What will it take for Bitcoin to be widely adopted?

Will governments ever approve of Cryptocurrency?

The question was asked of me as columnist at Quora.com: Will governments eventually ‘approve’ of cryptocurrency? First let’s agree on terminology…

  1. By “approve”, I assume that you are asking if governments will adopt or at least tolerate the use of crypto as legal tender in commerce. That is, not just as a payment instrument, but as the money itself—perhaps even accepting tax payments in cryptocurrency.
  2. The word “cryptocurrency” is sometimes applied to altcoins and even to ICOs. These are not the same. Many altcoins meet the criteria of the next paragraph, but none of the ICOs measure up (ICOs are scams). I assume that your question applies to Bitcoin or to a fair and transparent altcoin forked from the original code, such as Bitcoin Cash or Litecoin.

A blockchain-based cryptocurrency that is open source, permissionless, capped, fast, frictionless, with a transparent history—and without proprietary or licensing restrictions is good for everyone. It is good for consumers; good for business; and it is even good for government.

Of course, politicians around the world are not quick to realize this. It will take years of experience, education, and policy experimentation.

Many pundits and analysts have the impression that shifting to cryptocurrency—not just as a payment instrument, but as the money itself—will never be supported by national governments. A popular misconception suggests that a cryptocurrency based economy has these undesirable traits:

  • it is deflationary (i.e. that inflation is necessary to promote spending or to accommodate a growing economy)
  • it facilitates crime
  • it interferes with tax collection
  • It interferes with national sovereignty, which leads to “world government”
  • It is not backed by anything, or at least not by anything substantial, like the Dollar, Euro, Pound, Yuan or Yen
  • it interferes with a government’s ability to control its own monetary policy

Over time, perceptions will change, because only the last entry is true. Adoption of cryptocurrency puts trust into math rather than the whims of transient politicians. It helps governments avoid the trap of hoisting debt on future generations or making promises to creditors that they cannot keep—Yet, it does not lead to the maladies on this list.

But, what about that last item? Does an open source currency cause a nation to lose control over its own monetary policy? Yes! But it is not bad! Crypto cannot be printed, gamed or manipulated. Despite perception, it is remarkably resistant to loss or theft. Early hacks and fiascos were enabled by a lack of standards, tools and education. As with any new technology—especially one that changes practices or institutions—adoption of radical processes goes hand-in-hand with gradual understanding and acceptance of benefits.

How Does Crypto Help Governments?

Adopting/accepting a national (or international) cryptocurrency is a terrific way for governments to earn the respect and trust of citizens, businesses, consumers and especially creditors. There is no more reason for governments to control their money supply than there is for them to control communication networks, space travel or package delivery services.

You may not agree that cryptocurrency is good for government, and so I expand on the topic here. But your question doesn’t ask if it is good, it asks if governments are likely to approve.

Yes. Eventually…

First, a few forward thinking countries like Iceland, Japan or UAE will spearhead adoption of a true, permissionless cryptocurrency (or at least recognize it as legal tender) . Later, ‘stress-economies’ will join the party: These are countries that need to control either rampant inflation, a reluctance to tax citizens, treasury mismanagement or massive international debt. A solution to these problems requires restoration of public trust. I wouldn’t be surprised to see Greece, Zimbabwe, Venezuela or Argentina in the mix.*

Eventually, G7 countries will tread into a growing ocean. Not now; but in 5 or 8 years. The conditions are not yet right. It requires further vetting by early adopters, continued development, education and then popular consumer adoption. But all of these things are inevitable. Eventually, governments will recognize that a capped, trusted, transparent, math-based money is far better for all stakeholders than money based on intrinsic value, promise-of-redemption or force.


* We are not discussing countries that plan to create their own cryptocurrency. None of these plans involve a coin that is open source, permissionless, decentralized and capped. They are simply replacing paper with a national debit card. But it is not crypto.

Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

Technical Analysis: Can it predict future asset value?

I love clearing the air with a single dismissive answer to a seemingly complex question. Short, dismissive retorts are definitive, but arrogant. It reminds readers that I am sometimes a smart a*ss.

Is technical analysis a reasoned approach for investors to predict future value of an asset?

In a word, the answer is “Hell No!”. (Actually, that’s two words. Feel free to drop the adjective). Although many technical analysts earnestly believe their craft, the approach has no value and does not hold up to a fundamental approach.

One word arrogance comes with an obligation to substantiate—and, so, let’s begin with examples of each approach.


Investment advisors often classify their approach to studying an equity, instrument or market as either a fundamental or technical. For example…

  • Fundamental research of a corporate stock entails the analysis of the founders’ backgrounds, competitors, market analysis, regulatory environment, product potential and risks, patents (age and legal challenges), track record, and long term trends affecting supply and demand.A fundamental analysis may study the current share price, but only to ascertain the price-to-earnings ratio compared to long term prospects. That is, has the market bid the stock up to a price that lacks a basis for long term returns?
    .
  • On the other hand, a technical approach tries to divine trends from recent performance—typically charting statistics and pointing to various graph traits such as resistance, double shoulders, and number of reversals. The approach is more concerned with assumptions and expectations of investor behavior—or hypotheses and superstition related to numerology—than it is with customers, products, facts and market demand.

Do you see the difference? Fundamental analysis is rooted in SWOT: Study strengths, weaknesses, opportunities, and threats. Technical analysis dismisses all of that. If technical jargon and approach sound a bit like a Gypsy fortune teller, that’s because it is exactly that! It is not rooted in revenue and market realities. Even if an analyst or advisor earnest, the approach is complete hokum.

I have researched, invested, consulted and been an economic columnist for years. I have also made my mark in the blockchain space. But until now, I have hesitated to call out technical charts and advisors for what they are…

Have you noticed that analysts who produce technical charts make their income by working for someone? Why don’t they make a living from their incredible ability to recognize patterns and extrapolate trends? This rhetorical question has a startlingly simple answer: Every random walk appears to have patterns. The wiring of our brain guarantees that anyone can find patterns in historical data. But the constant analysis of patterns by countless investors guarantees that the next pattern will be unrelated to the last ones. That’s why short term movement is called a “random walk”. Behaviorists and neuroscientists recognize that apparent relationships of past trends can only be correlated to future patterns in the context of historical analysis (i.e. after it has occurred)..

Decisions based on a technical analysis—instead of solid research into fundamentals—is the sign of an inexperienced or gullible investor. Some advisors who cite technical charts know this. Technicals have no correlation to long term appreciation, asset quality or risks. They only point to short term possibilities.

The problem with focusing on short-term movement is that you will certainly lose to insiders, lightning-fast program traders, built in arbitrage mechanisms and every unexpected good news/bad news bulletin.

If you seek to build a profit in the long run, then do your research up front, enter gradually, and hold for the long term. Of course, you should periodically reevaluate your positions and react to significant news events from trusted sources. But you should not anguish over your portfolio every day or even every month.

  • Know your objectives
  • Set realistic targets
  • Research by reading contrarians and skeptics (They help you to avoid confirmation bias)
  • Study comparables and reason through the likelihood that another technology or instrument poses a threat to the asset that interests you
  • Then, invest only what you can afford to lose and don’t second guess yourself frequently
  • Dollar-cost-average
  • Revaluate semi-annually or when meeting with direct sources of solid, fundamental information

Finally, if someone tries to dazzle you with charts of recent performance and talk of a “resistance level” or support trends, smile and nod in approval—but don’t dare fall for the Ouija board. Send them to me. I will straighten them out.

WTF?! Who says so? Does the author have credentials?

I originally wrote this article for another publication. Readers challenged my credentials by pointing out that I am not a academic economist, investment broker or financial advisor. That’s true…

I am not an academic economist, but I have certainly been recognized as a practical economist. Beyond investor, and business columnist, I have been keynote speaker at global economic summits. I am on the New Money Systems Board at Lifeboat Foundation, and my career is centered around research and public presentations about money supply, government policy and blockchain based currencies. I have advised members of president Obama’s council of economic advisors and I have recently been named Top Writer in Economics by Quora.com.

Does all of this qualify me to make dismissive conclusions about technical analysis? That’s up to you! Wild Duck is an opinion Blog. My opinion is dressed as authoritative fact, because I have been around this block many times. I know the score.

Related:


Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

What Countries use US Dollar and Why?

Other than the United States, 5 U.S. territories and 12 sovereign nations use the US dollar as their legal currency. (Note that Micronesia covers six sovereign countries).

Additionally, I have traveled to island nations and some countries in Asia and Pacific that peg their currency to the US dollar. In these regions, citizens accept US dollars interchangeably with their own national currency, and their governments don’t seem to discourage or prosecute such transactions.

What gives value to paper?

Around 350 BC, Aristotle worked for the Greek council, trying to get farmers, weavers, chariot makers and tradesman to use government issued currency for the exchange of goods and services, rather than bartering with neighbors. This would not only facilitate taxation and public works, but it would help farmers to store and forward their wealth, instead of seeing their assets perish with each change of season.

He reflected on what makes a currency trusted and functional. He felt that one critical trait was “intrinsic value”. Today, most economists interpret this phrase as a currency having inherent or self-contained value. That is, it mustn’t be paper nor even a promise of redemption (for example, a picture of Caesar). And it mustn’t rely on the ‘good faith and credit’ of citizens. After all, nations are subject to the whims of transient politicians and any economy can collapse because of war, drought or over-spending. Rather, the money must be made from something of useful and dense value. For example, it could be gold, silver or some useful thing, like chocolate, coveted jewelry or a tool.

Today, money is no longer backed by gold or even a government promise of redemption (offering to exchange dollars for gold, grain, goats or land). For developed nations, this backing—a method of establishing intrinsic value—ended between 1971~1973, when President Richard Nixon dissolved the Bretton Woods Agreement and withdrew the promise of a conversion guaranty.

Instead, today, the value of national currencies floats in response to supply and demand.

Supply and demand is a natural economic mechanism, and for fluid and widely distributed commodities, it can be an elegant solution to the problem of establishing value, function and durability—but only if the supply is capped or very tightly regulated and the issuer is trusted by individuals, organizations and nations that quote prices, save or trade with the currency.

Unfortunately, this is not the case for any national currency across the world.

  • Supply: National currencies increase in supply when the government spends more than it raises from fees, taxes, government owned industries and borrowing—or whenever it cannot meet debt obligations. With fiat currency, the supply is open ended and uncertain.
  • Demand: The demand for a currency is a function of its issuer’s economy: How much are its people producing? How high are their debts? Do creditors believe that they will repay their debts in kind?—at least, someday, down the road.

Today, it’s all about trust—Trust in the ability of a country to return the goods and services that were bought by their people and trust in their government to avoid printing more money, which depreciates savings, redistributes wealth, and cheats creditors through the insipid dilution of inflation.

Whenever a government prints money, it reneges on debt and breeches the trust of creditors.

Why would any country substitute the currency of another country?

One need only look at this Zimbabwe money to understand why an independent nation might substitute the US dollar as legal tender. The same has happened to Argentina, Greece, Venezuela and Germany between the wars.

It was withdrawn from circulation in 2008. At the time, it was worth US 40¢ (40 cents). Today, Zimbabwe uses the US dollar as its legal currency, because its spending value is stable relative to monies issued African central banks. That is, the citizens trust the US dollar to resist inflation—and so they use it to store and trade their hard-earned wealth.

Is Adoption of the US Dollar growing around the world?

The days of our friends and enemies trusting the dollar—or even using it to negotiate large international trades (that is, as a “reserve currency”)—is gradually coming to an end. This is changing, because:

1. Bitcoin is gradually displacing the dollar as the world’s reserve currency. Even though it is slow to gain traction as a commercial and consumer payment instrument, it has all the components of an ideal currency for large international quotation, exchange and settlement.

The fundamental reason for the gradual trust in Bitcoin is illustrated by these graphs. Bitcoin is a capped commodity backed by a robust 2-sided network. Understanding and trust in its distributed consensus mechanism is growing. It cannot be manipulated by transient politicians. Nations that use it for significant transactions cannot be cheated when their trading partner or a 3rd party prints money to cover their own shortfall. It is an ideal reserve settlement instrument.

2. In recent decades, the dollar is built on debt rather than domestic output, a trade surplus, or high quality credit. This creates the potential for a collapse, if US citizens or creditor nations begin to doubt the likelihood of the United States reversing its slumping exports and staggering trade imbalance.

3. In recent years, the United States has lost gravitas in world forums due to the projection of power beyond its borders without a clear mandate or international support, and its recent lack of leadership in issues like the environment, trade accords and arbitrating regional peace agreements. This impression—along with the erratic statements and behavior of U.S. politicians causes both allies and enemies to seek an alternate reserve currency. Why so? …

A reserve currency is an international quotation and settlement instrument—even when the United States is not a party to a sale or transaction, and even if one or both parties is not a US ally. Many countries, banks and producers (of oil, food, military gear, etc) do not desire or appreciate the tremendous side-benefit that accrues to USA.

In effect, when you adopt the currency of one nation as the reserve currency for others, you grant credit to that country, without collateral. You allow them to print money without substantive backing, guarantees or even a balance of trade that makes it likely you will be repaid without the dilution of inflation.


Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

The USD is Tulip Mania—BTC is not

Please don’t pay any attention to this posting. It is not for you… *

This graph presents indisputable fact: It compares US dollar growth as reported by the US government and Bitcoin growth (for all time), extrapolated by pure math.

I wish that this would put to bed the fake news, conspiracy theories, and “nothing backs it” nonsense. Unfortunately, seismic shifts in architecture or process take time for society to understand and accept. Early adopters will be the fortunate buckos. Timid or clueless denizens will complain bitterly about the unfair advantage of those who wise up before it hits a 6 figure exchange rate. Eventually, comparisons with legacy currencies will be utterly meaningless. It will become the currency. It will be the gold-pressed latinum of universal recognition and intrinsic value.

15 years from now, some will look back on our era and claim that the Winkelvoss twins were lucky. Risk, patience and an understanding of economics is not ‘luck’. They have the gift of prescience.

Bitcoin cannot be manufactured. Despite it being open-source and easily copied, it is very unlikely to be displaced by an altcoin or ICO. The fact that there will never be more than 21 million original bitcoin presents incredible opportunity to the frugal and wise—for a short time.


* Hopefully, few people will heed the siren call. Investing is Bitcoin might be good for you, but it is bad for the community. How so?! The more that individuals or institutions hoard, speculate or invest in Bitcoin—as opposed to driving adoption by actually using it—the longer it will take to gain traction as a functional payment instrument, or as the money itself.

So, this article is not for you. Move along. These aren’t the droids you’re looking for.

Credit: (title & image): Peter Bergstrom
Did you catch the omage to both Star Trek and Star Wars? Look again

Is every Initial Coin Offering a Scam?

OK. Stop! Please, just stop! I get this question every day. More and more people asking about ICOs. I get it… I am an early Bitcoin user, I give blockchain presentations, I write a blog, and I work for a standards association. And so, this is my definitive response to a very pesky question.

Ron, in New York City reads this Blog. He asks this:

I work for an investment bank. Some banks, like Merrill Lynch, are hostile toward Bitcoin and other cryptocurrencies. Others, like Fidelity are dipping their toes in the water. And some, like Morgan Stanley speak with forxed tongue—condeming and hedging at the same time…

My employer is preparing to embrace Bitcoin with gusto. Once regulatory guidelines become clear and unified, we will offer crypto trading, options, futures and margin accounts. I am already working on customer literature and compliance training. We will also use crypto as money in all operations—to pay staff & consultants or purchase supplies & utilities We will even accept Bitcoin and Bitcoin Cash as payment from clients.

So, please tell me: Why does our in-house crypto expert constantly warn our managers and clients that ICOs are scams? How can she condem an emergent commodity? ICOs have sparked a massive new investment class. Are they really scams?

Listen up, Ron! Pay attention to your crypto expert. Follow her advice. With very few exceptions, ICOs are all scams, plain and simple.

Why are almost all ICOs scams?

Initial Coin Offerings are scams because of:

  • The way that they are promoted
  • What investors must do to profit
  • Their fundamental purpose: Dodge securities regulations, create MLM pyramids, or facilitate pump & dump. None are are sustainable, ethical or legitimate goals!

For those intent on using, investing in, or advising others on ICOs, this article explains how to discriminate a scam from a credible and functional instrument. Note the list of traits just below the red “Scam” button. If the ICO that you are evaluating exhibits even one of these characteristics, treat it like The Plague or the Mark of the Beast. It is most certainly a scam.

Note that ICOs are not Altcoins. There is a big difference. Altcoins are forked from Satoshi’s blockchain code. They are open source, license free, permissionless, with a transparent mining history going all the way back to the genesis block. The ownership of all pre-mined coins is known and auditable. There is absolutely no MLM aspect to an altcoin. If there is any central or authoritative component, it serves only to aid in quicker governance decisions or to overcome the energy overhead associated with Proof-of-Work. There is never another valid excuse for an authority, because authorities are chokepoints.

Many altcoins are legitimate projects designed to trade value, or serve as a functional component of an IOT (Internet-of-Things) process. This is also explained in the definitive guide to Why ICOs are almost all scams. Some of the IOT altcoins attract speculators and hoarders seeking to profit from trades. This is unfortunate, and it intereferes with the utility of the token (IOTA is a clear example). But, just as with Bitcoin, speculator interest doesn’t define a scam.

What about altcoins. Are they as toxic as ICOs?

Referring to my own definition, above, many altcoins—perhaps even most—are not scams. But, I am pretty picky on the altcoins that I recommend, because most of the clever features and functional improvements introduced by altcoins will be ripped and folded into Bitcoin. It is inevitable.

Apt metaphor for ICOs

After all, Bitcoin has an enormous lead, it has already achieved a two-sided network, and none of the altcoins are protected by patent, trade secrecy or opacity. By definition, they are free, transparent and without any licensing or proprietary features.

I was never burned by an ICO, but I have certainly consoled friends and colleageus who have been sucked into them. Unlike many columnists and consultants, I am not beholden to issuers. So, if your wondering what is an ICO? It is a puss-filled boil on your privates. You may quote me on that. The article linked above is honest, unbiased and definitive.

 

John Oliver explains Bitcoin, Blockchain & Crypto (with precision & clarity)!

John Oliver is a crossover who bridges the art of a comedian with the reporting and perspective of a liberal political pundit. Even detractors acknowledge that Oliver addresses serious issues with unusual wit and humor.

I never thought Oliver could (or would) tackle the topic of cryptocurrency—at least not with value to the viewer. It is too geeky, and too esoteric. (It also cuts into my mission of evangelism and education). 🙂

He did, and he sparkles! Feel free to jump past the fluff. The Bitcoin tutorial starts at 3:40. Of course, my friend, Shechter, in Long Island New York will bust a gut over what Oliver says at 9:40. It is not only clear and concise, it is accurate and terribly funny!

Whether you are a Bitcoin newbie or a seasoned blockchain coder, this is the video you have been looking for. This one is durable.

Related Videos:

What sets cryptocurrencies apart from each other?

Today, I was asked to answer this question at Quora:

“What sets each cryptocurrency apart from the others?”

“Cryptocurrency” is a broad term. It refers to payment coins, of course—such as Bitcoin and Litecoin. But, because most tradeable tokens attain an asset value, the word is often used to refer to smart contract devices, such as Ethereum, a host of other blockchain based tokens, functional Internet-of-Things tokens, and even ICOs (Initial Coin Offerings). Since people treat ICOs and IOT tokens as investment instruments even if they are useless as a payment mechanism, they all fall within the realm of a cryptocurrency.

So, before addressing the question, let’s distinguish between Altcoins and ICOs. I assume the question refers to Altcoins, and not ICOs…

ICOs are almost all scams. A very few of these are designed to function in a well-defined IOT role (Internet-of-Things). But, any ICO that you are likely to hear about share one or more traits described here.

But Altcoins are different. These are typically forked from Bitcoin or another established blockchain-backed coin. They are created because developers feel that they have solved one or more of the problems that limit the growth or appeal of Bitcoin. For example, Bitcoin has (or recently had) all these problems or perceived limitations:

  • Transaction Malleability (Recently solved with activation of SegWit)
  • Speed of transaction (Now being addressed by Lightning Network)
  • Cost of transaction (Also addressed by Lightning Network early 2018)
  • Very high electrical demand by miners (Still a major problem)
  • Fairness of and speed of distributed governance process (a big problem)
  • Finding a validation incentive after mining runs out (a long term issue)
  • Deep privacy features. These are inherent to Monero and Zcash. (Bitcoin will soon support onion routing transactions to enhance privacy)
  • Disparate goals of miners, developers, vendors and users (still a problem)
  • Limited Smart Contract mechanism (Ethereum is the current king in this realm, with slick methods of administering and executing contracts. Bitcoin will eventually acquire these features & benefits.
  • Like ICOs (these are almost all scams), some Altcoins (not scams) address specific IOT applications. This is a legitimate and non-payment use of blockchain technology. It represents a promising evolution. It is not yet clear if Bitcoin can eventually adopt these features and function in a non-payment, IOT capacity. The intrinsic, stored value aspect of Bitcoin would make it difficult to use in such applications.

One big problem facing Bitcoin is that the distributed consensus mechanism that makes it a trusted, peer-to-peer mechanism is based on Proof-of-Work (POW). Coupled with a mining incentive that increases dramatically with exchange rate, Bitcoin is—quite simply—untenable. With consumption topping 33 terawatt hours in December 2017, it already consumes more power than some countries. If even 2% of the world’s payment transactions were settled in Bitcoin, the mining would consume more power than is generated throughout the world. This just cannot continue!

Fortunately, developers and armchair inventors have proposed or demonstrated clever POW alternatives to achieve a fair distributed consensus. Some of these use a Proof-of-Stake mechanism, while others add a limited central-authority nexus to facilitate governance and scaling. Some are built on a modified blockchain that weaken several pillars of a true decentralized, p2p network. Of course, researchers are concerned that these systems deteriorate the decentralized nature of Satoshi’s original blockchain.

But, other systems may allow for a fully distributed and democratic trust platform, such as BFT Replication (IBM) or Distributed Objective Consensus, which was proposed by an amateur mathematician.

In reply to the title question, Altcoins are set apart by their claim to address the above problems & limitations, or to add features.

Will an Altcoin Triumph over Bitcoin?

Perhaps, a few altcoins will thrive, due to specific niche advantages; features that Bitcoin chooses not to address, such as deep anonymity or with a novel utilitarian feature that facilitates a specific Internet-of-Things process.

Unfortunately for altcoins, all coins require public trust and transparency. For this reason, they are open source, permissionless, without licensing, without patent protection and with a fully disclosed pre-mining history. And for that reason, Bitcoin is free to steal any clever advantage that works. It’s all up for grabs and no one can be sued.

In effect, each altcoin as a beta test platform for Bitcoin. Now that Bitcoin is finally addressing the problems of scalability and fair/speedy governance, there is little doubt that it will continue to dwarf other coins.


Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences around the world. Book a presentation or consulting engagement.

Building a Bitcoin ATM is easy, but…

…But offering or operating them engulfs the assembler in a regulatory minefield!

A photo of various Bitcoin ATMs appears at the bottom of this article. My employer, Cryptocurrency Standards Association, shared start-up space at a New York incubator with the maker of a small, wall mounted ATM, like the models shown at top left.

What is Inside a Cryptocurrency ATM?

You could cobble together a Bitcoin ATM with just a cheap Android tablet, a camera, an internet connection, and [optional]: a secure cash drawer with a mechanism to count and dispense currency).* A receipt printer that can also generate a QR code is a nice touch, but you don’t really need one. You can use your screen for the coin transfer and email for a receipt.

Of course your programming and user interface will make all the difference in the world. Your ATM must interface with an exchange—your own or a 3rd party.

If your plan is to sell Bitcoin and not exchange it for cash, then you don’t need a currency dispensing component at all. You only need a credit card swipe-reader and an RFI tap reader. Some models are smaller than a cookie and sell for under $30. They can be attractively embedded into your machine. In fact, some bank card processors offer them without cost.

I Have Built a Prototype. Now What?

Desktop ATM. No cash dispensed

Once you have a working prototype, you will need to test it with focus groups (alpha test) and at prospective public sites (beta test). You must also harden the production model against tamper and theft and find paying businesses or property owners, so that you can achieve economies of scale. (A reasonable business model requires that you produce dozens of devices each month).

Parts Cost: Bill of Materials

At scale, you can achieve a unit production cost of less than $200. But that’s for a desktop unit that does not accept or dispense cash. A high-quality and attractive machine that accepts cash and is free standing or ready for outdoor installation into a building exterior might cost you $650. You could sell these for $2,500 plus recurring fees to the property owner, depending on venue, or you might simply lease them, just as Xerox did in the early days of office copiers. (In a hotly competitive market, such as Las Vegas, you may need to pay a portion of your profits to the site, rather than profiting from ‘renting’ the ATM).

A Threat to Your Business

But wait! Before you run off and create an ATM venture of your own, with visions of a 350% profit margin, all is not as easy as it seems!…

Cryptocurrency ATMs intersect with a minefield of regulatory licensing and compliance standards. In many regions, they are not even legal for placement in a public area.

In most countries (including all of USA), you must be a registered Money Transmitter. You will need separate state licensing and—since you are moving cash in or out of the banking system—you must be partnered with a federally chartered bank. You will also need to post a hefty insurance bond—perhaps even for each machine and each municipality in which it is placed! These laws convey liability to both your clinet (the property owner) and to you. Many courts will hold the manufacturer of financial or medical products accountable for ensuring that their customers are licensed and compliant with regulations. That is, you may not be able to legally sell your ATM to organizations that have not demonstrated that they qualify to operate one.

Why is There a Camera in my ATM?

In all cases, you must capture photographs of your user and their state-issued ID, because you are required to know your customer and adhere to a slew of anti-money laundering practices. For example, with transactions larger than $2,000 (from anyone who is not known to you and a regular client), you must generate a Suspicious Activity Report. For transactions larger than $10,000, you must comply with RICO (Racketeer Influenced and Corrupt Organizations Act). This requires a camera, interview, and reporting process. You will be generating forms with data supplied by your user and possibly even a real-time verification of the facts they provide.

If you wonder why you needn’t do these things this when buying or selling your own cryptocurrency, it is because: (a) You are trading your own assets and are not the custodian of customer accounts; and (b) You are a consumer. It is likely that the exchange is required to do all of these things.

With Regulations, Can Bitcoin ATMs Generate Profit?

For the reasons described above, the operational cost of deploying and operating an ATM network (or your equipment for sale or rent) is significantly higher than the up front hardware cost. When you add the need to protect your venture from legal claims arising from process glitches or users that claim they lost cash or Bitcoin, you may arrive at an operational cost that makes your business model unworkable.

Of course, Bitcoin ATMs are profitable in some cases. I have consulted with a few start ups that operate them successfully in Las Vegas casinos, a few airports and race tracks, and at large outdoor fairs. But, for everyday use, the heyday of ATMs is most likely 5 or 10 years off. Before this happens, we need a more uniform and functional regulatory & insurance framework, and a higher volume of users per ATM.

Check out various Bitcoin ATM models below. Few manufacturers turn a profit. In the end, it boils down to location (high volume sites with the right people) and location (legal jurisdiction).


* One ATM startup found inexpensive hardware for dispensing currency by recycling mechanisms from bill-change machines used in game arcades or in hotels next to vending machines. These machines are being discarded, because newer vending machines accept credit cards and smart phone payment. But again, if you only plan to accept a credit or debit instrument for Bitcoin, then you don’t need a cash counter or dispenser.


Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences around the world. Book a presentation or consulting engagement.

Multisig Wallet: Protect Bitcoin in case of death or forgetfulness

UPDATE (April 2018): See footnote regarding Coinbase multisig vaults.* The feature will be retired this month, because it interferes with plans to improve support of Bitcoin forks.

Legacy Method of Inheriting Assets

Many Bitcoin owners choose to use a custodial account, in which the private keys to a wallet are generated and controlled by their exchange—or even a bank or stock broker. In this case, funds are passed to heirs in the usual way. It works like this…

An executor, probate attorney, or someone with a legal claim contacts the organization that controls the assets. They present a death certificate, medical proxy or power-of-attorney. Just as with your bank account or stocks and bonds, you have the option of listing next of kin and the proportion of your assets that should be distributed to each. These custodial services routinely ask you to list individuals younger than you and alternate heirs, along with their street addresses, in the event that someone you list has died before you.

Of course, Bitcoin purists and Libertarians point out that the legacy method contradicts the whole point of owning a cryptocurrency. Fair enough.

Multisig to the Rescue

Using multisig would be far easier, if wallet vendors would conform to standards for compatibility and embed technology into hardware and software products. Unfortunately, they have been slow to do so, and there are not yet widely recognized standards to assure users that an implementation is both effective and secure. But, there is some good news: It’s fairly easy to process your ordinary account passwords and even the security questions with a roll-your-own multisig process. I’ve done it using PGP and also using Veracrypt—two widely recognized, open source encryption platforms.

This short article is not intended as an implementation tutorial, but if the wallet vendors don’t jump up to home plate, I may release a commercial tool for users to more easily add multisig to their wallets. It really is safe, simple and effective. (If readers wish to partner with me on this? I estimate that it will take $260,000 and about six months).

What is Multisig and How Does it Protect your Wealth?

Multisig allows anyone with credentials to an account, wallet or even a locked safe to create their own set of rules concerning which combinations of friends and relatives can access their assets without the original owner. The owner sets conditions concerning who, when, how much and which accounts can be accessed — and the heirs simply offer passwords or proof of identity. If implemented properly, it doesn’t matter if some of the heirs have forgotten passwords or died before the original owner.

This can be illustrated in an example. I am intentionally describing a complex scenario, so that you consider a full-blown implementation. Although the ‘rules’ listed below appear to be complex, the process for creating the associated passwords is trivial.

The last 2 rules listed below do not use Multisig technology, but rather Smart Contracts. It enhances an owner’s ability to dictate terms. Here, then, is the scenario…

I want heirs to have access to my assets
at banks, brokers, exchanges or other ac-
counts–but only under certain conditions:

  • If any 4 of 11 trusted family and friends come together and combine their passwords (or an alternate proof-of-identity), they may access my wealth and transfer it to other accounts
    • But, if one is my husband, Fred, or my daughter, Sue, then only two trusted individuals are needed
    • —But not Fred and Sue together (At least one must be an outsider)
  • If any account has less than $2500, then it goes to my favorite charity, rather than the individuals I have listed
  • None of my accounts can be unlocked by my heirs, until I have not accessed them with my own password for 3 months. Prior to that, the Multisig will fail to gain access.

Again, the decedent’s wishes are complex, but executing and enforcing these rules is trivial. In my presentations, I describe the method on two simple PowerPoint slides. Even that short description is sufficient to show anyone who has used common cryptography apps to weave their own multisig add-on.

Of course, each individual will need to locate their own secret password, but a biometric or other conforming proof-of-identity can be substituted. Even if several survivors cannot recall their credentials, the multisig method allows other combinations of individuals to access the assets across all accounts.

This article may leave you wondering about the legal process—and this is where I agree with the Libertarian viewpoint: Sure! The courts have a process and heirs should document their access and decisions for tax purposes and to assure each other of fair play. But a key benefit of cryptocurrency and the disintermediation offered by the blockchain is the personal empowerment of access with impunity and without waiting for any legal process.

Let the courts to what they do, while you honor the wishes of your dearly departed.

If this article generates sufficient interest, I may prepare a short tutorial on how to split off your own Multisig passwords, regardless of which wallet or hosted services you use. It will work with any vendor, app or gadget —or— Perhaps, I will refine my homespun solution and offer it as an add-on app that can be used with any wallet, bank account or exchange. Simple, ubiquitous and effective multisig should have been available to even traditional banking customers years ago!


* History of Coinbase support for a multisig vault

Oct 29, 2014 — Coinbase adds Multisig Vault
                           Multisig rule: (3) private keys created. 2 are required to access coins:

  1. User Key
  2. Coinbase Key
  3. 2nd Coinbase Key but only user has passsword

Aug 31 2017 — No more NEW Multisig vaults

April 19 2018 — Sunset of Multisig vaults (and announced earlier, on Mar 20)

Sunset on Multisig vaults: They make it difficult to support forks. A new tool will still support withdrawls after multisig vaults are retired.


Ellery Davies co-chairs CRYPSAhosts the Bitcoin Event and presents at Crypto Conferences around the world. Book a presentation or consulting engagement.

Have there been successful Transaction Malleability attacks?

First, let’s get some basics out of the way…

What is Transaction Malleability?

Here are 2 explanations of transaction malleability: [Coindesk] [TechTalk]

In a nutshell, Transaction Malleability is a weakness in the original Bitcoin implementation that enables a bad actor to change the unique ID of a bitcoin transaction before it is confirmed on the Blockchain. Such a change makes it possible for someone to pretend that a transaction didn’t happen, if all necessary conditions are in place.

As the Coindesk article points out, a successful attack requires certain conditions that make a successful attack difficult or even unlikely. Many analysts referred to it as a bug that should eventually be fixed, rather than an urgent issue.

Was This Flaw Addressed

Transaction malleability was addressed (for Bitcoin) with the introduction of Segregated Witness (SegWit) in August 2017. 1, 2

But Was There a Successful Attack?
Attack? Yes. Successful? It’s doubtful…

In March 2017, five months before SegWit was implemented, a mining pool that administers 2% of worldwide activity launched a malleability attack. No one lost money – and some individuals believe that they did this to emphasize urgency and hasten the adoption of SegWit.

What About Lightning Network?

The Lightning Network is a ‘Level 2’ network overlay, currently being adopted by miners (depending on the service or exchange, it is being incrementally activated in the first months of 2018). To function properly, it requires that transaction malleability be solved. But, in the event that a miner is not SegWit compliant, it can resolve the malleability problem in other ways.

1 SegWit should not be confused with SegWit2x, an upgrade process that was cancelled a few months later in November. 2017

2 In the TechTalk article linked above, the author concludes:

“Transaction Malleability is fixed with Segregated Witness by no longer taking into account signatures when calculating the transaction’s fingerprint. Fixing Transaction Malleability means that the Lightning Network can work smoothly.”


Ellery Davies co-chairs CRYPSA, hosts the Bitcoin Event and presents at Crypto Conferences around the world. Book a presentation or consulting engagement.

Would an ethical government surrender control of monetary policy?

Godfrey Bloom is a member of the British Parliament. His in-your-face style of educating and shocking his peers has made him a controversial politician. He has occasionally been escorted out of the assembled parliament because of his rowdy rhetoric.

Consider the video below. Bloom offers a critical, but simple and clear explanation of the Fractional Reserve banking system used in the US and Europe. This gets to the heart of the matter! [continue below video]…

Conclusion (mine, and not Mr. Bloom’s): It is in the interest of governments to use a form of money that they cannot manipulate, print, spend, hide or lend without first earning, taxing or legitimately borrowing — and then balancing the books, openly.

Bitcoin is such a currency. Any country that adopts an open source, permissionless, and completely transparent monetary instrument will demonstrate to citizens and taxpayers that they respect their constituents and that they commit to balance their books like any state, corporation, NGO or household.

Would an ethical government surrender control of its own monetary policy? H*ll, yes! This is how a government avoids rampant inflation and the burden of non-consensual debt to future generations. It is also how a government makes taxation, redistribution and spending transparent and accountable. It is how a government restores trust.

We have been raised with centuries of dogma that teach us to accept inflation, and a constantly escalating public debt. Sometimes, the path forward is not immediately obvious. But history doesn’t lie. When trusted nations with large economies manipulate interest rates, borrow without a lender, or inflate a nation out of a crisis (what the US calls “quantitative easing”), the long term effect is certain to be no different than Argentina, Zimbabwe, Venezuela or Germany between the wars. It is a recipe for disaster. It places every citizen and their future children into debt-bondage.

Moving away from the Gold Standard in the 1970s was a risky maneuver. The risk was not abandoning a precious metal with intrinsic value—but rather it placed the full faith and credit of our economy in the hands of transient politicians, rather than in a capped commodity with certain and immutable properties.

Bitcoin is the new gold. It is capped, transparent, open-source, vetted and without a mechanism for quick or covert manipulation (the US calls this “raising the debt ceiling” and they do it every few months!). We may not move to an economy based on Bitcoin today or tomorrow, but that day is coming. Thankfully, it’s coming!

Thoughts on a “Korea Krash”

If you are reading this on January 16, 2018, then you are aware that Bitcoin (and the exchange rate of most other coins) fell by 20% today. Whenever I encounter a panic sell-off, the first thing that I do is try to ascertain if the fear that sparked the drop is rational.

But what is rational fear? How can you tell if this is the beginning of the end, or simply a transient dip? In my book, rational fears are fundamental facts like these:

  • A new technical flaw is discovered in the math or mining
  • A very major hack or theft has undermined confidence
  • The potential for applications that are fast, fluid and ubiquitous
    has dropped, based on new information*

Conspicuously missing from this list is “government bans” or any regulation that is unenforceable, because it fails to account for the design of what it attempts to regulate. Taxes, accounting guidelines, reporting regulations are all fine! These can be enforced. But banning something that cannot be banned is not a valid reason for instilling fear in those who have a stake in a new product, process, or technology.

Ellery’s Rule of Acquisition #1:

Drops triggered by false fears present buying opportunities

At times like this, you must make a choice: If you can’t afford to stay in the market and risk a bigger drop, then cash out and live with it. But if you believe in crypto and the potential for a digital future that dis-intermediates your earning, spending and savings, then this drop in dollar value presents opportunity.

This downturn will pass, because the cryptocurrency fundamentals have not changed or been undermined by recent events. There is no new technical flaw or hack. The potential for cash transactions and future applications get rosier every day (let’s assume that Bitcoin will finally add Lightning Network and that miners will stop fighting with developers)*

The current 20% drop is not a big deal. It takes us back to an exchange rate that we saw just one month ago in early December. It was triggered by saber rattling in South Korea. But, let’s face it: Governments have as much influence over trading or spending cryptocurrency as they do over the mating of squirrels in your backyard. Do you think fewer squirrels would mate, if the government banned them from mating?

If you can answer that question—and if you can afford to stay in the game—then relax. 1 BTC has the same value today as it had yesterday and the day before. It is worth exactly one bitcoin. The current dip in exchange rate with other currencies was sparked by fear; and that fear is misguided or irrational.

[click below for perspective]…

* Bitcoin has a serious limitation in transaction throughput and transaction cost. The problem is serious and it frustrates users, developers, miners and vendors. But it is not new, and the consensus about its likelihood of being corrected has not suddenly changed. These limitations are unrelated to today’s large drop in exchange value.


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

Proof-of-Work Alternatives: Massive electric consumption by cryptocurrency mining

Some blogs and news outlets eschew long titles. Publishers want readers to scan a list of topics that fit on one-line each. But, a better title for this article would be:

“Massive electric consumption by cryptocurrency mining:
An unfortunate environmental nightmare will soon pass!
… Proof-of-Work alternatives are on the horizon”

A considerable amount of electricity is used in the process of mining Bitcoin and other cryptocurrencies. Miners are effectively distributed bookkeepers, and this use of resources is part of a system called “proof-of-work”. It keeps the books fair, honest, and without an ability for the miners to collude (In other words, they cannot ‘cook the books’).

What makes the process unique and exciting is that this “distributed consensus” does not require a trusted authority, like a bank. In fact, the whole point of the blockchain revolution is that users trust a mechanism rather than a bank, government or even each other.

But, for any network that hopes to become part of the financial fabric, it must be ubiquitous and in constant motion. Proof-of-work just doesn’t make the grade, because it doesn’t scale. The need for miners to prove that they did something complex sucks up too much power. If Bitcoin or any proof-of-work currency were to be adopted for even a small fraction of commercial and personal transactions, it would overwhelm the world’s energy services.

One reader suggests the problem will be solved by the recent boom in shale fracking and renewable, non-polluting energy. He points out that crypto mining may even drive a market for distributed, clean electric production.

Unfortunately, clean and cheap power makes the problem worse. Even if electric capacity were to rise dramatically and experience a great cost reduction, cryptocurrency networks would automatically demand all the extra electricity. It is a no-win game, because mining incentives escalate with an increase in supply or drop in cost.

Will large-scale, blockchain-based networks fail, because of enormous electric demand? Fortunately, the future is not so bad, after all. Although networks, like Bitcoin, currently use proof-of-work to ensure honesty and fairness, it is only one of many possible measurement and enforcement mechanisms. Eventually, developers and miners will swap in another proof mechanism to keep the network humming—and without creating an environmental catastrophe.

Will Change in Proof Come in Time?

The political process for changing the fairness mechanism (“forking the code”) is complex and fraught with infighting, but the problem will eventually be addressed, and it will be solved before electric demand becomes a critical issue. Despite a messy voting process, the miners have too much at stake to ignore this problem much longer.

Various proof alternatives are already being used in altcoins. Since Bitcoin is perfectly free to steal these techniques (none can be protected by patent or trade secrecy), we can think of these other coins as beta-tests for Bitcoin. How so? As the first and biggest elephant in the room, Bitcoin will likely reign supreme, as long as it doesn’t wait too long before grabbing the best technology and tucking it into its quiver.

Proof-of-Work Alternatives

  • One method, already used by some altcoins, is called “proof-of-stake”. It’s a bit like getting voting rights based on how much land you own. This method does not demand lots of electricity—but some analysts feel that is not as fair, because it cedes network control to the wealthiest members.
  • Another method, called BFT Replication was developed by Marko Vukolić, at the IBM Blockchain Group in Zurich Switzerland. It might be exactly what we need.
  • Yet another method was proposed by C.V. Alkan, an amateur analyst with a passion to solve this problem. He calls it Distributed Objective Consensus.

These aren’t the only alternatives to proof-of-work. Ultimately, one or more of these fairness enforcement mechanisms will make its way into Bitcoin and other currencies and blockchain services. In my opinion, the electrical crisis is a genuine threat, but it is one with a solution that will be implemented soon—perhaps even this year.

Related:


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

Is Cruptocurrency Good for Government?

Today, editors at Quora asked me to answer a seemingly simple question:

“Is cryptocurrency good for government?

This is a terrific question, and one that I write about frequently. The question gives me a chance to summarize the key facets of widely mistaken fears.

In the first phase of cryptocurrency adoption (we are in the midst of this now), there is an abundance of skepticism: Misunderstanding, mistrust, historical comparisons that aren’t comparable, government bans & regulatory proposals—and a lot of questions about intrinsic value, lack of a redemption guaranty, risky open source platforms, tax treatment, etc, etc.

Out of the gate, few individuals and governments paid attention to Bitcoin. That was when it traded under $100. It was complicated to understand, and it seemed to be nothing more than gaming money coveted by nerds and geeks. But with each wave of adoption, or the crash of a major exchange, or the shutdown of Silk Road, public interest has piqued. And, of course, the price of Bitcoin has shot up from nothing to almost $20,000 in the past few years.

It’s natural that governments watch developments closely, and sometimes weigh in with guidance, licensing or regulations. But consider the underlying concerns: Why should governments care about this activity? Is cryptocurrency good for government?

Very often, we hear of government restrictions or “bans” on trading bitcoin. The justification typically hinges on a belief that cryptocurrency leads to bad things:

  1. Leads to widespread tax evasion
  2. Facilitates criminal activity (because of anonymity)
  3. Causes citizens to lose faith in their own government
  4. Interferes with a nation’s ability to control its own monetary policy
  5. Reduces liquidity of (government-backed) national currency
  6. Causes a deflationary economy. People will delay spending and stop investing

The first three concerns are patently false and the last three concerns raise an interesting question: Might it benefit a government to surrender control over its own monetary policy? We’ll explore this, below…

Let’s look at each of these fears. I won’t try to analyze or defend each statement below. You can find the justifications throughout this blog.

1. Gradually, governments are coming to recognize that the first three concerns are false. If cryptocurrency gains widespread traction as a payment instrument—or even as cash itself—governments are not weakened in their ability to tax, spend, or enforce tax collection. This myth arises from a lack of education, experience and familiarity.

2. We have seen some spectacular news stories involving very serious criminal activity that accepts bitcoin. In each case, the bad guys were caught—and they were caught because they foolishly accepted bitcoin.

In fact, cash is a far better tool of crime than cryptocurrency. Pre-paid debit cards are even worse.

Bitcoin is not anonymous. It is what cryptographers call pseudo-anonymous. I call it “a fool’s anonymity”! Although Bitcoin allows users to create anonymous wallets, anyone selling drugs or committing a notorious deed can be tracked. A million armchair analysts (anyone who uses and follows Bitcoin), can follow the money trail—through VPNs and mixers—all the way until something is spent in the real world. At some point, someone buys a tennis ball or gets braces for their kid, or buys a book at Amazon. That’s when it all unwinds.

3. Far from cryptocurrency undermining trust in government, it does just the opposite. It demonstrates to citizens that the government shares an obligation to balance its books, just like every individual, corporation, NGO, city or state.

In effect, governments must raise the dollars that they intend to spend. In an emergency, they can borrow, of course, but only if they can find creditors that truly believe in their ability to repay the debt.

This trust yields phenomenal results:

  • Creditors no longer wonder if a nation will attempt to turn on the printing press (like Argentina, Venezuela, Sudan, Zimbabwe, Greece or Germany between the wars).
  • Citizens no longer fear that their transient elected officials will constantly raise the debt ceiling (This is a euphemism for “hoisting debt on future generations”, and destroying credibility with debtors at the same time).
  • Redistribution of wealth through wacky tax laws is still possible, but it is more likely to require the consent of taxpayers, because suddenly, governments can’t hide expenses behind the opaque barrier of a printing press, nor can they use inflation as a mechanism of social policy. Instead, they must create clear, 2-entry line items for each social welfare expense: Who gets the money? —and Where does it come from?

4, 5 and 6: Now, we arrive at the least understood concerns…

#4 and #5 are true. But as we discuss in #3, loss of control over monetary policy is a very different thing than losing control over fiscal policy.

It took decades to discover that decoupling a country from its delivery service and telephone companies resulted in a remarkable boost to industries, services and productivity. Likewise, decoupling a nation from its currency is a really, really good thing. No one can play games, trust is restored. Our kids aren’t born into debt of the nations that purchase our government bonds.

#6 is perhaps the most difficult to accept. Some economists still insist that a small amount of inflation is critical to getting people to spend and invest. But a growing number of experts are discovering that this just isn’t so. Deflation is often associated with unemployment, war, recession and a loss of liquidity and investment. In fact, deflation can be triggered by these things, but when it is the result of a trusted and capped-but-divisible money supply, it doesn’t lead to any of these things.

The concern about people not spending is a linguistic trick. Another way to say the same thing is that a capped money supply encourages people to save for big expenses and for retirement. Since when is that a bad thing?

I have been answering questions about Bitcoin and cryptocurrency since Satoshi was at the helm. Talk to me. Ask about it! Then, think for yourself. Stay engaged.


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

Say it Again: “Bad News is Good News”

By now, every interested news-junkie is aware that Bitcoin plummeted from $15,000 to $13,000 (USD exchange rate) on January 11, 2018. This morning, every news outlet and armchair analyst attributes the drop to the Korean government signaling that it will ban Bitcoin trading among its citizens.

With Donald Trump and Kim Jong Un butting heads over nuclear missile tests and the upcoming Winter Olympics, you would think that South Korea has other priorities than banning Bitcoin.

As with all news—except accidents—the Korean plans were known by a few insiders (in this case, government bureaucrats), and so the influence on value was bigger than the drop that occurred after the news story. In the days before this “event”, it was probably responsible for a drop of about $4500 in exchange value.

Listen up Wild Ducks! We have heard this before. On Sept 11, China announced the exact same thing. I wrote about it in the most popular article of my 7 years as Blogger: Bad News is Good News for Bitcoin Investors.

As an investor, am I worried? Not on your sweet bippy. I am ecstatic! There are some things that governments cannot ban: the mating of feral cats; water from seeping into cellars; communications networks that are distributed and permissionless. Ineffective and unenforceable regulation always spells opportunity. When I hear of such “bans” (or learn about Jamie Dimon claiming that Bitcoin is a ‘pyramid scheme’ before having all the facts), I become confused and excited

Investors often fail to recognize the way in which toothless government edicts work. I am confused that anyone would act on such flawed information. I am excited that they do. Why?—Because each time Bitcoin makes a quick dive due to crazy or irrelevant news, it makes an even bigger upward jump within days. In this case, the reverse correction has already begun.

I created the chart, below, for my presentation at the Cryptocurrency Expo in Dubai during the last days of October. During this 3 day conference, Bitcoin jumped from $6000 to 6500 because these days followed a hard fork that scared analysts. Within 5 weeks of the conference, Bitcoin touched $20,000, depending on the exchange from which you get quotes. But here’s an odd thing (not so odd, to me): With sudden market accessibility in the past 30 days, why is Bitcoin falling? [continued below]…

In the past month (Dec 10 2017~Jan 10 2018), Bitcoin and Bitcoin futures are finally becoming accessible to traditional brokers using familiar investment instruments. As a result of market accessibility, everyone and his brother is getting into Bitcoin. Since it is still difficult to take a negative position, you might expect this fresh interest to drive up value. This expectation is reinforced by my own anecdotal observation: Based on the large number of old acquaintances asking me to help them buy Bitcoin, it certainly feels like the sentiment is bullish. But no! Existing stakeholders are dumping their positions!

It’s not just because of yesterday’s news. Rather, it’s because anyone who has seen Bitcoin triple in just 3 months, feels that their personal stake experienced a “lucky” gain. They want to turn that paper gain into a profit before it tanks.

But then, there are the cognoscenti. That’s us…We are the individuals who have a feel for the natural, intrinsic value of Bitcoin. We understand that value does not require a redemption guarantee from Caesar. We have a reasonable vision of currency, inflation, economics, history, the role of government—and especially, of distributed trust. Just as important, we understand why an altcoin is unlikely to replace Bitcoin—even if it solves some of Bitcoin’s frustrating technical and governance issues.

Governments tend to react to perceived threats before understanding opportunities, motives and that which is fait accompli. There is a role for government in all of this, but it is not to ban what cannot be banned. That is simply good news for us stakeholders.

Related Reading:


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

What if you send Bitcoin to a non-existent address?

I get this question a lot. Today, I answered it at Quora.com. But, here at A Wild Duck, I have more bandwidth to elaborate.

Question:

What if I make a typo when sending Bitcoin. The recipient address may be invalid or it may belong to another individual. —But there is a third possibility. Couldn’t it be a valid address, but without any wallet that can receive it? I bet the blockchain catches these errors—Right? Will I always get my money back?

The short answer:Don’t worry, it cannot happen. That won’t happen either. Sure, it’s possible. That’s wrong, and You’re screwed!

But let’s look at this a bit closer. A little knowledge goes a long way!

Incidentally, this answer gets into some gritty, esoteric details. It may lead you to believe that cryptocurrency is complicated, risky or not worthwhile. But, it only seems this way. With any new technology, standards and practices gradually flow into gadgets, apps and services. Early televisions required an expert operator.  The next generation of owners dealt with vertical hold, contrast and antennae bolted onto the chimney. If your older than 55, you schlepped to a pharmacy with Dad to test a dozen or more vacuum tubes, just to find out if the circuitry was getting weak.

No one does these things anymore. TVs are flat and with a perfect picture. They are almost as easy to use as a toaster. (Except for the five remotes needed to choose a source and set up the sound! These ridiculous gadgets are only now being replaced with voice control and other smart technologies).


Back to square one: Can you send money to an invalid Bitcoin address due to a typing error? If you do, will you get it back?

It is not likely that you would do so in a hundred lifetimes. But if you succeed at creating what appears to be a valid address, you are screwed. Only a hundred million trillionths of valid addresses will ever have a wallet behind it. The blockchain does not record the creation of wallets. No one can know if there is anyone with the address and the keys to the apparently valid wallet address that you sent money into.

Addresses transfer things from one place to another. You enter a street address into your GPS expecting to be transported to a location. But, with everything else, an address moves value or sensitive information. So, let’s start with an absolute, inviolate rule: Never type an “address” into any system!

Instead, cut & paste the address from the source or—at least—from the message that delivered it. After all, you don’t want a note to your lover ending up on the mobile phone of your boss.

But you didn’t ask about best practices—you asked about checksums…

1. Invalid Address (No wallet could exist for what you typed)

Bitcoin addresses include a 32 bit checksum, which makes the possibility of typing a valid address by mistake about 1 in 4.3 billion. So don’t worry, a mistyped address will be caught by your own wallet or service, before anyone even peeks at the blockchain.

But what if—somehow—you manage to enter an address that seems valid (it passes the checksum test), but there is not yet a wallet created with that address?

2. Address Appears Valid (But there is no wallet, or they belong to the wrong person)

You might think that the transaction gets staged, but eventually fails, because the wallet address is unlikely to have ever been created. But there is a problem with that theory: Wallets can be created off-line and remain dormant for years. The block chain does not know which wallet addresses exist. It only knows which appear to be valid addresses.

For this reason, sending bitcoin to an address that is entered in proper form, but does not belong to anyone will result in permanent loss. Technically, the money exists, but no one has the private keys to spend it. Any effort to recover the loss would better be spent on a good therapist and searching for a job in the sunset years of your life.

It would be nice if you could create a wallet that matched the receiving address. Sadly, this is impossible, because wallets are created through a random one-way process.

This ends an answer to a straightforward question. But, now, let’s have some fun…


Let’s figure out what are the chances that someone actually does have a wallet that matches a valid address that you typed by accident. (After all, you already beat odds of 1-in-4.3 billion by typing an address that satisfied the checksum!)

A Bitcoin wallet address is a string of 34 characters (letters and numbers).* From the full set of 10 digits and of 52 upper/lower case western characters, four are excluded to reduce the chance of entry error (O, 0, I, L). This means that the number of possible wallet addresses is 5834 = 1060 *

The human brain has between 100 and 1000 trillion synapses. Yet, 1060 is:

  • More than the synapses in all brains of every animal that ever lived
  • More than every atom in our planet, solar system and galaxy
  • More than—Well, you get the point!

Even if everyone on earth creates a new Bitcoin wallet every single minute and all wallets are valid for life, the chances of accidentally typing the valid address of another user is very nearly zero.

* Interesting caveats and notes:

  1. Bitcoin addresses are currently generated via an algorithm called RIPE-MD160. This further limits the number of possible wallet addresses to 2160 = 1.4*1048). But this reduction is caught when sending, because the checksum uses the same algorithm to validate against a properly formed address.
  2. Checksums aren’t just for catching a typing error. In addition to 34-character addresses, Bitcoin supports 33 characters and even some 26 character addresses. The checksum ensures that shorter addresses are not actually longer addresses that with leading zeros (transcribed as blanks) or that have dropped a digit.

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement

Revenue Neutral model reduces altcoin investment risk

Titles are chosen by editors and not journalists or experts. I fought my editor over the above title. Yes, I address the teaser—and I explain a solid altcoin investment model. But, that comes after the break. The first part of this article should be titled “Why would anyone quote cost or value in Bitcoin?”. The subjects are highly related, so bear with me…

Today, a reader asked this question:

Some financial sites discuss value in terms of Bitcoin, rather than dollars or Euros. Why would I calculate the value of a new car, my rent or an investment in this way? It’s hard to understand how much money I need!

Answer: Your right! It’s difficult to estimate the value of a car or your rent in terms of Bitcoin. You are paid in dollars or Euros—and your landlord quotes rent in the same currency.

On the other hand, it’s natural to gauge the value of something by comparing it to a commodity that you earn and spend at a steady or predictable rate. Therefore, your assumption that it makes more sense to determine value on a dollar-basis is absolutely correct. No one determines the value of a new car by comparing the cost with a government’s national debt—or the number of donuts you would need to sell (unless you are a donut maker).

But, this assumption is transitory. It is based on a historical paradigm that is gradually changing. We are entering a bold new era. A big debate is shaping up over How gradual is the change? But make no mistake: This change is occurring in our lifetimes…

That change will eventually lead you to estimate, earn, spend and value things in Bitcoin or a similar cryptocurrency. One day soon, fluctuations in the value of the US dollar or Euro will cause you to wonder “What is happening with the dollar?” rather than shake your confidence in Bitcoin. Bitcoin (or something similar) will integrate into your mindset as the exchange medium, rather than fiat currency of a nation state.

Naturally, a series of dominos must fall, before you realize that Bitcoin is the money. I predicted this four years ago, and the process is already occurring. It is retarded by two unfortunate events, but these are both temporary setbacks:

  • Today, more people are hoarding and speculating rather than accepting or spending Bitcoin for goods and services. This delays the day that it can act as a useful, functional currency.
  • Miners, users, vendors and developers are chasing different goals. This makes it very hard to agree on necessary changes that will address several critical technical problems (i.e. transaction cost, speed, electrical demand, replay issues, etc).

Both of these problems have solutions, and we have already seen the solutions at work in altcoins. Think of forks and altcoins as beta tests…Bitcoin will fold in the best of these technical improvements and will very likely continue to inch toward becoming the world’s de facto currency.


Revenue Neutral Investing

To answer the question in the title, let’s look at this from a completely different angle. The individual who asked the original question went on to ask this:

Cryptocurrency sites compare and track the cost of altcoins in terms of Bitcoin rather than dollars. What’s with that?! Do they assume that we will all be selling Bitcoin to buy the new altcoin?

It actually makes sense to value altcoins in terms of Bitcoin—even today. How so?…

This growing trend provides very useful information. This method of quotation helps the reader to determine the relative change in value between the two currencies and compare it to fundamentals that they learn from news and research. The information can then be used to hedge an investment or even craft a revenue-neutral investment strategy. Allow me to explain…

I am long on Bitcoin. This is not likely to change. So I keep a significant fraction of my wealth in this form.

But, I also understand that the use and market for cryptocurrencies is young and very immature. A very few other forks and altcoins are the real deal. They have solved some major technical flaws with Bitcoin and they have the potential to become a credible, functional currency. This isn’t the place to explain my favorite coins, but the strategy is relevant.

Since I already have a substantial position in Bitcoin, I wish to avoid further exposure in the market. Therefore, I invest long and short at the same time (for example, using puts and calls)* on certain coins that are likely to perform better than other coins. This reduces risk, by leaving me without a loss, if the entire market rises or falls. The only way I might lose is if I get it exactly wrong! That is, if the coins that I believe are scams do better than the ones that I feel are well-designed and with a solid adoption trend. (Remember: The risk reduction strategy is to invest on the difference between an overvalued dog and an under-performing beauty).

To avoid the downside scenario (i.e. getting it exactly wrong), focus on fundamentals and not the cost of a unit, short term trends, emotional zeal, or other technical issues. Don’t follow the crowd! Bet on value and bet against hype. (TIP: The take-away, here, is to do both at once!) Investors who consider only asset cost and trends are in a craps shoot. The smart money determines which coins are likely to be a better functional instrument than other coins and then sticks with a dollar cost averaging plan for months at a time.

Want to learn more? Want to know which coins I admire? Reach out. Let’s talk. I don’t bite.

* A regulated financial exchange for puts and calls does not exist for altcoins. But, with a little research, you can create an nearly equivalent futures contract or options instrument. You may need to be a bit creative.


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck, hosts the Bitcoin Event and kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

How does the Blockchain ‘know’ you have printed a paper wallet?

Let’s say that you no longer trust your currency exchange to host your Bitcoin wallet and you don’t trust a Trezor or Nano hardware wallet. You don’t trust your memory and you don’t trust your kids. And you certainly know better than to keep your wealth in your PC or phone. That would be downright crazy—right? What can you do?!

A growing number of people are printing paper wallets. It is the ultimate form of security. Some individuals even delete their cloud wallet, leaving everything to a string of hex characters or a QR code printed onto a slip of paper. (NB. You had better be certain that you and a few trusted individuals know how to find that piece of paper!)

But here’s an interesting mystery. If you print the paper wallet off-line and delete your other wallets, then how can the blockchain ‘know’ that you have changed wallets? The short answer: It doesn’t and you haven’t!

Let’s explore a bit deeper…

  • The deed to your house is stored and maintained by a registry. It is housed in a court house or other government building.
  • With a bearer bond, a certificate in your posession is the actual item of value.

But, in both cases, the fact that you made a photocopy of your deed or corporate bond is not of any consequence to others. It is the same with a Bitcoin wallet. (In this case, the ownership record is netiher in a government warehouse nor in your posession. It is crowd-sourced).

Printing out a paper wallet does not change your wallet ID. The paper wallet is simply another method of storing and retrieving the proof that you own a part of a mathematical solution set—That is, you know the solution to a problem.

Your paper wallet is just a copy of the keys to your wealth. You may choose to destroy the other keys, that’s your business. No one knows or verifies that you still have access to your stored secret or how you stored it. It’s up to you to maintain access to the keys. The blockchain only records a transfer of ownership from one wallet to another at the time of a payment transaction.

Got it? I hope you like the metaphors. I am fairly proud of myself for this explanation.


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

Why would anyone attribute value to Bitcoin?

Oh, Cheez…We’re back to this question, again!

As a Bitcoin columnist, I get this question a lot. Today, an answer was requested at Quora.com, where I am a leading contributor on cryptocurrencies:

“Clearly, some people value Bitcoin. But How can
this be? There is nothing there to give it value!”

Many individuals, like the one who asked this question, suspect that Bitcoin was pulled out of thin air—and that it is not backed by gold, a government, or an authoritative redemption guaranty. After all, it is just open source code. What stops me from creating an ElleryCoin using the same code?!

Let’s start with the short answer:

  • Indeed, it was pulled out thin air
  • It isn’t backed by an asset, government or promise
  • You could easily clone Bitcoin (the entire mining ecosystem) and distribute it yourself. It would be exactly like Bitcoin. Yet, Bitcoin is clearly valued by everyone, and your new coin is unlikely to generate interest or adoption.

A More Complete Answer: What is value?

Bitcoin has more intrinsic value than a government printed paper bill. The value arises from a combiation of fundamental properties:

  • It has a capped supply
  • It is widely recognized, liquid, and resistant to legislation
  • It has attained the robust supply-demand of a growing, 2-sided network.
  • It is open and transparent. This elevates user trust
  • Unlike cash and credit, Bitcoin requires no back-end settlement. That’s because it is not a payment instrument. Rather, it is money itself.
  • Finally, it’s value is likely to be durable, because it is not printed by a country that spends beyond its means and racks up debt. In fact, it can never be inflated.

Downside and Risks

But wait! What about the long transaction delay and high cost? There are sharp disagreements anong miners, users and developers concerning block size, transaction malleability, and replay issues. Aren’t these a deal killers? And what about wild volatility in the exchange rate? Doesn’t this retard adoption as a functional currency?

These are transient issues associated with a new technology. Bitcoin is weathering growth pains that arise from a new and distributed governance technology (democracy can be messy!). But, all of these issues have sound solutions. We have witnessed and tested the solutions with various forked coins. Think of these imrpoved altcoins as beta tests. Even if current problems delay the day when you can spend bitcoin at every retail establishment—it is already sucking liquidity from national currencies and becoming the world’s de facto reserve currency.

Many individuals find all of this hard to accept. That is because we have been conditioned to think that ‘value’ arises from assets with ‘intrinsic’ value, the promise of redemption, or by edict. This is not true. In all things (including gold, a Picasso painting, or your labor), value arises from simple supply and demand.

Some individuals claim that all other factors are secondary. But, even this statement is false. All other factors are irrelevant. They may be related, but they are not the source of value.

I recognize that this answer may seem smug or definitive. So, allow me to suggest related questions with answers that are a bit more interesting, because they are subtle. Unlike the question of value, these two questions are open to analysis and opinion: (1) “Will people continue to value bitcoin in the future?” — And (2) “When will Bitcoin stop swinging wildly in value?” (measured by its exchange rate with other currencies).

This is fun! Let’s explore…


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.