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To shut down bitcoin completely you would have to monitor and control everybody's computer individually. Unlike liberty dollars etc, there is no central point of failure by design. Hell, you could even send bitcoins using smoke signals or by letter, in principle. Of course, they could make life very difficult for businesses wanting to accept bitcoin.
Mind you, if the US authorities managed to ban bitcoin it wouldn't really damage it much... it would still function as a medium of exchange for the rest of the world.
I could see bitcoin being difficult to shut down for person-to-person transactions for relatively small amounts of money much like it's difficult to prevent person-to-person transactions using cash. However, it would be a simple matter to target larger businesses that accepted bitcoins.
I'm skeptical of the bitcoin and news stories such as the following don't increase my confidence in it as a real alternative to the various sovereign currencies or gold bullion.
Originally posted by Ars Technica
Major glitch in Bitcoin network sparks sell-off; price temporarily falls 23%
It hit a low of $37 as developers scrambled to fix the problem.
Bitcoincharts.com A technical glitch in the core Bitcoin software forced developers to call for a temporary halt to Bitcoin transactions, sparking a sharp sell-off. The currency's value briefly fell 23 percent to $37 before regaining much of its value later in the evening.
The core of the Bitcoin network is a shared transaction register known as the blockchain. Approximately every 10 minutes, a new block is created containing a record of all Bitcoin transactions that occurred since the previous block. Nodes in the network, known as miners, race to "discover" this next block by solving a cryptographic puzzle. The winner of this race announces the new block to the other nodes. The other nodes verify that it complies with all the rules of the Bitcoin protocol and then accepts it as the next official entry in the block chain, starting the race anew.
It's essential for all miners to enforce exactly the same rules about what counts as a valid block. If a client announces a block that half the network accepts and the other half rejects, the result could be a fork in the network. Different nodes could disagree about which transactions have occurred, potentially producing chaos.
That's what happened on Monday evening. A block was produced that the latest version of the Bitcoin software, version 0.8, recognized as valid but that nodes still running version 0.7 or earlier rejected. Rollback
"After some emergency discussion on #bitcoin-dev, it seems best to try to get the majority mining power back on the 'old' chain, that is, the one which 0.7 accepts," wrote Bitcoin developer Pieter Wuille in an e-mail. "That is the only chain every client out there will accept. If you're a miner, please revert to 0.7 until we at least understand exactly what causes this."
He asked merchants to stop accepting transactions until the problems had been sorted out. Mt. Gox, the leading Bitcoin exchange, announced that it was suspending Bitcoin transactions shortly afterwards.
The fix is technically straightforward, and (with the exception of coins "mined" in the last couple of hours) users' Bitcoins are not in any danger of being lost. Still, the incident shook the confidence of the markets. From a high of more than $48 earlier Monday, the value of Bitcoins plummeted to less than $37 around 10 PM Central time on Monday evening, a 23 percent decline. The price has since recovered; one Bitcoin is now worth about $46.
This latest glitch is different from the problem that caused Bitcoin prices to briefly fall to zero on Mt. Gox in June of 2011. In that case, the sell-off was caused by the compromise of the exchange itself. The integrity of the underlying Bitcoin network was not affected, but the incident still contributed to a decline in public confidence in the currency. From a high of $32 earlier in the month, Bitcoins would decline to a value of $2 before the end of 2011.
This time, the glitch occurred in the core Bitcoin software itself. Accordingly, the incident will be an important test of the cryptocurrency's decentralized governance structure. No single person or institution can order Bitcoin miners to abandon the 0.8 branch of the blockchain in favor of the 0.7 branch. Rather, the "winning" branch is effectively chosen by a majority vote of the network's computing power. Bitcoin's technical developers must convince a majority of the network's miners to voluntarily downgrade their software. Fortunately, Bitcoin still enjoys a relatively tight-knit community, and its leaders say they are confident they can get the cooperation they need.
Ok, I've been asked enough times, here it is -- my view and analysis of "Bitcoin", which I have taken to calling "Bitcon." That probably deserves an explanation....
Let's first define what an ideal currency would be. Currency serves two purposes; it allows me to express a preference for one good or service over another, and it allows me to express time preference (that is, when I acquire or consume a good or service.)
All currencies must satisfy at least one of these purposes, and an ideal currency must satisfy both.
The good and service preference is what allows you to, possessing a dozen eggs from a chicken, to obtain a gallon of gasoline without finding someone who has gasoline and wants eggs. That is, it is the ability to use the currency as a fungible intermediary between two goods and services, one of which you possess and the other of which you desire. Without this function in an economy you have only barter and poor specialization, with it you have excellent specialization and a much-more-diverse economic picture. Time preference is the ability to choose to perform a service or sell a good now but obtain and consume the other part of the transaction for yourself later. With a perfect currency time preference has no finger on the scale; that is, the currency neither appreciates or depreciates over time against a reasonably-constant basket of goods and services. Since technological advancement tends to make it easier to produce "things" in real terms, a perfect currency reflects this and makes time preferenceinherently valuable. This in turn forces the producers of goods and services to innovate in order to attract your economic surplus from under the mattress and into their cash registers, since not spending your economic surplus is in fact to your advantage. Today's fiat currencies intentionally violate the natural time preference of increasing productivity, but even yesterday's metallic standards did a poor job of representing it. The problem here is the State, which always seeks (like most people) to get something for nothing and what it winds up doing instead (since getting something for nothing is impossible) is effectively stealing.
Unfortunately Bitcoin, as I will explain in detail, also does a*****-poor job of satisfying either of these requirements.
But before I get to that, I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State. This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.
All currencies require some means of validation. That is, when you and I wish to transact using a currency I have to be able to know that you're not presenting a counterfeit token to me. Gold became popular because it was fairly difficult to "create" (you had to find it and dig it out of the ground) and it was reasonably-easy to validate. The mass and volume were easily verified and other materials of similar mass and volume had wildly-disparate physical properties and could be easily distinguished. (The recent claims of "salted" bars with tungsten notwithstanding!) With only a scale and a means of measuring displacement of a known thing (e.g. water) I could be reasonably-certain that if you presented to me something claiming to be one ounce of gold that it in fact was one ounce of gold. It therefore was "self-validating."
Likewise, dollar bills are reasonably self-validating. I can observe one and if it appears to be a dollar bill, feels correct and has the security features I can be reasonably certain that it is not counterfeit. The Secret Service can determine with a fairly high degree of certainty (and very quickly too) whether a particular bill is real as they can verify the serial number was actually issued and that a bunch of the same serial numbers are not being seen in circulation, but for ordinary commerce this is not necessary; the bill itself has enough unique features so for ordinary purposes it is self-validating.
Bitcoin and other digital currencies are different -- they're just a string of bits. To validate a coin, therefore, I must know that the one you are presenting to me is unique, that it wasn't just made up by you at random but in fact is a valid coin (you were either transferred it and the chain is intact or you personally "mined" it, a computationally-expensive thing to do), and has not been spent by you somewhere else first.
In order to do this the system that implements the currency must maintain and expose a full and complete record of each and every transfer from the origin of that particular coin forward!
This is the only way I can know that nobody else was presented the same token before I was, and that the last transfer made of that token was to you. I must know with certainty that both of these conditions are true, and then to be able to spend that coin I must make the fact that I hold it and you transferred it to me known to everyone as well.
Now consider the typical clandestine transaction -- Joe wishes to buy a bag of pot, which happens to be illegal to transact. He has Bitcoins to buy the pot with. He finds a dealer willing to sell the pot despite it being illegal to do so, and transfers the coins to the dealer. The dealer must verify the block chain of the coins to insure that he is not being given coins that were already spent on gasoline or that Joe didn't counterfeit them, and then he transfers the pot to Joe. There is now an indelible and permanent record of the transfer of funds and that record will never go away.
This creates several problems for both Joe and the dealer. The dealer can (and might) take steps such as using "throw-away" wallets to try to unlink the transfer from his person, but that's dangerous. In all jurisdictions "structuring" transactions to evade money laundering or reporting constraints is a separate and unique crime and usually is a felony. Therefore, the very act of trying to split up transactions or use of "throw-away" wallets in and of itself is likely to be ruled a crime, leaving any party doing that exposed to separate and distinct criminal charges (along with whatever else they can bust you for.)
Second, due to the indelible nature of the records you're exposed for much longer that with traditional currencies to the risk of a bust and in many cases you might be exposed for the rest of your life. In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States, along with many other jurisdictions. Since the records never go away your exposure, once you engage in a transaction that leads to liability, is permanent.
Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue. Let's say you "buy" Bitcoins (whether for cash or in exchange for a good or service you provide) at a time when they have a "value" of $5 each against the US dollar. You spend them when they have a "value" of $20 each. You have a capital gain of $15. At the time of the sale you have a tax liability too, and I'm willing to bet you didn't keep track of it or report it. That liability never goes away as it was wilfully evaded and yet the ability to track the transaction never goes away either! Worse, most jurisdictions only permit the taking of a capital loss against other gains, and not against ordinary income taxes. This really sucks because it's a "heads you pay tax, tails you get screwed" situation. This is the inherent problem that gold and other commodities have as "inflation hedges"; the government always denominates its taxes in nominal dollars, not inflation-adjusted ones. The only currency against which there is no FX tax exposure is the one the government you live under uses and denominates its taxes in. That is why the government's issued currency will always be the preferred medium of exchange irrespective of all other competing currencies.
Incidentally, all of this exposure which you take with Bitcoin is very unlike transacting a bag of pot for a $100 bill -- or a gold coin. Unless you're caught pretty much "in the act" once the pot is smoked and the dealer spends the $100 the odds of an ex-post-facto investigation being able to disclose what happened and tie you to the event fades to near-zero. This never happens with a Bitcoin transaction -- ever.
If that dealer is caught some time later, but still within the statute of limitations for the original offense, you could get tagged. And if the statute of limitations has expired you're still not in the clear if you had a capital gain on the transaction.
There isn't any way to avoid these facts -- they're structural in all digital currencies. And they don't just apply to buying or selling drugs -- they apply to any act that is intended to evade a government's currency or transaction controls. The very thing that makes Bitcoin work, the irrefutable knowledge that a coin is "good" predicated on digital cryptography, is the noose that will go around your neck at the most-inappropriate time. Those who are using Bitcoin as a means to try to foil currency controls or state prohibitions on certain transactions are asking for a criminal indictment not only for the original evasion act itself but also the possibility of a money-laundering indictment on top of it, and the proof necessary to hang you in a court of law is inherently present in the design of the currency system!
Now let's talk about the other problems generally with all such currency systems in terms of an ideal currency and how Bitcoin stacks up.
First, the ability to use Bitcoin to express good and service preference.
Here the fundamental problem of wide acceptance comes into view. This is the problem that the proponents of the system are most-able to address through various promotional activities. Unfortunately it also leads to deception -- either by omission or commission -- of the flaw just discussed. To the extent that the popularity of the currency is driven by a desire to "escape" state control promotion of that currency on those grounds when in fact you are more likely to get caught (and irrefutably so!) than using conventional banknotes is an active fraud perpetrated upon those who are insufficiently aware of how a cryptocurrency works.
Cryptocurrencies have a secondary problem in that because they are not self-validating there is a time delay between your proposed transaction using a given token and when you can know that the token is valid. Bitcoin typically takes a few minutes (about 10) to gain reasonable certainty that a given token is good, but quite a bit longer (an hour or so) to know with reasonable certainty that it is good. That is, it is computationally reasonable to believe after 10 minutes or so that the chain integrity you are relying on is good. It approaches computational impracticality after about an hour that the chain is invalid.
This is not a problem where ordering of a good or service and fulfillment is separated by a reasonable amount of time, but for "point of transaction" situations it is a very serious problem. If you wish to fill up your tank with gasoline, for example, few people are going to be willing to wait for 10 minutes, say much less an hour, before being permitted to pump the gas -- or drive off with it. This makes such a currency severely handicapped for general transaction use in an economy, and that in turn damages goods and service preference -- the ability to use it to exchange one good or service for another. What's worse is that as the volume of transactions and the widespread acceptance rises so does the value of someone tampering with the block chain and as such the amount of time you must wait to be reasonably secure against that risk goes up rather than down.
Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns. Yes, obligation -- not privilege.
Bitcoins are basically cryptographic "solutions." The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin. As each coin is "mined" the next solution becomes more difficult. The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation. Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.
That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later! That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy. If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!
The other problem that a cryptocurrency has is that it possesses entropy.
Entropy is simply the tendency toward disorder (that is, loss of value.) A car, left out in the open, exhibits this as it rusts away. Gold has very low entropy, in that it is almost-impossible to actually destroy it. It does not oxidize or react with most other elements and as such virtually all of the gold ever dug out of the ground still exists as actual gold.
Fiat currencies, of course, have entropy in both directions because they can be emitted and withdrawn at will. We'll get to that in a minute, and it's quite important to understand.
Bitcoin exhibits irreversible entropy. A coin that is "lost", that is, which the current possessor loses control over either by physically losing their wallet or the key to it, can never be recovered. That cryptographic sequence is effectively and permanently abandoned since there is no way for the entity who currently has possession of it to pass it on to someone else. This is often touted as a feature in that it inevitably is deflationary, but whether that's good or bad remains to be seen. It certainly is something that those who tout the currency think is good for the value of what they hold, but the irreversible loss of value can also easily lead people to abandon the use of the currency in which case its utility value to express goods and service preference is damaged, quite-possibly to the point of revulsion.
This is not true, incidentally, for something like a gold coin. The coin can be lost or stolen but unless it's lost over the side of a boat at irretrievable depth it can be recovered and the person who recovers it can spend it. What constitutes "irretrievable depth" has a great deal to do with exactly how many coins might be there too -- what's impractical for one coin is most-certainly not when the potential haul reaches into the thousands of pounds!
I mentioned above about fiat currencies being able to be issued and withdrawn. There is often much hay made about the principle of seigniorage, which is the term for the "from thin air" creation of value that a state actor obtains in creating tokens of money. Seigniorage is simply the difference in represented value between the cost of emitting the token (in the case of paper money, the paper, security features and ink) and the "value" represented in the market. There is much outrage directed at the premise of fiat currency in this regard but nearly all of it is misplaced because people do not understand that in a just and proper currency system the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.
That is, in order for time preference to be neutrally expressed, less the natural deflationary tendency from productivity improvement, the government entity issuing currency gets the benefit of seigniorage when the economy is expanding. But -- during times of economic contraction they also get the duty to withdraw currency (or credit) so as to maintain the same balance, as otherwise the consequence is inflation -- that is, a generalized rise in the price level and the destruction of the common person's purchasing power.
That this is honored in the breach rather than the observance does not change how these functions are supposed to work, any more than the fact that we have bank robbers means we shouldn't have banks. This, fundamentally, is why currency schemes like Bitcoin will never replace a properly functioning national currency and are always at risk of becoming worthless without warning should such a currency system arise, even ignoring the potential for legal (or extra-legal) attack.
Simply put there is no obligation to go along with the privilege that the originators of a crypto-currency scheme have left for themselves -- the ability to profit without effort by the future efforts of others who engage in the mining of coins.
Those who argue that state actors creating currencies get the same privilege are correct, but those state actors also have the countervailing duty to withdraw that currency during economic contractions associated with their privilege, whether they properly discharge that duty or not.
For these reasons I do not now and never will support Bitcoin or its offshoots, nor will I accept and transact in it in commerce. I prefer instead to effort toward political recognition of the duties that come with the privilege that is bestowed on a sovereign currency issuer in the hope of solving the underlying problem rather than sniveling in the corner trying to evade it.
The latter is, in my opinion, unworthy of my involvement.
This couldn't possibly be a bubble. After all Greenspan told us you can't see a bubble until after it has burst. So this couldn't possibly be a bubble...
[But just in case it is a bubble, have any of you whizkids out there figured out a way to short this mother?]
This couldn't possibly be a bubble. After all Greenspan told us you can't see a bubble until after it has burst. So this couldn't possibly be a bubble...
[But just in case it is a bubble, have any of you whizkids out there figured out a way to short this mother?]
This couldn't possibly be a bubble. After all Greenspan told us you can't see a bubble until after it has burst. So this couldn't possibly be a bubble...
[But just in case it is a bubble, have any of you whizkids out there figured out a way to short this mother?]
This couldn't possibly be a bubble. After all Greenspan told us you can't see a bubble until after it has burst. So this couldn't possibly be a bubble...
[But just in case it is a bubble, have any of you whizkids out there figured out a way to short this mother?]
Ok, now on a more serious note... Dear iTulipers, sadly (for me), I suffer from this chronic internet disease, and thus I felt an obligation to stay up till 3AM to my detriment but to your benefit, and provide an extensive retort to this otherwise well researched article that raja kindly posted regarding bitcoin. I retort, not because it is a badly researched article, but actually because it is one of the better researched ones I’ve seen in an-internet-while (a few days), but which still contains numerous flawed conclusions that I can’t help but to question or correct. I find some of the conclusions flawed only because the author in some cases did not research bitcoin far enough – though he surely went much further than most, and deserves recognition for this; but in other cases looked at bitcoin as if it were a currency that should abide by US government law and specifically fiat regulatory rules, when many of its userbase intends to use it to avert fiat all together and consider it designed as a global internet currency without central control and specifically, government regulation - though not sure they will fully succeed in the latter part. Without further ado…
Currency serves two purposes; it allows me to express a preference for one good or service over another, and it allows me to express time preference (that is, when I acquire or consume a good or service.) All currencies must satisfy at least one of these purposes, and an ideal currency must satisfy both.
I don’t see how bitcoin prevents or limits preference of one good over another. Perhaps the author didn’t go to a bitcoin shopping website and see that each good or service had a unique price, not unlike how things are priced in fiat. In fact, most places selling goods for Bitcoins first price things in their local currency, then covert it and place the price sticker in Bitcoins – as much as they may not like to admit this.
Time preference is the ability to choose to perform a service or sell a good now but obtain and consume the other part of the transaction for yourself later. With a perfect currency time preference has no finger on the scale; that is, the currency neither appreciates or depreciates over time against a reasonably-constant basket of goods and services. Since technological advancement tends to make it easier to produce "things" in real terms, a perfect currency reflects this and makes time preference inherently valuable. This in turn forces the producers of goods and services to innovate in order to attract your economic surplus from under the mattress and into their cash registers, since not spending your economic surplus is in fact to your advantage.
But this is exactly what bitcoin does, except in a much much shorter time scale recently. I won’t argue this makes for a great currency as the value stability is seriously lacking, but it sure is awesome for holders of Bitcoins, which only propogates the desire for the currency even more. In other words, this makes the currency even more popular, despite its unknowable conclusion at this point.
Unfortunately Bitcoin, as I will explain in detail, also does a*****-poor job of satisfying either of these [good preference and time preference] requirements.
Either the author wasn’t clear enough, either I didn’t understand, or his arguments do not align to his conclusion, in fact they disprove his conclusion as I have articulated.
But before I get to that, I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.
But that’s the whole point!! Well, at least for a large number of Bitcoiners. As such, it is in fact fulfilling its own unique requirement as a currency lacking in ALL fiat currencies.
This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.
This remains to be seen. I don’t doubt at some point somebody, possibly even many people may end up in jail as an example, but so long as it is profitable or beneficial, or more important, aligns to the core philosophical standpoint of its userbase, then it’s not a sufficient deterent.
All currencies require some means of validation. That is, when you and I wish to transact using a currency I have to be able to know that you're not presenting a counterfeit token to me. Gold became popular because it was fairly difficult to "create" (you had to find it and dig it out of the ground) and it was reasonably-easy to validate. The mass and volume were easily verified and other materials of similar mass and volume had wildly-disparate physical properties and could be easily distinguished. (The recent claims of "salted" bars with tungsten notwithstanding!) With only a scale and a means of measuring displacement of a known thing (e.g. water) I could be reasonably-certain that if you presented to me something claiming to be one ounce of gold that it in fact was one ounce of gold. It therefore was "self-validating."
Ah but it is not at all *easy* to validate, not for the common man who lacks the X-ray machinery or whatever fancy tools required to ensure it wasn’t salted. Whereas Bitcoin is *automatically* validated almost for free (fractions of a penny), and not even at the cost of the processing cycles of your computer, but rather of those of the bitcoin ‘miners’. Exactly zero knowledge is required to validate a bitcoin, other than having the buy/sell software already installed on your PC. A better argument worthy of a few paragraphs would be that bitcoin is too slow to validate for many real world (not online) businesses, as to be 99% sure the transaction does not consist of fraudulent Bitcoins, at least 6 miner validation ‘confirmations’ must be acquired – a process that can take upwards of an hour on average. For small amounts of Bitcoins, aprox 10-20 mins with 1 or 2 confirmations may be sufficient. Imagine standing in line at starbux where every person paying in Bitcoins stands there at the cash register for 10-20 mins! Or Imagine the black Friday sales at BestBuy where $2,000 TVs are being sold and 6 confirmations are required. But I digress…
Likewise, dollar bills are reasonably self-validating. I can observe one and if it appears to be a dollar bill, feels correct and has the security features I can be reasonably certain that it is not counterfeit.
This is mostly wishful thinking. Clearly the author never heard of the SuperDollar – which is a counterfeit so perfect, it is better than the US dollars created by the US mint!
The name derives from the fact that the quality of the notes exceeds that of the originals.[6] Some have estimated that 1 in 10,000 bills was a counterfeit of the quality ascribed to supernotes (!!!)
This problem is pretty much impossible with Bitcoin. Not only can you not counterfeit them with todays computer technology, but it is impossible to create even better ones. You can’t create a better 0 or 1, they either exist or don’t, there is no quality to them.
Bitcoin and other digital currencies are different -- they're just a string of bits. To validate a coin, therefore, I must know that the one you are presenting to me is unique, that it wasn't just made up by you at random but in fact is a valid coin (you were either transferred it and the chain is intact or you personally "mined" it, a computationally-expensive thing to do), and has not been spent by you somewhere else first. In order to do this the system that implements the currency must maintain and expose a full and complete record of each and every transfer from the origin of that particular coin forward! This is the only way I can know that nobody else was presented the same token before I was, and that the last transfer made of that token was to you. I must know with certainty that both of these conditions are true, and then to be able to spend that coin I must make the fact that I hold it and you transferred it to me known to everyone as well.
Sounds really complicated huh? But it’s all automated and happens in less than 10 minutes per confirmation. Also unlike fiat currencies, Bitcoin is an amazing scientific testbed of how the world actually uses currency, because a full ledger exists since its inception and everyone who wants to can analyze it . Try doing that with a US dollar or trusting Central Banks are properly reporting their data. Currency is all about confidence and trust, in this particular category, Bitcoin scores about an 8/10 only because it doesn’t actually disclose the identity of the individual who spent the money and on what, but that aside, we know lots of other useful info that would be impossible to know with cash transactions, or credit cards whose data is not publicly available for academics to study.
Now consider the typical clandestine transaction -- Joe wishes to buy a bag of pot, which happens to be illegal to transact. He has Bitcoins to buy the pot with. He finds a dealer willing to sell the pot despite it being illegal to do so, and transfers the coins to the dealer. The dealer must verify the block chain of the coins to insure that he is not being given coins that were already spent on gasoline or that Joe didn't counterfeit them, and then he transfers the pot to Joe. There is now an indelible and permanent record of the transfer of funds and that record will never go away.
Well, actually, the Bitcoin block-chain does not disclose identities or IP addresses or other personally identifiable information. At best, some alternative bitcoin nodes can geographically estimate the destination of *some* transactions based on GeoIP technology (IP addresses are assigned to specific ISPs and their geographical location is accurately pinpointed – but their customer’s whereabouts is not – typically you can narrow down a customer to a city or town), along with a time-stamp and size of the transaction in Bitcoins. One might imagine – Ah Hah! There goes your anonymity, but none was really claimed by the main authors. It’s more like obfuscation through complexity, or as we say in IT: Security through obscurity – until somebody takes the time to figure it all out and make it available: See the geographical map of this particular transaction, along with all the other details extracted from the live blockchain. But before we claim bitcoin anonymity to be doomed, firstly these alternative clients are the exception, rather than the norm in collecting transaction geographical info. Secondly, this info is not precise enough, and thirdly it can be very easily fooled dramatically by using of tools like Tor and/or I2P which can make my transaction occurring in Sydney, Australia, show up on these maps as from Moscow.
This creates several problems for both Joe and the dealer. The dealer can (and might) take steps such as using "throw-away" wallets to try to unlink the transfer from his person, but that's dangerous. In all jurisdictions "structuring" transactions to evade money laundering or reporting constraints is a separate and unique crime and usually is a felony. Therefore, the very act of trying to split up transactions or use of "throw-away" wallets in and of itself is likely to be ruled a crime, leaving any party doing that exposed to separate and distinct criminal charges (along with whatever else they can bust you for.)
The author is judging bitcoin as if the rule of law is enforceable upon its users – it is not, for those that want to masquerade themselves through the proper anonymity add-on tools. Once they are properly anonimized, traceability is nearly impossible! How do you think most of those hacking groups LulSec and Anonymous, can carry on their attacks on major international websites and governments without getting caught? Some members have gotten caught yes, but mostly because they slipped up on their usage of anonimizing tools or processes, and once one is caught, often they know whom other members are in real life, etc. With Bitcoin the latter part is less likely as with most online retail service transactions, I will not know employees of X company in another city or country.
Also, FINCEN’s recent virtual currency Guidance, to my understanding, did not suggest that individuals *spending* Bitcoins were subject to AMAL rules directly. Further, on a global scale the US is one out of 200+ countries, its laws are not necessarily enforceable elsewhere. Bitcoin is not ultimately regulated by the USA.
Second, due to the indelible nature of the records you're exposed for much longer that with traditional currencies to the risk of a bust and in many cases you might be exposed for the rest of your life. In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States, along with many other jurisdictions. Since the records never go away your exposure, once you engage in a transaction that leads to liability, is permanent.
Not sure how this could be true. Once you have a police record for stealing or committing whatever fraud in fiat-land, it’s in the police records for life too. How’s that any different than bitcoin? I suppose perhaps the author is comparing fraudulent and mostly anonymous fiat cash transactions to bitcoin transactions that have a permanent record. In that sense, it’s true, bitcoin could be much less anonymous for the majority of people… but far more anonymous than cash or any other form of transaction the second Tor/I2P is used. Any criminal smart enough to be using Bitcoins, is probably smart enough to make himself untraceable, though there will surely be exceptions.
Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue.
This is a contradicting statement. If it is not state-linked, it thus implies it is not state issued, and thus cannot be considered a currency, thus what FX tax issue can there possibly exist?
Let's say you "buy" Bitcoins (whether for cash or in exchange for a good or service you provide) at a time when they have a "value" of $5 each against the US dollar. You spend them when they have a "value" of $20 each. You have a capital gain of $15. At the time of the sale you have a tax liability too, and I'm willing to bet you didn't keep track of it or report it. That liability never goes away as it was wilfully evaded and yet the ability to track the transaction never goes away either!
I’m no expert, but this problem already exists with fiat currencies. What if one day I go and buy potatoes for $1/lb and then 3 days later it’s on sale for $0.75 per lb? How’s that any different than requiring less Bitcoins to perform the transaction for the same good, the second time around? If fiat isn’t taxable because less is required, then why should Bitcoins be taxed? Also, governments declaring Bitcoins to be a real currency because they want to tax it, only goes further to enforce the notion that Bitcoin is an acceptable and legal means to transact daily goods, and that it is here for the long-haul. Will governments be so tax greedy as to grant it such status?
Worse, most jurisdictions only permit the taking of a capital loss against other gains, and not against ordinary income taxes. This really sucks because it's a "heads you pay tax, tails you get screwed" situation. This is the inherent problem that gold and other commodities have as "inflation hedges"; the government always denominates its taxes in nominal dollars, not inflation-adjusted ones. The only currency against which there is no FX tax exposure is the one the government you live under uses and denominates its taxes in. That is why the government's issued currency will always be the preferred medium of exchange irrespective of all other competing currencies.
Unless you manage to piss off a large portion of your citizenery, and they choose to use Bitcoins anonymously, and say F’U to taxes all together! Paying no taxes, is much preferred to any other currency that imposes taxes by design.
Incidentally, all of this exposure which you take with Bitcoin is very unlike transacting a bag of pot for a $100 bill -- or a gold coin. Unless you're caught pretty much "in the act" once the pot is smoked and the dealer spends the $100 the odds of an ex-post-facto investigation being able to disclose what happened and tie you to the event fades to near-zero. This never happens with a Bitcoin transaction -- ever. If that dealer is caught some time later, but still within the statute of limitations for the original offense, you could get tagged. And if the statute of limitations has expired you're still not in the clear if you had a capital gain on the transaction.
If one is dumb enough to transact illegal goods without adequate anonymity the author is correct, otherwise, he couldn’t be more wrong. But why hasn’t the author in all this illegal drugs example even mentioned the notorious Silk Road? This is the organization that for the past 3 years has been selling illegal drugs online using Bitcoins in the USA and has yet to be caught by the FBI, NSA and whatever else the government has tried. Ah, because they figured out that whilst your average joe6pack bitcoiner may not be smart enough to properly anonymize himself, why then, not anonymize the destination instead? Silk Road lives inside the infamous FreeNet and wrapped in Tor Onions.. thus making it a website that is pretty much impossible to track within the Internet.
There isn't any way to avoid these facts -- they're structural in all digital currencies.
First, they can be avoided as I’ve mentioned, and as for “all digital currencies”… by default, and only so far. Don’t underestimate the creativity of the brilliantly oppressed!
And they don't just apply to buying or selling drugs -- they apply to any act that is intended to evade a government's currency or transaction controls. The very thing that makes Bitcoin work, the irrefutable knowledge that a coin is "good" predicated on digital cryptography, is the noose that will go around your neck at the most-inappropriate time.
Already countered this above sufficiently.
Those who are using Bitcoin as a means to try to foil currency controls or state prohibitions on certain transactions are asking for a criminal indictment not only for the original evasion act itself but also the possibility of a money-laundering indictment on top of it, and the proof necessary to hang you in a court of law is inherently present in the design of the currency system!
IF, they get caught in the first place. If they choose not to leave digital foot prints, good luck catching them.
First, the ability to use Bitcoin to express good and service preference. Here the fundamental problem of wide acceptance comes into view. This is the problem that the proponents of the system are most-able to address through various promotional activities. Unfortunately it also leads to deception -- either by omission or commission -- of the flaw just discussed. To the extent that the popularity of the currency is driven by a desire to "escape" state control promotion of that currency on those grounds when in fact you are more likely to get caught (and irrefutably so!) than using conventional banknotes is an active fraud perpetrated upon those who are insufficiently aware of how a cryptocurrency works.
Hmm, that gives me an idea… maybe I should register: bitcoin-darwin-awards.com
Cryptocurrencies have a secondary problem in that because they are not self-validating there is a time delay between your proposed transaction using a given token and when you can know that the token is valid. Bitcoin typically takes a few minutes (about 10) to gain reasonable certainty that a given token is good, but quite a bit longer (an hour or so) to know with reasonable certainty that it is good. That is, it is computationally reasonable to believe after 10 minutes or so that the chain integrity you are relying on is good. It approaches computational impracticality after about an hour that the chain is invalid.
This is not a problem where ordering of a good or service and fulfillment is separated by a reasonable amount of time, but for "point of transaction" situations it is a very serious problem. If you wish to fill up your tank with gasoline, for example, few people are going to be willing to wait for 10 minutes, say much less an hour, before being permitted to pump the gas -- or drive off with it. This makes such a currency severely handicapped for general transaction use in an economy, and that in turn damages goods and service preference -- the ability to use it to exchange one good or service for another.
Yep, he got this one mostly right, but I don’t recall the Bitcoin developers claiming bitcoin is aiming to replace national fiat currencies. As I mentioned close to the beginning of this retort, for transactions of small denominations 1 or 2 confirmations should be adequate for most businesses. But still, a 10-20 min wait is not going to work very well for many bricks and mortar shops, especially the popular ones that have cash-register line-ups.
What's worse is that as the volume of transactions and the widespread acceptance rises so does the value of someone tampering with the block chain and as such the amount of time you must wait to be reasonably secure against that risk goes up rather than down.
The ones that carry, analyze and inspect the blockchain (currently a ~6 GigaByte file) are the bitcoin clients. For your average IT folk, it is relatively easy to acquire a copy of the blockchain. Simply download a bitcoin client software, wait for it to automatically download the 6GB file, find where the file is in the folder, then start to analyze it. But this is where the challenge starts, it’s a binary file, not clear text. There is a significant order of magnitude of knowledge required beyond your average IT folk to actually first read, then extract data from the blockchain to then understand it, so that it can later be altered – another technical knowledge hurdle not possible without having some serious programming skills and requiring a labour of countless hundreds of hours to be sure, and for what? To swindle the local restaurant out of a $30 lunch? But there’s more inherent protection than this. The brilliant Satoshi Nakamoto, designed the blockchain such that it is an ever growing trail of cryptographic hashes, with each hash representing a Bitcoin transaction stored inside a ‘block’ which requires immense computing power to validate. In other words, if you alter even a single byte of information in a blockchain file, the client software will declare the entire file as invalid as one of the hashes will not compute. So, the only other way to create a fraudulent valid blockchain file, is to harness enough computing power that is greater than 51% of the entire bitcoin mining network – also referred to as the 51% attack. A task that is nearly impossible at this point, lest you are a large corporation or government hellbent on destroying bitcoin (see 51% link for details). The largest super computer in the world has a computational power of 17.59 PetaFlops. Bitcoin’s entire computational power is currently 778.40 PetaFlops (CTRL+F for “PetaFLOPS”), thus bitcoin is now considered the largest (decentralized) super computer on Earth by a factor of 45+ times!
Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns. Yes, obligation -- not privilege.
I don’t understand this. Sovereigns = US citizens, or something else? And what obligation is this, legal tender laws?
Bitcoins are basically cryptographic "solutions." The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin. As each coin is "mined" the next solution becomes more difficult. The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation. Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.
The general idea is correct, but there’s one specific detail that is not accurate. The next solution doesn’t get more difficult necessarily. Difficulty is determined once every 2016 blocks (each taking aprox 10mins, thus aprox 4 days to process) by the bitcoin algorythms based on the total network hashing power of the previous 2016 blocks. Thus it is entirely possible, that difficulty does go down from time to time. For example, if an entire mining pool of hundreds of thousands of miners goes down due to some technical glitch for 1 or 2 days (out of 4), and this mining pool was quite large in overall network hashing power, you can bet the next 2016 blocks will have a lower difficulty. That said, the overall trend is definitely of difficulty going up over time as it is a function of the total network hash rate which itself is a function of the price of the bitcoin currency. As the price per unit rises, there is more incentive for miners to chase after the next block (1 block/10mins=25 coins, aprox $180 each or $4,500 as of today). This means miners will increase their computing power by expanding their fire hazardeous mining rigs, or by attracting new miners. I would bet $1,000 that sometime in the next couple of years we’ll see an MSM headline that reads something akin to: “House fire broke out due to nerdy basement dweller mining Bitcoins”.
That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later! That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy. If that sounds kind of like a pyramid scheme, it's because it is very similar to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!
The other problem that a cryptocurrency has is that it possesses entropy.
Hold on there chief. All crypto currencies haven’t even been invented yet, so let’s not extrapolate into the future but agree you speak primarily of bitcoin and its clones at present.
Entropy is simply the tendency toward disorder (that is, loss of value.) A car, left out in the open, exhibits this as it rusts away. Gold has very low entropy, in that it is almost-impossible to actually destroy it. It does not oxidize or react with most other elements and as such virtually all of the gold ever dug out of the ground still exists as actual gold. Fiat currencies, of course, have entropy in both directions because they can be emitted and withdrawn at will. We'll get to that in a minute, and it's quite important to understand. Bitcoin exhibits irreversible entropy. A coin that is "lost", that is, which the current possessor loses control over either by physically losing their wallet or the key to it, can never be recovered. That cryptographic sequence is effectively and permanently abandoned since there is no way for the entity who currently has possession of it to pass it on to someone else. This [irreversible entropy] is often touted as a feature in that it inevitably is deflationary, but whether that's good or bad remains to be seen.
No need to wait, I can answer now. It will be good for all the remaining holders of Bitcoins, as their already deflating currency will deflate even faster and become more valuable due to a shrinking supply of Bitcoins, but ultimately bad for the currency in the very long term, as even 4 quadrillion units (21million Bitcoins divisible to 8 decimal places), is still a finite number; however, wake me up in 20-200 years when that starts to become a problem – then we’ll just whip up some modifications (a few more decimal places?) or migrate to a new digital currency, and voila, another 2012 end of the world prophecy avoided.
It certainly is something that those who tout the currency think is good for the value of what they hold, but the irreversible loss of value can also easily lead people to abandon the use of the currency in which case its utility value to express goods and service preference is damaged, quite-possibly to the point of revulsion.
I don’t see how. If each passing day I need less (bitcoin) money to buy goods because the currency is deflating because people are losing their digital wallets, why would I lose faith in the currency, when it gives me more and more buying power each day?!
I mentioned above about fiat currencies being able to be issued and withdrawn. There is often much hay made about the principle of seigniorage, which is the term for the "from thin air" creation of value that a state actor obtains in creating tokens of money. Seigniorage is simply the difference in represented value between the cost of emitting the token (in the case of paper money, the paper, security features and ink) and the "value" represented in the market. There is much outrage directed at the premise of fiat currency in this regard but nearly all of it is misplaced because people do not understand that in a just and proper currency system the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.
“just and proper currency system”? LOL, of which fiat currency do you speak of exactly??! I know not any just and proper one. Great argument, except that this responsibility lies upon the shoulders of academic central banksters who know not the hardship of the working class, and whose revolving door primary dealing privileged buddies make up the very top of the greatest pyramid scheme of all time – many billions of times greater than that of the current bitcoin market cap. I’ll trust an obedient and unwavering bitcoin algorithm, than the moods and swings of a central banker’s central planning any day of the year.
That is, in order for time preference to be neutrally expressed, less the natural deflationary tendency from productivity improvement, the government entity issuing currency gets the benefit of seigniorage when the economy is expanding. But -- during times of economic contraction they also get the duty to withdraw currency (or credit) so as to maintain the same balance, as otherwise the consequence is inflation -- that is, a generalized rise in the price level and the destruction of the common person's purchasing power.
I thought they expanded credit during hard times, and withdrew it during the good times, the latter of which Bernanke calls the “Exit Plan”, which he was 100% sure he could execute it in 15 minutes back in 2010 or so… 3 years later (many blocks of 15 minutes), it’s still not executed, and has recently been redefined as merely stop printing and keeping the status quo in terms of not unwinding the credit expansions of the past 5 years. But even this has been merely all jawboning, and no action. As the saying goes: “In theory practice is perfect, but in practice it is ever only theory!”
This, fundamentally, is why currency schemes like Bitcoin will never replace a properly functioning national currency and are always at risk of becoming worthless without warning should such a currency system arise, even ignoring the potential for legal (or extra-legal) attack.
I would never attempt to dispute that Bitcoin could go from Hero to Zer0. There are known weaknesses indeed, and probably even more than the developers admit to or are even aware of; however, one must dig even deeper than this author has to identify these and calculate their probability of occuring.
Simply put there is no obligation to go along with the privilege that the originators of a crypto-currency scheme have left for themselves -- the ability to profit without effort by the future efforts of others who engage in the mining of coins.
Before you group and stone all the developers, please consider the absolute brilliance and dedication, and especially the countless hundreds if not thousands of hours they have put into developing this revolutionary currency that the world may benefit from (if it doesn’t all blow up soon enough in a hyper deflationary crash back to zero). Out of the top 10 largest wallets in all of bitcoin, excluding the top 3, the remaining have aprox 50,000 bitcoins each after 3 years of existence. At $180/bitcoin, that’s aprox 9 million dollars. In today’s Nasdaq Bubble 2.0 where a cute piece of software is valued at 1 Billion dollars, or when some 17 year old sells a news aggregation app to Yahoo for 30 Million, I think IF the main software developers of bitcoin (whom by the way are still working countless hours per day in the background, to the benefits of millions of users), are indeed the owners of those 10 wallets… well, IMO, they deserve it! In actual reality, at least some of those wallets belong to entrepreneurial businessmen such as the inventor of Avalon ASIC mining rigs or the ASICminer fund (ability to mine millions of times faster than anybody else), the Satoshi Dice gambling site (is responsible for something like >25% of all bitcoin transactions), or Bitpay.com with $5.2 Million in bitcoin transactions and growing per month, or Mt.Gox exchange founders, responsible for 50-80% of all intercurrency transactions, including first time bitcoin buyers. The list goes on, and on.
Those who argue that state actors creating currencies get the same privilege are correct, but those state actors also have the countervailing duty to withdraw that currency during economic contractions associated with their privilege, whether they properly discharge that duty or not.
Wake me up when Bernanke executes his Exit Plan, until then, I’ll hang on to my Bitcoins.
For these reasons I do not now and never will support Bitcoin or its offshoots, nor will I accept and transact in it in commerce. I prefer instead to effort toward political recognition of the duties that come with the privilege that is bestowed on a sovereign currency issuer in the hope of solving the underlying problem rather than sniveling in the corner trying to evade it. The latter is, in my opinion, unworthy of my involvement.
Enjoy getting screwed by your government while smoking HopiumMr. Karl Denninger. I for one, applaud the efforts of our sniveling brilliant revolutionary crypto currency developers whom are trying to solve the problems a massive global fiat fraud, to the benefit of all of humanity.
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