EVERY TUESDAY for most of 1979 to 1980, the Blitz wine bar in Covent Garden was the host of an influential club night. London was then a dilapidated city. The Blitz was a shabby place. What made him stand out were the Blitz Kids, Tuesday night regulars in extravagant clothes. A teenage George was working in the locker room. The gate policy was strict. Getting in, said Steve Strange, who ran the club party, you had to look like “a walking work of art.” Mick Jagger has already been refused entry.
It all seemed superficial and fleeting. The make-up, the outfits and the obvious disdain for people who didn’t walk in works of art were marks of lack of seriousness. Still, the Blitz Kids, a mix of art students and sea urchins, would continue to shape popular culture, according to “Sweet Dreams: The Story of the New Romantics,” a new book by Dylan Jones. This brings us to another meeting place for the curious, the fantasies and dropouts: bitcoin. To most people, this seems a fad at best, a con-job at worst. But he refuses to disappear. And its dollar price is up about 150% since March.
It’s hard to have a meaningful conversation about bitcoin. Showing interest is inviting contempt from skeptics and an inbox full of get-rich-quick booster proposals. But a nagging thought will not go away. What if these crypto-kids were on to something like the ridiculed Blitz Kids were? After all, in addition to notoriety, bitcoin has ingenuity and scarcity on its side.
Start with ingenuity. Even people hostile to bitcoin will admit that its technology is devilishly smart. It’s basically a way of accounting for who spent what. Instead of a central exchange to keep score and verify payments and receipts, it uses an electronic ledger which is distributed system-wide to Bitcoin users. The dispersed nature of the system means that tampering with accounts would require taking control of the majority of computers on the network. It is a major source of trust in bitcoin.
Much of its appeal to users is that no official entity – no government, bank, or tech company – is in charge. (This is also what a lot of people don’t like about it.) The system is self-regulating. It is also self-limiting. Bitcoins are “mined” when a computer solves a very time-consuming math problem. It should identify a large number encrypted in the system code. Over time, the remaining numbers become more difficult to find. Eventually, the mine will be exhausted. Bitcoin’s provisioning protocol is as restrictive as the Blitz’s gate policy. Only 21 million bitcoins will be produced.
Millennials are comfortable with all of this. The older technophobic crowd tends to be hostile. So be it. “That most people still hate bitcoin is not a bad thing,” writes Dylan Grice of Calderwood Capital, an alternative investment boutique, in a recent letter to clients. This is to say that it is difficult to make a lot of money buying an asset that everyone loves. And as with the Blitz, infamy and outrage are part of the allure. Older visitors might complain that the music played there was unremarkable or that the place was a dumping ground. It didn’t matter. The club acted as a focal point for like-minded people. It is an underestimated virtue. Thomas Schelling, Nobel Prize-winning economist and game theorist, argued that people gravitate around focal points without formally agreeing to do so. His insight extends to asset markets. Gold bars – or bitcoins – are valuable if enough people tacitly agree.
What exactly could this value be? An honest answer is: “Who knows?” Bitcoin has no intrinsic value. As with gold, there is no future dividend stream on which to build a valuation. Yet people have become comfortable with gold as an asset because it has been around for so long. Bitcoin is a newcomer, but its use is growing. So if you think it has a future, you might want to own it, says Grice. Indeed, if you like gold as a hedge against a pick-up in inflation or some other calamity, you might consider transferring some of your gold allocation to bitcoin. It has advantages over precious metal: it can be stored and transferred more easily, for example. In some places you can actually use it.
Bitcoin is a fairly small club. Next to it, the gold looks as vast as Wembley Stadium. The market value of all bitcoin is only 1 to 2% of the value of all gold above ground. Scarcity is a trait of many things that are perceived to be of value. Steve Strange, sadly deceased in 2015, understood this perfectly. “The best gesture I’ve ever done was kick Mick Jagger out the door,” he says.
This article appeared in the Finance & Economics section of the print edition under the title “Blitz-coin”