The recent crash of popular bitcoin exchange MtGox has given some commentators the opportunity to hint at the collapse of bitcoin itself.
In Japan, where MtGox was based, regulators have claimed they do not see bitcoin as a currency and as a result argue that their jurisdiction does not extend to MtGox or its collapse. Instead, bitcoin is treated like gold. While this is not reassuring to those who have lost their coins it does offer a fruitful analogy to help us understand what has happened. As it turns out, telling lessons can be found in the Australian and New Zealand gold rushes of the 19th Centuries.
At one level the comparison is a simple one. After the first major discovery of gold in New Zealand by a miner named Gabriel Read word soon spread and many thousands of miners made their way to Otago, hoping to make a fortune. Through the combined efforts of this large labour force small amounts of gold were ultimately consolidated through a long supply chain into valuable bullion.
However, this was only after all the profit had been extracted from the miners themselves. Those with a more entrepreneurial focus – rather than what might be generously described as a spirit of adventure – recognised that the real bonanza lay with supplying goods and services to the miners.
If we consider bitcoin and cryptocurrencies generally there is a comparison here with the service industry that has sprung up around them. Mining pools such as coinex.pw, computer chips built specifically for crypto-mining and the many coin exchanges that have emerged (including MtGox) all provide services for, and extract profits from, this new generation of digital miners.
For the original gold miners there was a constant sense that they were being exploited at every turn by those providing them with services. Chief among the exploiters was the assay office, where gold would be assessed for purity (thus enabling miners to move their wealth from gold into currency). This feeling of exploitation was reinforced by individual examples of less scrupulous practices including, at times, straight theft.
Whatever provoked the recent disappearance of MtGox, the incident has had a similar effect in raising suspicions around the entire economy of bitcoin. Except that it hasn’t for the miners. The suspicion is one generated by the uncertainty of journalists who are only aware of this one cryptocurrency. Very few amateurs – the original individual bitcoin miners, the oldtimers from 2009 – are left. As with Gabriel Read’s generation of pioneers, once the big operations moved in and pushed down the margins, the little guys moved on.
As resources become increasingly scarce, mining changes. The lone miner’s enthusiasm for short-term gain that hallmarked early rushes is no more. Now, successful mining means the long term commitment of large scale and deep mining that requires significant capital investment, whether that be in drills to physically drill in the ground or secretive computer hubs that crunch the numbers in search of digital gold.
Increasing rarity forced the early gold miners to work collectively, as wage-earners for large mining companies or into entirely different jobs. For Australia and New Zealand this shift in the labour force helped to build modern nations as miners moved into agricultural and other primary and eventually secondary industries to create a broader economic bases for both countries.
For miners of cryptocurrencies the decreasing chances of finding bitcoin has initially seen a move to “easier” currencies such as Dogecoin or ZeitCoin. But this too is a temporary solution; only possible while mining is easy and prices are volatile. In the longer term as the market matures and national governments attempt to regulate it (in the same way that securities traders are regulated) miners will be forced to consider other as yet unidentified ways to apply their massive, virtual, labour power to computational problems whose solutions produce economic value.
It is not premature to claim that the fall of MtGox is the end of the gold rush for bitcoin. But with so many other cryptocurrencies seeking the attention of miners and traders, it will still be some time before such mining or trading represent a mature and stable economic activity.