Home » Crypto-currency » Bitcoin: Revolution or Trap? Part 1

Bitcoin: Revolution or Trap? Part 1

by John Rubino on February 2, 2014 · 24 comments

From Chapter 18 of The Money Bubble by James Turk and John Rubino:

In the Internet’s early days there was general agreement that one of the first killer apps would be some form of cyber-currency. Since money was already largely non-corporeal, existing as entries in bank accounts and ready to spend with plastic cards, the next logical step would be to move the whole thing online and dispense with paper and coins and their costly and burdensome infrastructure of banks, regulators and printing presses. The emergence of such currencies would, in this optimistic scenario, consign relics like the dollar and the Fed to history’s circular file and usher in an era of trust, stability, and growth similar to what occurred under the classical gold standard.

But the digital liberation of money turned out to be easier said than done, as the first wave of cyber-currencies came and went without much of an impact. eCash, for instance, was an encrypted, anonymous payment system that allowed anyone anywhere to send and receive instant payments. But it relied on the existing banking infrastructure, and because “anonymous” meant “money laundering” to the police, it faced extreme pushback from authorities who viewed such currencies as primarily empowering drug dealers – and from banks that saw no point in encouraging the competition. Only one small bank ever accepted eCash, and the currency died a quiet death a few years after its introduction.

A larger impact was made by e-gold, which offered accounts denominated in grams of gold from which owners could make and receive payments. It generated some buzz, peaking at five million users and $2 million of transactions in 2009. But here again, the fact that much of this action was apparently money laundering by parties with good reason to stay anonymous led to legal pressure that eventually led to its failure.

James’ company, GoldMoney, was originally designed to operate as a gold-based payment system based on several digital currency patents. It avoided the money laundering stigma by requiring users to register under their own names, and also met with early enthusiasm. But other logistical and legal barriers proved to be insurmountable, and GoldMoney’s payment system was deemphasized in favor of offshore gold storage. By the late 2000s, purely digital currencies looked, to most observers, like a near-impossibility in a world where governments and banks had the power to prevent such competition.

ENTER BITCOIN
In 2008, a mysterious person or group using the apparent pseudonym Satoshi Nakamoto unveiled a new digital currency called Bitcoin that appeared to solve some of its predecessors’ problems. Without going too deeply into the technical details, the Bitcoin system tracks each piece of currency from buyer to seller, eliminating the possibility of one person spending the same piece of currency multiple times before the counterparties catch on. The network is distributed, with no central clearinghouse or bank holding everyone’s money and imposing rules. “Miners” create more Bitcoins by solving complex algorithms to add more Bitcoin to the system, with the difficulty of the number crunching increasing as the quantity of Bitcoin grows, thus keeping their supply rising at a steady, predetermined rate until it reaches is a preordained limit of 21 million a century or so hence.

Bitcoins, which are a long string of alphanumeric characters, can be stored in a variety of places, from a digital “wallet” on a desktop computer to a centralized service in the cloud, or even completely off-grid by being printed on a piece of paper. And because it operates over peer-to-peer networks similar to those used by techies and teens to download music and videos, it bypasses the established banking/regulatory system, making it, at least initially, free of government oversight.

Nakamoto, whoever he (or she, they) was, disappeared in 2010. But by then the Bitcoin community had taken on a life of its own. Hundreds of users began to mine Bitcoins with increasingly sophisticated computers, and the number of merchants and individuals willing to accept, store, and transact in the currency rose steadily.

As the buzz grew louder, the small community of techie/libertarian early adopters was joined by traders sensing a serious momentum play. The dollar price of a Bitcoin rose from 5 cents in early 2010 to 36 cents in November. In February 2011 it briefly achieved parity with the dollar, and when a Forbes Magazine ran a favorable story that called it a “crypto currency,” the price went parabolic, to nearly $9. More breathless press ensued, sending the price to $27 and putting the market value of Bitcoins in circulation at $130 million.

On the Internet’s black market – the network of sites only accessible to computers running anonymizing software such as Tor – Bitcoin was rapidly becoming the preferred form of money. This drew the ire of the establishment, with US Senator Charles Schumer demanding the closure of online drug emporium Silk Road and describing Bitcoin as “an online form of money-laundering.”

At about the same time, Bitcoin’s Achilles heel became apparent, which is that it has to be stored somewhere, and no place is 100 percent secure. Bitcoins stored on a desktop can be wiped out by a crashed hard drive. Backed up on other storage media, they’re vulnerable to hackers. Kept in an online storage service – which sounds like a bank but has no deposit insurance or even physical reality – they can disappear without a trace. Traded on an online exchange they can likewise simply disappear, with no recourse to former owners.

As Bitcoin rose in value the number of high-profile crimes and crashes rose apace. A Tokyo-based exchange was hacked and lost numerous client accounts. A Poland-based storage service accidentally overwrote its customer records. A West Indian storage service simply shut down, and its owner disappeared. And viruses aimed at Bitcoin caches proliferated. Newcomers, meanwhile, discovered that working with Bitcoin required skills not yet common among the non-techie 99 percent. The press turned scornful, and a consensus formed that the concept was fatally flawed and without much of a future.

The Comeback
Throughout that boom and bust, Bitcoin retained a core user base that saw its possibilities and worked to overcome its flaws by developing point-of-sale hardware and online merchant services while lessening its dependence on a small number of exchanges.

And then, just when the outside world had stopped paying attention, Bitcoin recovered. From under $20 at the beginning of 2013 it rose to $240, crashed to below $100, and then in one dramatic arc soared to more than $1,000. In early 2014 Bitcoin’s market value exceeded $10 billion and the number of merchants willing to accept it was soaring. The market appears to have spoken: Bitcoin is for real.

Bitcoin

Coming on Feb 5: Bitcoin: Revolution or Trap? Part 2. Read it now here.

  • QEternity

    Been reading my way thru your book and really enjoying it — well, as much as one can enjoy the destruction of the currency….

  • lee

    Established governments will not allow competitor currencies to exist except marginally. You can take that…to the Bank.

    • Chris

      I don’t think gov’t as we know it, is going remain “established” for long.

      • sculptor bill

        do you think and internet that used over 10% of our power grid will still run if “establish government” is gone? Would Mad Max like to own bitcoins or gold coin?

    • deepfriedfunk

      Is it really a competitor? It’s not really anonymous, as the NSA has a backdoor into every piece of licensed hardware or software since the Telecommunications Act of 1996… so it’s basically free inside data to them… Plus with $15 MILLION a day spent on Power Usage (see taxes) to run the Network, why stop it?

    • GoodNPlenty333

      Governments cannot stop competitor currencies from existing without shutting down the internet now that this peer to peer technology has been discovered. You cannot stop it, and it cannot be uninvented. Cryto-currencies are here to stay.

      • pipefit9

        Poor analogy, Good333. We’ve spent a fortune bombing the heck out of Afghanistan for 12 or 13 years, and opium production is up. What government are you talking about that doesn’t allow drugs? Surely not the one supervising the largest cultivation protection project in the world.

        Why haven’t they crushed BitCoin? I have no insider information, but they have publicly stated that they approve of it. Perhaps it is some sort of Beta test for the coming one world currency?

        One thing is certain. When they roll out the the IMF currency, your Bitcoins will be worth zero, or perhaps have some tiny nominal conversion value, same as dollars, Euros, Yen, etc.

        The dollar, Euro, Yen, and other fiat promises total into the many hundreds of trillions of dollar equivalent in liability. The world’s GDP is something like $60 trillion. In other words, for every dollar of fiat promise, there is somewhere between five cents and 10 cents available to pay those claims. Hence, the present system will fail. If you want a leg up on the masses, you would be best served getting a job with the IMF, not mucking around with some new fangled form of fiat.

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  • sculptor bill

    I tried my best to invest $500. in b-coin when they were 3.60 or so, I lacked the computer skills, worried my computer would crash, or the file would get erased. I wanted to accept b-coins as a merchant, but couldn’t figure it out, either. Thats a big hurtle….i know you can just let an “app” on your phone handle it…I don’t have a phone, don’t know how to download an app. and really are you going to walk the streets with a phone full of $100,000 in B-coin?

    I love cash, currency, gold, and understand this is just electronic cash, but it depends too much on techno computer savy, and can be hacked away or lost, no back up, no insurance, no recourse through court and law inforcement….in fact maybe law enforcement will declair this illegal/tax evading/pirate money.

    If my $500 had been invested in b-coin and was now worth $ $120,900 in coin, the majority of it would be turned in to 100oz of Gold, which is the ultimate in what I trust. I trust my vault in switzerland and the burried jar in my garden more than computer or phone that can be hacked

    B-coin smells a little too much like tulips for me, the run up from pennies to $1000 is a little too fantastic, and I don’t quite trust the original creation story, or the original creator(s)who may sitting on billions of$ of coin.

    • deepfriedfunk

      That’s the problem, with only 47 people holding most BTC, they are creating the “scarcity” and they ALL want to dump it w/o lowering the price.. Good Luck…

      • GoodNPlenty333

        That 47 people statistic is complete and utter nonsense. It is not possible to determine how many people own most of the BTC because most people have multiple addresses, and many of the largest single addresses represent funds from thousands and thousands of people (exchanges, gambling sites, escrow services etc). Furthermore, many of the earliest bitcoins mined were lost as people lost interest and moved on, so don’t go around spewing stats that are impossible to calculate.

        Besides, BTC isn’t like dollars, where I can earn more by just sitting on them.

        • Uhh

          It is not impossible. It has already been done.

          • rick

            Link then?

          • GoodNPlenty333

            It is impossible, and it has not been done. I can split my money into two addresses and it is impossible to tell if I sent half my money to somebody else, or simply split my money. Furthermore, I can create a site and group many people’s money into a single large pool (keeping track of owners in my own database so that all transactions are off the blockchain). This is also undetectable. The “study” that was done made the completely faulty and erroneous assumption that one address equals one person, which is not even close to reality.

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  • deepfriedfunk

    “complex algorithms to add more Bitcoin to the system, with the difficulty of the number crunching increasing”

    When people say this, it means they don’t know how BTC works….

    There is NO “Mining”, “complex algorithms”, or “number crunching” it is simply a peer to peer network that verifies and counts all transactions… The more transactions that take place, the more the “number ‘crunching’ ” increases – – or you could say, the price of Bitcoin is determined by how many times it is traded.. Until, or course, There are no more coins to “mine”, or it becomes ridiculously cost preventative… At some point the earlier transactions will have to be stripped from the bitcoin once that chain has been thouroughly established… Now, there is still room for the price to increase dramatically, but in the long run, BTC is a dead horse…

    • deepfriedfunk

      Also check out the Forbes article on BTC power usage – $15 MILLION every DAY!!!!!!! now if that power was “stored” somewhere it would have value.. Alas, $15 million a day goes to power/taxes… Why would govts stop that?

    • GoodNPlenty333

      Yes there is mining. Yes double SHA256 is a number crunching algorithm (hash).

      so, you are the one who appears to know absolutely nothing about Bitcoin.

  • bitcoin

    http://www.bitoomba.net if you want to play with some of your bitcoins

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  • Al Bondiga

    “Bitcoin: Revolution or Trap?”

    How about REVOLUTIONARY TRAP?

    I mean REALLY!

    I understand that you stupid American’t war criminals have shyt for brains and the critical thinking skills of a cucumber, but STILL you slobs should have figured out already by now that if you CANNOT HOLD IT IN YOUR HANDS IT’S *N-O-T* really ‘yours to begin with’.

    I now return you to your blathering stupidity, there will be no further commercial interruptions. Enjoy.

  • Bruce C

    I don’t understand Bitcoin completely and for some reason it doesn’t interest me much either. However, as soon as a learned a little bit about it I thought that the last thing this world needs at this time is an even more abstract and esoteric currency system than we have now.

    It definitely seems to be a very creative alternative payment system that avoids a lot of issues, so it probably is here to stay in one form or another. In fact, the farther down the monetary food chain the greater the benefits, which would include the majority on the planet, and that is arguably revolutionary.

    However, for me personally and I suspect most Western consumers, I can’t help wondering how it is practically different than just using a debit card. I mean, as I understand it, to use bitcoin for payment one first has to buy some bitcoins and then those are exchanged for some good (or service), and the recipient then either saves those bitcoins for some other transaction or “cashes” them in for some other currency. So what’s the big deal? Are there really little or no transaction costs to all of that? And what’s up with bitcoin’s constantly changing exchange value?

    I understand that there are myriad new and unprecedented opportunities for monetary exchanges that are theoretically possible, not to mention the “higher dimensional” book keeping systems possible, but I think the point of JR’s question is whether or not “open-ended” technology is a way to circumvent the fundamental monetary problems of debasement and theft.

    My sense is no. Two ideas come to mind. A good friend’s late grandfather told me more than once that one of the great lessons for mankind to learn is to avoid an over-reliance on technology. The second was the evocation of the main message in the book/movie “The Day the Earth Stood Still”: That the aliens’ solution for keeping them in check was to create all-powerful robots that would destroy anyone and anything that threatened the peace.

    That the quantity of bitcoins is limited by the requirement of ever-more complex algorithms and that all the rules of bitcoin must be agreed upon by all “observers” sounds just as absurd.

  • tom

    Is Bitcoin money? No. It’s a medium of exchange. The origins of BTC are too murky and I’m suspicious. Perhaps the NSA/CIA is behind it. Don’t laugh. Why would the creator of BTC stay anonymous unless he never existed or gave himself a few billion in advance. And, as one writer said, the NSA has backdoors into all the hardware so how secure is your BTC? The Internet has to be updated and hardened against governments and hackers who exploit the intentional weaknesses. BTC is only as secure as the network and it’s a sieve. Here’s the biggie. Like gold, crypto currencies don’t earn interest but at least you can physically own and control your gold. And, if you put your BTC into a stock mutual fund to earn a return, the government can prevent conversion back. Will governments ever allow conversion between their systems and BTC? I’d feel a lot better with electronic money based on physical gold. James Turk already was there years ago with a better system. Tried it and they squished him. There’s your answer.

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