Currency Based in Nothing Has Limited Success

Bitcoins, pioneered by the Winklevosses, have huge ascent and fall
by Val Heinmets
Co-Editor Arts


Following the spectacular crash of Greece’s good friend Cyprus about a month ago, there have been two separate events signaling a mounting push-back against the developed world’s embracing austerity measures.

The first is a new technological currency called the Bitcoin, which in the last month has gained a great deal of notoriety and a large amount of followers. The second was the announcement that the data many politicians have cited in support of measures, a 2010 paper by Harvard professors Carmen Reinhart and Kenneth Rogoff entitled “Growth in a Time of Debt,” was based on flawed information. The Reinhart and Rogoff announcement is hugely important and was hard to miss this week, the Bitcoin, slightly less so. Though they aren’t directly connected, both phenomena point to a wide-spread and growing distrust of frugality.

For those unfamiliar with Reinhart and Rogoff’s work, their landmark research showed countries whose debt-to-GDP ratio is above 90% experience a dramatically slower growth rate. A 28-year-old UMass Amherst graduate student found mistakes in their excel spreadsheets, namely the exclusion of a few key countries like New Zealand, Australia, and Canada, who all disprove this theory. Reinhart and Rogoff maintain that these mistakes were unintentional and that they do not affect the overall findings of the study. Indeed, even with these countries added in, according to their data, with debt at 90% of GPD, growth will still slow to a rate of 2.2%. This number is not nearly as alarming as the 0.1% that was previously estimated.

The question of whether or not the governments of the developed world are taking on too much debt remains, although the answer would still point to yes in most cases. However, how exactly we should deal with this debt remains unclear. This faulted study sheds new light on the arguments proposed by politicians like Sen. Paul Ryan and former Secretary of the Treasury Tim Geithner to entities like the European Union’s Economic and Monetary Affairs Commission, questioning the measures that have negatively affected so many people. The recent push-back against austerity, though, has taken place in two parts, this first example on an institutional, macro level, but the second, and perhaps more interesting, on a very personal one.

Unless you’re on the cutting edge of either the internet, the news cycle, or finance, it was easy to miss the rise of the Bitcoin, a currency that seems backed only by its own existence. I first heard of it through one of the paper’s finest and most “alt” editors, and subsequently was filled in through New York Magazine’s Kevin Roose, who runs an outstanding Twitter (@kevinroose), and chronicled his journey of Bitcoin discovery through its recent highs and lows.

And what depths and heights they were! Although recently the value has somewhat leveled off (recently meaning this week), at its height on April 9, one Bitcoin was worth $230, up from $50 only one month before, the crash in Cyprus playing a pivotal role. The advantages of Bitcoin can be easily understood during a time when the Cypriot government and their central banks are literally taking people’s money as a result of austerity measures. The Bitcoin is an entirely online currency system, unregulated by any government or central bank, meaning no one can touch it. Now it may already be a little risky, but given the current global financial crisis, hey, they’ve found some people to give it a shot.

The Bitcoin is based on a system called “mining,” a process that somehow uses programs, servers, and an algorithm to find and give value to the currency. The Wall Street Journal and the New York Times both described the process as “complicated” and “sophisticated,” basically meaning that no one with an English degree has any idea how this works. Whatever the process of assigning value to the online currency, it does seem to be working for now. Many brick-and-mortar stores have started accepting the coins, perhaps most notably Pizza Hut.

Just how many users of Bitcoin are there now? It’s hard to say, although the currency has been around since 2009. Most notably, the Winklevii twins of failed Facebook-owning fame have shown a fanatic support of the currency, publicly claiming to have invested as much as $11 million in the currency just as the bubble was bursting. Classic Winklevoss. There will never be more than 21 million Bitcoins in circulation though, according to its foundation, which I’m sure is something very real and not at all arbitrary. I just can’t explain it to you using any words or information because it does not exist in plain terms.

What is important is that despite these risks and mysteries, many people are willing to invest and use this alternative currency out of distrust of their governments’ economic policies and financial institutions.

So while Bitcoins may not ever be globally used and accepted (and another study could just as easily be brought up to support the ongoing implementation of austerity measures across the U.S. and the Eurozone), the increased criticism of austerity is a trend that will not be easily turned around or avoided. On April 18, with the front page of the New York Times focusing on starving Greek children as a direct result of EU-implemented austerity measures and the head of the International Monetary Fund advising the United Kingdom to reconsider its austerity-steeped economic strategies after a dismal performance, it would seem that a mounting global effort against austerity may just be beginning.

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