It Is Silly Season in the Land of Cryptocurrency

The excitement about bitcoin and blockchain is sort of like the dot-com bubble—if nobody in 2000 was quite sure what the internet was for.

In October, the Colorado biotech company Bioptix changed its name to Riot Blockchain. The company’s valuation doubled within a few days.

This might strike you as an extraordinarily bizarre story. But even more bizarrely, it’s becoming ordinary. Weeks later, the British company Online PLC changed its name to Online Blockchain. The company’s shares jumped 400 percent. In December, the Long Island Iced Tea Corporation—which, as you might expect, sold iced tea—rebranded itself Long Blockchain. The company’s shares promptly rose nearly 300 percent. On Tuesday this week, the legacy photography company Kodak announced the launch of KODAKCoin, a “photo-centric cryptocurrency to empower photographers and agencies to take greater control in image rights management.” The stock rose 80 percent in a matter of hours.

It is officially silly season in the land of cryptocurrency. To borrow a reference from the show Portlandia, this is the “put a bird on it” stage of crypto, where seemingly every multinational company, small business, and fledgling entrepreneur is desperately slapping blockchain onto press releases and venture-capital pitches. Some of these companies might conjure an actual consumer business from this exercise in magical word choice. So far, most of them are doing no such thing.

Before we continue, many readers—and, perhaps, many stunned employees at the aforementioned companies—might be wondering: What the heck is a blockchain, anyway?

At the most basic level, it is a record of information stored on a network of computers. When people use a cryptocurrency like bitcoin to buy a pizza, a kilogram of illegal drugs, or a yacht, these digital transactions are approved by a network of computers around the world running bitcoin software. Each batch of these transactions—a “block”—gets a cryptographic code, a copy of which is posted to every computer in the network. These blocks are permanently linked to each other in a “chain” of publicly approved transactions that cannot be edited. Thus, blockchain.

You could say that blockchain is the ultimate “anti-trust” technology. That’s not only because it facilitates transactions between parties that don’t have to trust each other, but also because it doesn’t rely on a single source of power with total control of a market, like old-fashioned “trusts.” That means you could have a currency without a Federal Reserve (as with bitcoin) or run a software program without buying space on an Amazon server (as with Ethereum).

For the last six months, the biggest blockchain story in the world has been bitcoin, whose vertiginous price increase has captured global attention. Some analysts, myself included, have compared the bitcoin boom and the crypto frenzy to the dot-com bubble. In this analogy, bitcoin is akin to a single, fragile dot-com darling, while blockchain is akin to the internet, a potentially revolutionary technology that can survive the obliteration of any one cryptocurrency.

But while this analogy is popular, it has one critical weakness that doesn’t bode as well for crypto. When the dot-com bubble burst, starting in 2000, the internet was very much a mainstream phenomenon. About 50 percent of American households were online, and the number continued to grow even as the NASDAQ imploded. The internet was a technology with relatively obvious implications. At the time, Google was already ranking webpages in search results, Amazon was already a digital store that shipped boxes to front porches, and AOL had already figured out how to bundle news with personal communication, a decade before Facebook improved the recipe. The internet in 2000 had captured our attention; tens of millions of Americans were actually using it. Blockchain has merely captured our curiosity; tens of millions of Americans are merely reading about it.

Bitcoin might be where Pets.com was in 2000—a technological curiosity in search of an enduring business need. But blockchain is not where the internet was in 2000. Even blockchain’s biggest defenders can’t say what the technology’s most obvious consumer use-cases are going to be, because they plainly don’t exist yet. It is possible they never will.

Bitcoin is the most famous blockchain product, but it has little potential to scale. Visa can handle 60,000 transactions per second. Bitcoin can barely handle 10. Another popular use-case, called “smart contracts,” can automatically execute agreements like stock investments without relying on the inefficiencies of brokers, lawyers, and paper contracts—slow-witted humans. But one such smart investment vehicle called the Distributed Autonomous Organization was felled by a software bug that accidentally made a damaging investment worth tens of millions of dollars. The members had to reconvene and vote to amend the contract to take their money back. It turns out humans can be useful, slow wits notwithstanding. Several people have emailed or approached me in the last few months about blockchain’s application for local reporting. I have taken great pains to understand the promise of this idea. But the term “blockchain journalism” still reminds me of a romantic couple where you are technically fond of both people but have no idea what they’re doing together. Is it altogether possible that a distributed, anonymous ledger is simply an elegant mathematical solution in permanent search of a human problem.

To be fair to blockchain and its advocates, some inventions are coy about their utility. Four decades passed between the first prototype of the internet at the U.S. government’s Advanced Projects Research Agency and the first web browser. Seven years elapsed between the invention of the transistor and its first major commercial application in the transistor radio. Perhaps in a decade, blockchain will find its purpose.

One of the crypto start-ups that makes the most sense to me is Filecoin. Like an Airbnb for data storage, the company proposes to use latent storage on computers around the world to replace or supplement data servers, which are more vulnerable to hacking and other disruptions. The company has created its own cryptocurrency, called filecoin, to pay users to join the community. (Users could theoretically hold these tokens as an investment, exchange them within the network, or sell them for dollars.) By decentralizing data storage in this way, the company says it can improve the resilience of the internet and make it harder for governments to shut down access to certain sites and apps. In September the company raised more than $200 million in an initial coin offering, or ICO, the largest in history.

Will Filecoin revolutionize data storage? Who knows. The investor appetite in all things blockchain will encourage an orgy of trial and error. It is inevitable that many of these ideas will shortly prove themselves to be pointless. But that’s the nature of this phase of experimentation. There will be more blockchain startups for payments, banking, escrow contracts, legal documents, intellectual property, investment strategies, voting systems, and more. The crypto industry may get smarter. But on the way there, things will probably get dumber.