In The Future, everything will be paid for with Bitcoin [keychains]. / Photo via.
By Cory Pein
Originally published in The Baffler.
The story was everywhere last week: MIT undergraduates will each receive $100 in Bitcoin when they arrive on campus next fall. The gift comes thanks to an affluent donor and two precocious student entrepreneurs — one a sophomore computer science major, the other a first-year Sloan MBA student and president of the MIT Bitcoin Club.
I exaggerate slightly when I say the story was everywhere. As far as I know,Foreign Affairs hasn’t yet picked it up. But the Boston Globe, Boston Magazine,USA Today, Time, Vice, The Wire, Slate, the Guardian, the Independent, theTelegraph, the Christian Science Monitor, the Jewish Daily Forward, RT, public radio’s Marketplace, Reuters, and Bloomberg all did run with it, along with basically every tech blog (and there are way too many tech blogs).
The coverage was predictably gee-whiz. The Bitcoin Club’s press release ticked a lot of boxes for the overworked content providers, slouched like wan ghouls over the assembly lines at modern factory news organizations, desperately scouring Twitter for material that might appease their insecure, trend-obsessed editors. Boxes like:
• Young computer prodigy: check.
• Wise and wealthy mentor: check.
• Elite university: check.
• Faddish app-type thing: check.
• Get-rich-quick potential: check.
• Dawn of a brave new world: check.
“Giving students access to cryptocurrencies is analogous to providing them with internet access at the dawn of the internet era,” said Jeremy Rubin, the MIT Bitcoin Club sophomore, according to his own press release.
Add it all up and you get basically the plot of Aaron Sorkin’s Facebook movie. You can almost hear the editors saying, “Yeah, Bitcoin, I’ve heard of that. Write it up, but don’t spend too much time on it!”
There were, you might’ve guessed, some pieces missing from their analyses.
Let us quickly dispense the obvious tone-deafness of distributing free money—even if it is Monopoly money—to students at an elite university where engineering grads earn a median salary of $72,000 straight out of school.
It was more troubling that no one bothered to explain what $100 in Bitcoin actually means. Most publications call Bitcoin a “virtual currency.” A better description is “gambling chits for geeks.” Those foolish or greedy enough to have succumbed to Bitcoin fever have found that its price is comically volatile and that converting it into something usable entails doing business with clownish gangsters—more on that later. Anyway, as far as the IRS is concerned, Bitcoin is not currency, but taxable property, and therefore a liability.
By repeating the lie that Bitcoin is currency, and one that will soon be in the wallets of every nerd-chic MIT undergrad, this seemingly feel-good story serves a hidden agenda: to feed the fever.
MIT’s student newspaper, doing the journalistic yeoman’s work, reported that the Bitcoin club “secured more than $500,000 in commitments from about 25 donors. Half of the money will come from Alexander Morcos ’97, who co-founded Hudson River Trading, a high-frequency trading firm based in New York.”
This is where the cut-and-paste coverage disappoints most. Let’s see, high-frequency trading . . . rings a bell, doesn’t it? Wasn’t there something in the news recently? Oh, right—it was the national media frenzy that accompanied the publication of a new book by America’s most famous financial journalist, Michael Lewis. The book, Flash Boys, reveals how high-frequency traders “rigged” the stock market with such ruthless efficiency that Goldman Sachs cried out for mercy.
Alex Morcos, the principal donor to the MIT Bitcoin experiment, is a co-founder of Hudson River Trading, one of the corporate villains cited in Flash Boys. Not one journalist who covered the MIT Bitcoin story last week connected those dots. None stopped to ask, “Why are the people who rigged the stock market so interested in pushing Bitcoin?”
Dig for just a few minutes, and another storyline emerges. This is a classic story about some Wall Street scoundrels searching for their next epic pump-and-dump scam.
Hudson River Trading is one of thirty-nine named defendants in a federal class action lawsuit filed on April 18 by the city of Providence, Rhode Island against high-frequency trading firms. The lawsuit alleges that Morcos’s company and others violated securities law by defrauding and manipulating U.S. securities markets, “diverting billions of dollars annually from buyers and sellers of securities to themselves” [PDF]. The alleged victims include taxpayers, public investment funds and individual investors. This fresh court case was not nearly so widely covered as the MIT Bitcoin press release, although the details of the scam are laid out clearly in the sixty-page complaint (which even cribs some bar charts from Flash Boys).
Since 2010, Morcos and employees have appeared multiple times before federal financial regulators to defend or minimize the very dubious practices, such as “spoofing” and “front-running,” that are at issue in the class action lawsuit. Hudson River Trading has also spent hundreds of thousands of dollars onlobbying and campaign contributions.
More recently, Hudson River Trading helped bankroll the Modern Markets Initiative, a slick lobbying and propaganda campaign currently working to ensure that the reputational damage done by Lewis’s book does not translate into actual regulation of their activities.
If Wall Street is rigged—and it is, of course—Morcos has been on the winning side. In 2008, the year millions of Americans (including myself) were laid off as a direct result of the financial crisis, which was itself a direct result of Wall Street manipulation, Morcos contracted for the construction on his $6 million “exotic, one-of-a-kind home” on the beach in Southampton, New York, according to a lawsuit filed in 2011 by the builder over withheld payment [PDF].
Morcos, whose LinkedIn page lists him as a member of a “Bitcoin Entrepreneurs & Coders” group, has an undeniable interest in rescuing the reputation of Bitcoin from a year’s worth of bad headlines.
Morcos is an angel investor in Kraken, an “exchange for arbitrary assets with support for Bitcoin, Litecoin, Namecoin, Ripple and Ven.” Naming a financial services company after a murderous sea monster might seem strange, but considering that the most well-known Bitcoin exchange, Mt. Gox, was allegedly named after the fantasy card game Magic: The Gathering, Kraken is an improvement. Or perhaps it is a sly joke. (What’s bigger than a vampire squid? Kraken!)
Morcos is certainly not the only mainstream financier engaged in puffing up Bitcoin. Also last week, as the Bitcoin story spread, Bloomberg announced that its shockingly overpriced computer terminals would carry price data on Bitcoin. The data would be provided by the company Morcos invested in, Kraken. The Wall Street Journal took that to be another “key stamp of approval” for Bitcoin. Indeed, it is an indication that Michael Bloomberg himself sees profit potential in, if not Bitcoin itself, at least the idea that other people believe Bitcoin has value.
Aside from Morcos’s projects, a number of Silicon Valley startups are trying to market Bitcoin to the mainstream. The most prominent of these is CoinBase, which this month moved into posh digs in downtown San Francisco. Like Kraken, CoinBase is in the business of converting Bitcoin, a pretend currency, into real currency. Over the past year the most prominent Bitcoin exchange, Mt. Gox, collapsed ignominiously after “losing” some $500 million in deposits under highly suspicious circumstances.
So, to distance themselves from such fiascos, the new, Bloomberg-approved Bitcoin exchanges boast about their relationships with established financial institutions and regulators. CoinBase is backed by the prestigious Silicon Valley “incubator” Y Combinator, Andreessen Horowitz and Union Square Ventures, and the startup claimed last year to be doing $1 million per month in sales with more than 650,000 users. Its slogan is “Bitcoin, safe and easy.” (Not everyone agrees; some irate customers have pilloried CoinBase for inexplicably freezing transactions worth tens of thousands of dollars.) A Union Square partnerexplained the firm’s investment logic thusly: “If Bitcoin really becomes the global currency that every country and every business accepts, and Coinbase becomes the JP Morgan Chase of Bitcoin, that could be worth a lot of money.”
Indeed, if Bitcoin works, these early investors win. And if Bitcoin tanks, which it probably will, then those investors are still first in line to skim gobs of money from desperate suckers with devastated credit thanks to years of legalized usury. So that scenario is also a win for someone.
As for Alexander Morcos and his fellow “Bitcoin Entrepreneurs,” it is impossible to know how much Bitcoin they hold, personally. But it doesn’t matter. The safe bet is Wall Streeters are less interested in the long-term potential of cryptocurrencies than in the short-term profit potential of the Bitcoin bubble.
Some free advice to MIT students: Beware Wall Street traders bearing gifts.
Corey Pein is a writer and reporter in Brighton, England. He offers free samples atcoreypein.net.