the pseudonym Satoshi Nakamoto, whose true identity remains unknown.

HOW DOES BITCOIN WORK?

Bitcoin works through a technology called the blockchain. When a user wants to make a payment, the proposal goes through Bitcoin’s user system, called miners. Miners use computers to crack a mathematical puzzle that will validate the transaction. The puzzle can only be solved through trial and error, and the first user to crack the code is rewarded with 50 bitcoins. The more transactions that take place, the more complicated the puzzles get. Once the puzzle is solved, the transaction is validated, and the resulting data is added to another block on the chain— this secures the exchange.

WHERE DOES BITCOIN’S VALUE COME FROM?

Bitcoin’s scarcity and potential to replace cash made it an attractive alternative to its first users. Because it is a decentralized cryptocurrency, no single bank or entity controls it. The code used in the blockchain is also open source, meaning anyone can view or update it.

Similar to the way Facebook’s value as a social network increases the more people are on it, Bitcoin’s value as a cryptocurrency increases the more people use it. The more valuable it is, the more people want it—increasing its value even more.

WHAT’S WRONG WITH BITCOIN?

Bitcoin’s value is volatile, often surging and falling dramatically in short periods of time. It was never meant to be used as a way of getting rich—which is why some are distancing themselves from it. Because Bitcoin has no intrinsic value, many investors believe it is a bubble that will soon burst.

Some are also concerned about its environmental impact. People used to mine bitcoins on their personal computers. However, with its increasing value, they now need to use an Application Specific Integrated Circuit, or ASIC—machines that are big, hot, and use a lot of electricity, powered by fossil fuels and coal. A Vox story estimated that Bitcoin’s annual energy use is equal to the entire country of Serbia—and that amount only continues to increase with its popularity.
— HANNA LEE

My experience falling down the blockchain rabbit hole for the first time in mid-December 2017 was an anxious, emotionally exhausting affair. I decided to buy a few hundred dollars’ worth of bitcoins and leave it at that—not a big bet, but at least I’d catch a draft if the price kept skyrocketing, as it had started to do in November. (The price has since experienced what investors call a “massive correction,” falling all the way back down to where it was then.) A few hours after the initial purchase, I invested more. Within a day, I had shoved an uncomfortable chunk of my savings into the digital currency. Retirement solved.

Anyone who’s sampled the chaotic crypto-markets knows what came next: “Fear, Uncertainty, and Doubt,” or FUD in the vernacular of the movement. I encountered a lot of bearish voices, all of them huffing and puffing about the bubble. The price of Bitcoin is floating on hot air, they growled. It could pop at any minute. So in a panic, I sold it all.

Even with the accumulated value of my labour restored safely to Canadian dollars, I was already deep into Wonderland, for better or worse. I wanted to know more, but so-called crypto experts online just made me uncertain and confused.

I needed someone sensible to show me around. Jessie Cortes is a 33-year-old Toronto-based “crypto-consultant” who’s been day-trading cryptocurrencies full-time since last summer. When we meet in early January, Cortes wears a crisp haircut and stylish wireframe glasses. He gently shuts his chrome MacBook as we begin to talk, but he keeps an eye on the steady stream of messages pinging on his phone, from fellow “scalpers” (those who buy and sell on a minute-by-minute basis) on crypto forums and online discussion groups. He absorbs these updates seamlessly while he overviews the crypto-landscape and the various ways to profit. “I help people find ways to make money in this game,” he explains.

To most people, cryptocurrencies still seem like a forbidding fringe technology, but early adopters like Cortes are now well-established and ready for business. A new generation of entrepreneurs is emerging, and they’re all trying to catch the wave of mainstream adoption before it crests. “The goal right now is just to get as many people as possible to participate and understand what’s going on,” says Cortes.

Cortes will set you up with a wallet and an exchange, teach you different trading styles, offer tips and advice about the ecosystem, or help you code a bot to do it all automatically. He’ll even help you set up a miniature mining operation on a spare computer, through which you can earn a couple bucks a day. Mining, or “proof-of-work,” is one of the key tools that makes blockchain technology effective. The blockchain is an unchangeable record of transactions within a network. Usually it’s referred to as an immutable ledger. The ledger is distributed across the network, so it’s public—like a spreadsheet that everyone can see. Everyone can add to the spreadsheet by making a transaction, such as sending bitcoins, but no one can change an entry once it’s been made (not even the person who made it). Mining is the process whereby participants in the network are incentivized to secure the ledger. Miners are paid in bitcoins to make Bitcoin safe.

If you remove all the steps, you could say that blockchain mining turns electricity into currency. That’s why large-scale mining operations have attached themselves to coal plants in China, and Quebec is trying to sell off its excess hydro energy to crypto miners. Cortes helps individuals join mining pools, which amalgamate their collective computing power and divide the profits among their members.

But don’t try to hire Cortes to manage your portfolio; he’s not interested. The whole point is that people are individually engaged and empowered to do what they want with their currency, he says. “You have to look at yourself as a bank.”

That’s not a metaphor. What is a bank if not a place that holds your money? If you want to move your money somewhere—to a family member in another country, to a portfolio manager, or to your own purse from an ATM—you have to ask the bank, and they might charge a fee for their trouble. But blockchain technology obviates the need for a bank—you can hold onto your money yourself with perfect security, and send it to whoever you want without asking.

You have every reason to be skeptical when you hear a promise of perfect digital security, but that’s because until now, data was always kept in centralized servers surrounded by firewalls. If the data is valuable enough, it’s basically inevitable that some hacker will find a way in, as countless breaches— from credit reporting agency Equifax’s massive leak of information for 143 million people, to a Yahoo breach affecting three billion accounts—have proven.

The blockchain doesn’t keep the transaction data on a particular set of servers that hackers might gain access to. Instead, it decentralizes the record of transactions, storing it everywhere for all to see while keeping your identity and your crypto-wallet safe. Even if a hacker managed to perform the virtually impossible task of unravelling the cryptography to change one instance of the ledger, such that someone else’s bitcoins transferred to their own wallet rather than the intended wallet, they’d still have to perform the same feat on all the other versions of the ledger, all at the same time. Instead of robbing the bank’s vault, they’d have to rob every house at once. People who believe in cryptocurrencies are those who accept the principle that blockchains are so secure, they extinguish the need to trust powerful institutions to keep the books.

Maybe that doesn’t sound fun. For Cortes, it is. He possesses the two necessary attributes to excel at crypto-trading: a do-it-yourself approach to tech and a gambler’s flair for risk. He uses apps and games to play around with stocks, though primarily with fake money. But he’s also into online gambling, and as an amateur boxer, he likes to bet on matches. Through his 20s, Cortes made his income independently as a DJ and Airbnb host. Now he lives inside the crypto-universe, reading whitepapers about new alternative currencies, scanning for tips on different forums, and watching the price charts rise and fall. It’s profitable, but it’s also a full-time job. The price of agency is effort.

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The blockchain revolution isn’t about how we exchange money, but how we exchange value. So-called tokenized ecosystems may be the new marketplaces for personal goods and resources—such as the spare storage space on your laptop, or even your time, energy, thoughts, and attention. Is your art valuable? Or the energy from the solar panel on your roof? Tokenized ecosystems are the decentralized networks that will enable people to trade independently on the value they create.

Consider Steemit, a decentralized social network that runs on blockchain software. Steemit rewards people for contributing and curating content by paying them with its own digital assets, some of which are then spent on other creators within the ecosystem as tips, and some which can be traded for other currencies.

At the time of publication, one Steem Dollar was valued at $3.84 USD, and some people are getting better returns for their posts than many online publishers pay for articles. Steemit generates a system of value for people who invest in the network through their effort and talents, and that system touches other systems of value, like Bitcoin or dollars, or a token from another ecosystem.

For the true believer, these blockchain-based decentralized apps—ones with their own tokenized ecosystems—will soon overtake and replace the apps we currently use to relate to each other online.

Will Salmon is a self-described “blockchain evangelist.” A slender man in his forties with thick facial stubble, he runs a meet-up six days a week at 7:30 a.m. at the Depanneur Café in Montreal. The group is spiritedly titled, “Blockchain Coffee: Be the Change You Wish to See in The World,” and it’s meant to be a welcoming spot for newbies trying to make sense of the tech. The curious should seek out the tennis ball-sized globe perched on a saucer, with the words “collective brain” scrawled in sharpie over the Pacific Ocean. There you’ll find Salmon, scribbling in a thick notebook and ready to explain everything in his strong Parisian accent.

Salmon used to work for an accounting software company in Ireland, where he had the opportunity to study blockchain as a potential solution early on. After researching the technology at length, he was convinced that it would bring massive disruption to society. So, four years ago, he took a leap of faith. He quit his job and devoted himself full-time to the revolution. “For me, it’s the beginning of the 21st century,” he says.

But Salmon is anxious about the way that blockchain tech has inspired a gambling culture. When he first began educating people about the tech, few even knew what it was, and those who’d heard of Bitcoin were mostly skeptical. Now, he says that the old men in his neighbourhood talk to him about alternative cryptocurrencies like they’re discussing race horses. Salmon realized that he didn’t want to obsess about prices or treat the blockchain like a get-rich-quick scheme, so he sold all of his bitcoins a few years ago.

Bitcoin has made plenty of early investors into millionaires, but today Salmon freely admits that he’s broke, though he prefers to say that he has “the luxury to think about money outside the box.” When he’s not organizing meet-ups, he’s working at the Depanneur Café.

While people like Cortes make blockchain enthusiasm look suave, Salmon plays the part of the Mad Hatter. In conversation, he stitches together futurist postulations and blockchain hypotheses with dizzying speed. Instead of hustling on the cryptocurrency exchanges, Salmon focuses on networking within Montreal’s crypto community as he searches for other true believers who share his long-term outlook. It’s not this wave of blockchain adoption Salmon wants to catch, the one that’s supposed to do to banks what email did to fax machines; it’s the next wave he’s watching, when decentralized apps take over everything else.

For example, Salmon is anticipating the day when autonomous cars relieve traffic congestion, liberating the streets for more public use. Into this imminent future Salmon wants to launch a tokenized ecosystem called Fitcoin, similar to an initiative founded in Austin, Texas. Just as Bitcoin rewards miners with bitcoins and Steemit rewards engaged community members with steem, Salmon wants the city of Montreal to reward people with Fitcoins to, say, use public bike transit. These Fitcoins could then be redeemed for city services, like at the library, or traded for other cryptocurrency. Salmon believes tokenized ecosystems enable win-win scenarios, where people are incentivized to be healthier and the burden on health care is thus diminished.

If this or similar schemes ever come into effect, life will feel a lot more like a video game, with everyone speeding around picking up coins. But what about people with different abilities? Will Fitcoin adjust its parameters for those in motorized wheelchairs, or will they excel in some other tokenized ecosystem? Needless to say, there isn’t a cryptoutopia ahead.

The blockchain isn’t a panacea, but it could redefine ownership. Your bike to work would be yours in a whole new way if you could buy something with it.

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Whether Salmon ever manages to convince the city to invest in his vision, others are looking to blockchain technology to solve even bigger problems. Laurent Lamothe was the prime minister of Haiti from May 2012 to December 2014, while the country was still recovering from the 7.0-magnitude earthquake that struck near the nation’s capital Port-au-Prince on January 12, 2010. He’d just returned to his home in Florida the night before the earthquake struck, and he watched the images of the devastation on TV along with the rest of the world.

“I lost a lot of family members and friends,” he told me over video chat, pacing around his sunny Miami home. “A quarter of a million people passed away. It was the most difficult experience of my life, seeing the tragedies and horror stories from every single family in the country.”

One year after the earthquake, popular Haitian performer Michel Martelly was elected president and named Lamothe his adviser, making him responsible for the reconstruction effort. Lamothe’s responsibilities included helping coordinate the international aid effort and collaborating with groups like the American Red Cross, which had received nearly half a billion dollars in donations earmarked for Haiti, more than any other organization. But reporting in 2015 by ProPublica and NPR suggested that very little of that money went to directly helping Haitians. For example, the Red Cross had promised to house 130,000, but five years later, only six permanent homes had been built. (The Red Cross disputes this reporting, and points to investments in hospitals and a wastewater treatment plant as some examples of how that money has made an impact.)

Although Lamothe has publicly praised the Red Cross’s efforts in Haiti, he also criticizes aid organization’s lack of transparency during the crisis: “When we said we wanted to know [where their funds were to be spent], to discuss it and have shared priorities, they told us that everything was spent. But that did not translate into the streets. We didn’t really see anything that happened with that money.”

The same year the Red Cross’s work in Haiti was exposed to public scrutiny, Lamothe learned that blockchain technology could solve some of Haiti’s most pressing problems. Lamothe first heard about the blockchain at a special conference hosted by Richard Branson, Virgin’s grinning CEO, on his private island. “That’s when I discovered the power of the blockchain and its potential to change the world as we know it,” he says.

Take international aid. A new platform called Alice uses blockchain technology to help charities and social enterprises operate transparently. With a secure decentralized ledger, it becomes possible to publicly track where every donation goes and how every dollar is spent. But that’s not the only way that blockchain tech could help Haiti and countries like it.

Buying and selling property in Haiti can be hopelessly complex. One of the challenges that hampered the Red Cross’s efforts was the country’s dysfunctional land title system. Haiti’s National Land Registry Office has only registered a tiny fraction of the country’s more than 17,200 square kilometres, while other agencies keep their own separate records. Land disputes have interfered with and ultimately defeated many reconstruction and development projects. After the earthquake, the situation was even worse. “Everything was lost,” says Lamothe. “All the records were held in a single office, and that office collapsed.” Blockchain technology offers a secure, paperless method of recording property transactions that virtually eliminates the possibility of dispute. Sweden and Russia are already in the advanced stages of implementing land registry systems on their own private blockchains.

Lamothe is advocating for blockchain solutions in other areas of governance as well. He believes blockchain technology could bring much-needed transparency and accessibility to elections, and platforms like Follow My Vote and Polys have already launched blockchain applications to disrupt this space. Whether it’s voting, financial inclusion, or charitable donations, Lamothe hopes that blockchain developers will turn their gaze to Haiti as “a good test case.”

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When Alice finally found the mad tea party in Wonderland, she couldn’t understand what anyone was talking about. The world of blockchain tech can feel equally baffling, but one can always find a candid perspective among those who are basing their approach on betting odds. “It’s the purest democracy,” says Cortes. “Wouldn’t you want to invest $500 or $1,000 in that and see how it goes?”

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