Day 2: Bitcoin, Beanie Babies, and Tulips

I was listening this morning to experts on a technology podcast discussing the current valuation and future of Bitcoin. This online currency, which operates separate from any country or bank, made the news this week when the announced valuation of a single Bitcoin surpassed the $1000 mark. The trading of Bitcoin, which takes place completely on the Internet, has heated to a fever pitch, and the analysts speculated that this could be only the beginning.

I am interested in Bitcoin (though I don’t possess any). I see it as a manifestation of the movement away from paper or even plastic currency that I experience whenever I pay for my coffee at Starbucks with my phone. Clearly I am not alone here, as demand for this limited and precious electronic commodity continues to drive up the prices. This is all despite the fact that to date virtually no retailers accept Bitcoin as legal tender, and the US Governement will not accept it for payment of taxes. Currently Bitcoin is mainly used for limited online purchases, certain hipster retail outlets, and (allegedly) for online drug deals.

What is impossible to assess right now is whether this is the beginning of a significant new international economy or the feeding frenzy of crowds. One does not have to think long back to remember the Beanie Baby craze of the mid 90s when otherwise level-headed people sunk their investment dollars into tiny stuffed animal toys. People were certain that the limited editions (particularly those that went out of production) were as good as gold, and that the trading fairs would go on forever. The loveable nesteggs skyrocketed in price until overnight their value plummeted to literally fluff.

Such bubbles can be traced well before the invention of synthetic sock puppets. In the early 1600s the population of Holland went crazy for tulip bulbs. Perceived scarcity and an overheated market brought the price of a single tulip bulb to well over the yearly income of an average citizen. Like with Beanie Babies, there was a tangible object acquired, but the object only maintained its value as long as the majority believed in the value. As the bubble burst, Dutch traders were left with piles of bulbs which they could not sell, eat, or use to ward off creditors.

On the other hand, intrisically useless things that prove useful to a group can maintain confidence indefinitely. The essence of any system of currency is the agreed trade of useless objects to represent real concepts. My dollar bill is not worth anything. I can’t collect a dollar of gold or make the paper into anything valuable. Dollars are valuable only because we all agree to the illusion (in one of Kurt Vonnegut’s final novels Galapagos, humankind is brought to apocalyptic disaster when as a group they suddenly realized they’d were trading useless paper). Of course a dollar has the “full faith and credit” of the United States, but if individuals started to turn them down, it would not be long before the value tulipped out. If people find value in trading Bitcoin, and if it eases transactions across continents and cultures, there may be a future in a non-existent currency.

Why write about this here? Besides the fact that I find this utterly fascinating (and besides the fact that I will need to write about everything to fill 24 days), I think there are lessons for all of us in tech. Obviously there is much speculative madness in new technology for education and elsewhere as companies rise and fall based on confidence as much as intrinsic value. The iPad is the best because everyone believes it is the best, and that will change not as much from the introduction of a superior device as from a mass decision that something else is better. In the end, we are all tulips in the wind.

As always, I welcome your comments.

Image: ‘Green Sally Up’ http://www.flickr.com/photos/51035555243@N01/11708787 Found on flickrcc.net

 

One thought on “Day 2: Bitcoin, Beanie Babies, and Tulips”

Comments are closed.