How I Almost Got Rich On Bitcoin

Alright children gather around, it is story time. Today I will tell you about the time when I almost got rich off of Bitcoin. The year was 2011 and I was a fresh faced PhD student at ASU, looking for my first year project. The project we settled on was Bitcoin. At the time Bitcoin was young and its price was running in the gutters. Our paper was titled something like: Making Heads or Tails of Bitcoin. Basically we were trying to see if Bitcoin was actually a currency like its proponents claimed it was.

So in order to assess the technology I had to have some. Believe it or not but there even was a bitcoin faucet that gave you some fractional bitcoins for free back then. I got a bit from the spigot, mined some myself as part of a pool and then I purchased 3 bitcoins for $30 from the now bankrupt MtGOX.

We scraped the exchange rates from bitcoincharts.com and I used Harrigan’s tools to extract the transaction history. The paper’s main conclusion at the time was that BTC did not fulfill the functions of currency. The currency had to be (1) a medium of exchange, (2) a store of value, (3) a unit of account. Bitcoin was not suitable to be a medium of exchange because people were not using it to trade goods and services and in most cases existing payment methods were more performant. It wasn’t a unit of account as the prices posted in BTC fluctuated wildly. The only function was store of value, and that was heavily dependent on someone else being willing to buy BTC when you needed to sell it.

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We compared the functionality provided by Bitcoin to other payment methods and it lacked in some serious ways. Transactions would take 10 minutes to clear, and much like real cash, once it was gone it was gone. There was no way to recover what was lost to fraud or theft. The only unique feature was anonymity. So we argued the value of Bitcoins in trade will come from this anonymity aspect. We were not entirely wrong. Bitcoin became the currency of choice for Darknet back then. All sorts of illegal trades were conducted in it. What we did not see coming was the speculative bubble. Beyond anonymity, people also wanted to get in on the sweet sweet returns bonanza.

At the time people made a lot of fuss about this Austrian school of economics and it took me a while to get my head around that this was a shibboleth for libertarian thinking. You kept hearing how Bitcoin was going to cure all ills of filthy “fiat currency”. The competing thought was gold standard which was a couple decades outdated at the point. People compared the BTC to gold, in the sense its supply was limited. It seemed like there was a lot of wishful thinking around bitcoin being commodity based. First off, the supply limit is arbitrary. People who have strong enough portion of the computing power can just dictate new limits, or change the mining rate… Second, gold doesn’t disappear when you turn off the computers. Bits and bytes do disappear. They have no commercial value beyond what people put in them, much like paper in the fiat currency.

We submitted the paper to CACM. Nobody knew what to do with it. We were not well versed in Finance theory needed to do more than what we did. The reviewers knew even less as they were computer scientists. The first round review came with two reviewers pulling in different directions, and editor saying do both. Second round review came with a rejection that was back in 2012. So besides some interviews for Wired and ArsTechnica (I love both btw) not much came out of it.

I wrapped the project up. I had one bitcoin left in the wallet… I could keep the wallet and see if it went anywhere, or I could sell my bitcoin for a whopping %20 return and get two footlongs at Subway. Being a penniless PhD student, I choose to have two days of lunch. Now when I hear bitcoin prices, I tell myself that it is a bubble that is going to burst any minute now. Just you wait¹.

¹_{Beyond being bitter though, I honestly think government action against exchanges may drain a huge chunk of value out of crypto currencies. Because the majority of its value now is people trying to get in on the riches created by speculation. Governments have all sorts of reasons to crack in on this monetary supply, but more so with recent ransomware plague. Ransomware is possible because it is possible to turn crypto currencies into rubles, dollars or yuan. If the regulated banking market is forced out of the game by regulation, this may limit bitcoin value to just the network of people who like their anonymity and are willing to exchange their fiat currency for digital currency.}