In 2011, we discussed Bitcoin, a pure and decentralized digital currency. Introduced in 2009 as a mathematical treatise from a still-mysterious source, Bitcoins already had their own exchange and some retailers were beginning to accept it as payment. Bitcoins are decentralized. That is, they are not issued or backed by any government or bank, and they can be exchanged between buyers and sellers without either party having an account at a financial institution. Yet the supply of Bitcoins are provably limited, the growth in supply is mathematically constrained, spending is untraceable, and the validity of ownership is instantly provable. For these reasons, AWildDuck predicted that Bitcoin would gain steady traction and eventually be trusted as a mainstream form of payment and investment.
A “flash crash” is nothing more than a buying opportunity.
Of course, as with a new security or exchange medium, the road to maturity is bumpy. Bitcoins have endured wild swings in value, even very recently. These so called “flash crashes” are caused by pre-programmed trading or simply rumors on a day of thin trading. Despite swings in the exchange value, Bitcoin is gradually gaining legitimacy as a vehicle for payment, investment and even as a hedge against regional conflict. Here some things that cause a sudden change to Bitcoin’s exchange value:
- Programmed trades: These affect any immature or thinly traded security. In fact, they present opportunity for long term investors or anyone less prone to panic.
- Banking Crisis: Contemporary examples include Cyprus and Greece
- IRS decision: Recognizing Bitcoin accumulation as a tax reporting obligation
- Hacker attacks: Bitcoin is safe. These are temporary DDOS attacks
- Reports or investigations: Anything concerning illegal trade (e.g. Silk Road)
Regional events also drive the Bitcoin exchange value higher, but only because of problems with another currency:
- Excessive Government Borrowing & Printing: (Japan and USA come to mind)
- Hyperinflation: South Sudan is currently at 79% while Belarus is at 70%
- Trade embargo or regional instability: (Iran and North Korea). Citizens seek a safe haven that requires no physical transport and no cash exchange agent.
Are governments along for the ride? Of course not! They try hard to suppress pure, decentralized currency that is impossible to counterfeit, trace or tax. But Bitcoin is gradually becoming legitimized through wider retail acceptance, international currency exchanges, and a broader public understanding of the very positive privacy & security implications. Bitcoin is here to stay.
While it may seem bold to add another radical prediction to our 1-for-1 record, we believe that governments will eventually embrace Bitcoin—or some other pure and decentralized digital currency. In fact, they will halt the minting of their own regional paper and coin currencies—perhaps in our lifetimes. Even governments will one day see advantages of a currency that cannot be forged or directly manipulated.
Here is an interesting development: An entrepreneur in Sandy UT has begun minting brass and silver tokens that offer a physical representation of a Bitcoin. They sure look like currency and they come in various denominations. Each coin includes a hidden code covered by a tamper-evident hologram. The code is a hash that helps an owner to verify that the value represented by the minted token has not been used by others.
Of course, this seems to thrash the whole concept of Bitcoins. It raises a litany of contradictions. For example, if it is in your pocket, then it is not truly anonymous. And although you can test the hash to ensure that the coin is valid for the moment, you must trust Mike Caldwell in Utah every day that you carry it. If he were unethical, he could circulate a copy. In fact, he is no different than a central bank, which of course is what Bitcoins render irrelevant. So what’s the point, Mike? … There are much better bitcoin custody solutions that don’t require physical bitcoins and still allows the owner to remain anonymous, but secure.
It would occur to few who understand the decentralized and mathematical nature of Bitcoins to bother with a physical token. It goes against everything that they stand for. Yet, Mike’s mint, casascius.com, offers non-Geeks a reasonable off-line, portable and still somewhat anonymous exchange medium. Most importantly, as long as he can avoid attracting high-tech counterfeiters, his coins offer a medium for those who don’t fully understand how to trust, test or move digital Bitcoins, a “pure” digital currency.
Read more about Mike Caldwell and physical Bitcoins:
- Now you can carry physical Bitcoins in your pocket
- Casascius: Mike Caldwell’s mint in Sandy Utah
- Or read our 2011 introduction to Bitcoin. It’s very readable
- Late in 2011, Wired Magazine published a thorough history,
introduction and overview of Bitcoin
Update:
Did Ted Nelson deduce Satoshi’s identity?
Readers who follow Bitcoin or have read about it’s 2008 roots know that it was the embodiment of a paper dropped onto the internet by a mysterious mathematician using the pseudonym Satoshi Nakamoto.
Shinichi Mochizuki
In May, Ted Nelson, the man who coined the term “Hypertext” (way back in 1963) donned a Sherlock Holmes hat, grabbed a pipe and magnifying glass and did some very clever deducing. Of course, Nelson also reads technical papers by like minded thinkers around the world and this gives him a lot of raw data from which to deduce! He thinks that he has discovered the true identity of Bitcoin’s creator and has made a very convincing video. It ends with a plea for the genius’ next big invention.
I have an alternate theory based on a 1999 visit with cryptographer and DigiCash founder, David Chaum, over a period of 10 days in Palo Alto, CA. But Nelson’s video is compelling. Now I am not so sure which way to lean.
I gather from this article that Bitcoin has distinct advantages over existing forms of currency if it were to catch on with businesses and consumers. (That’s a very big “IF”). But I could really use some clarification of those advantages.
Let’s say that I accept that Bitcoin can be made simple for the rest of us. That is, let’s assume that the giddiest of mathematicians are correct and that the acquisition, savings, and spending of Bitcoins are simple and trustworthy.
Now then, please tell me what are the advantages of Bitcoin over saving & spending dollars or Euros? Be really specific and succinct. A bulleted list would please me. Avoid run-on sentences, save the explanations for another article, and for G-d’s sake, avoid hyperbole such as “Bitcoin is a PURE currency without government control”. I have no idea what that means. Just list the direct advantages to the consumer; not the reason that you believe it transforms society.
Ellery, allow me to take this one…
Hello Minneapolis Mom. Great question! I accept your challenge.
Regarding a comparison of Bitcoin –vs– government backed currency, you asked for a bulleted list of consumer advantages. I have also included a list of disadvantages (according to some Bitcoin detractors). You will see that some facts about Bitcoin are on both lists. That is, some people consider them an advantage, while others consider them to be disadvantages.
Below, I expand on a list of advantages and disadvantages that will appear in next week’s issue of Time Magazine (Tech by Lev Grossman, USA edition, Apr 22, Pg16, ¶3). My response to your question is more complete than paragraph 3 & 4 in that article.
You asked for simple and concise. As with any technical topic, some of the advantages and disadvantages are “under the covers”. For issues such as the last disadvantage at bottom, it is necessary to introduce and define a technical term.
Bitcoin Advantages (over national currency)
Bitcoins have all the advantages of cash, and then some.
which helps create new markets and gives access to under-served markets
Bitcoin Disadvantages
*Block chains regulate the integrity of an open source project that allows peers to verify the validity and unspent status of currency. It is akin to a registry of serial numbers and transactions, but one that supports anonymity and prevents forging. Hypothetically, it is possible that someone with brief control of more computing power than all other participants combined could “fork” the block chain and effectively substitute a false enforcement mechanism. This would allow the operator to spend previously spent currency which is the same as printing counterfeit money.
Such an attack might require only a few tens of million dollars today or might be accomplished by taking control of all the servers at Amazon or Google. Even with fewer than 0.05% participation, Bitcoin is already the largest distributed network (except the Internet itself), and so the potential for such a spectacular event lessens as the Bitcoin network grows.
Ellery, I appreciate the mention.
I like your article and thought it appropriately addresses the trust issue. You may be interested to know that I have come up with a 2-factor scheme that eliminates that need for trust. It’s called “BIP 38” and I offer it on all my higher denomination items.
Mike
This past weekend, the Wall Street Journal published an excellent overview of Bitcoin within the full page article, Bitcoin vs. Ben Bernanke.
Today, they followed with another ½ page in The Wall Street Journal as Technology lead: Bitcoin Startups Begin to Attract Real Cash.
(Access to these articles may require a subscription)
It’s interesting that VCs and other funds consider this to be a time of a “land grab”, while some analysts point to eventual regulations as a primary reason for caution. I suspect that the investors know what law-based pundits rarely accept. Sometimes laws (and perhaps entire monetary systems), must give way to the facts on the ground. In my opinion, Bitcoin is more real than currency backed by gold, banks or governments. Bitcoin or something substantially similar, will someday replace government backed currency. Not just in theory or in practice, but indeed.
Coinbase and other venture could earn substantial sums for their investors, perhaps only short term, but that does not mean that the currency itself will be stable and have long term appreciation and liquidity. The venture funds are mostly investing in the start-ups but not in actual bit coins. The real gold rush may be in the companies who could make money regardless of what happens to bitcoins. It’s like the brokers who make money regardless of which way their stocks or the entire market moves.
Hello Brasov,
I understand the difference between investing in a gold mine (or a gold exchange) vs. actually taking control of gold as an investment vehicle. I agree that profiting from involvement in infrastructure or transactions allows participation in a trend while insulating the participant from the underlying asset risk.
… But a dramatic increase in Bitcoin-related participation by investors and institutional funds (in any form, even ancillary) — even if it contributes to wild swings — is a tangible indication that someone trusts the process, at least for the duration of their investment and more realistically for the entire period that the investor market continues to grow.
Some of the funds seeking a Bitcoin play (not the coin itself, I realize), are thoughtful players with conservative values. They are not simply day traders or inexperienced “nouveau rich”.
Bitcoins will eventually settle at a real world value — and then rise in value forever after, as the total money supply tops out at B:21M. In fact, the total supply in circulation will gradually shrink as a few coins are lost each decade.
This is the real deal, my friend. I may be early to extol the sanity, the beauty and the inevitability of pure stored value without requisite trust in institutions or governments. But, to me, this is very clearly the real deal.
It may take awhile. It may even get ugly for awhile. But, in the end, it will be the overwhelming choice as a universal exchange medium. Few other currencies will remain standing. Those that make a stand will be transient.
A simplified timeline: In 1,000 BC, it was Cowry shells, gold and drachmas. Then, it was the British pound. In the 20th century it was gold again and the dollar. In recent years, it has been oil, dollar-denominated debt and shares of Apple Computer. During our lifetime, or that of our children, it’s a safe bet that Bitcoin will emerge as king of the hill.
Biggest Ponzi scheme. It’s history-in-the-making. Bernie Madoff is sure to be eclipsed. Too bad we weren’t the first to come up with this.
Hi Jon,
You are among the brightest of individuals. Lots and lots of pure horse sense. (That’s a compliment. Among two-legged species, horse sense is in short supply!)
You and I see this issue *very* differently, my friend. I would love an opportunity to discuss it with you. My respect is sufficiently deep, that if I could not demonstrate the error in your thinking, than I shall be worried. But, I bet that you will get on board this train.
Bitcoin is a pure and de-politicized exchange medium without need for an underpinning. Eventually, it won’t even require an exchange, because it will be accepted as value received. The math is perfect and it provides a terrific foundation for every necessary feature of a successful currency.
I believe that Bitcoin will dethrone national and bank currencies by rendering them moot—perhaps as quickly as 20 years. Maybe sooner. There are only two reasons for the delay between now and then:
o Gradual public understanding of something that appears unconventional
(it is not! The US dollar has a less compelling justification and reserve).
o Sufficient time to rigorously vet, test and trust the math, and wallet apps
Bitcoin will blossom like the Internet or like Google. It will not take as long to displace national currencies as the cell phone did to displace land lines (that is still ongoing — but many land lines are actually IP switched calls).
Don’t worry, Jon! I am not yet betting the house on this, although I will kick myself for not following my own advice.
If Bitcoin is not the eventual winner (displacing most national currencies), it will fall to something substantially similar. Even in this case, original and future Bitcoins will probably hold their value. There are 10.5 million now and the supply will eventually max out at 21 million B$ by the year 2040. No need for growth in supply thereafter. People will simply split coins into smaller fractions as the world races to adopt the inevitable.
So sayeth Ellery…And you know what that means, right?
Hi Ellery,
I’d rather be dull and rich than smart and poor. Every time that bitcoin is divided the block chain grows and the whole thing becomes more cumbersome to manage. What they will eventually discover is what I call digital entropy or the point at which the binary system and computing fails.
Meanwhile those who get in early and get out before it collapses will make money that is politicized but accepted as a medium for exchange. Barring the unforeseen event of digital entropy will be a different phenomenon to be known as “infinitesimal divisional hyper-inflation” or the equivalent of printing new currency to pay a government’s debts.
I don’t think the real pitfalls have even been discovered or predicted. I’m smart enough to know that I’m really not all that smart.
You see the true value of all bitcoin is zero and it only takes on tangible value because people are political animals and will use anything they can as a means of exchange.
The moment that people refuse to accept bitcoin as a means of exchange it will collapse and I have little doubt that wheels to that effect are already turning and gathering momentum.
Let’s just call it what it really is: Sci-Fi Money. Or to truly get the joke just insert “ullsh” between the “B” and the “i”. In fact I’m going to start my own currency and call it Ullsh-Coin. Sort of the anti-matter of Bitcoin, as it were.
This of course is all just my 2p worth — or make that 2B worth. I’ll take your offer for a real conversation. Let’s see if you can liberate me.
Cheers, Jonathan
HI Ellery –
Not sure you saw this. Of interest to Wild Ducks:
http://www.cnbc.com/id/101041321 —and— http://www.cnbc.com/id/101036995
Ellery,
We’ve had discussions about BitCoin in the past, and you have now Blogged about it 3 times (including very early on, to your credit).
You’ve been a big proponent of its value and operations, while I have been somewhat skeptical, indicating that currency of any form (whether physical coin/paper or virtual coin) needs to be backed up by recognized authorities—either governments which back the currency and legitimize it, or major banks (e.g. World Bank, Deutche Bank, Bank of America, etc.) which provide services and nearly free exchange to other recognized currencies.
Here’s one of the latest little spats going on with BitCoin:
http://news.cnet.com/8301-1023_3-57603194-93/bitcoin-exchange-mt-gox-sues-for-return-of-$5m-from-coinlab/
How will it be possible for an average Joe to become comfortable with using this new currency, in the absence of backing up by a recognized world financial power?
Thanks for the Bitcoin articles, Rob and GDR…
1. About GDR’s link
The information in this article does not debunk Bitcoin nor even raise a flag of concern. It describes a spat between participants in a joint venture and not a problem with the underlying mechanism of Bitcoin.
On the other hand, there have been cases of currency manipulation and promotion scams. Even these articles present no cause for alarm. Though accurate, they relate to issues associated with an immature market. These stories have no bearing on the complete fairness of the currency and the long term stability that will follow.
Bitcoin was a flash of brilliance that will stand beside with other sea changes in the way humans do things. It’s difficult to draw comparisons, but think of the simple lever, Pasteurization, or the airfoil (discovering that a wing causes lift). Put another way, Bitcoin is the transmission fluid that delivers what our capitalist ethos was meant to accomplish.
2. About Rob’s links
a) The Winklevoss brothers have it right. They understand the fundamental benefits of a perfect digital currency.
But it will take time for the general public to understand or accept the universally beneficial fallout of the inevitable transition. The reluctance to make that switch can be attributed — in part — to articles like the one linked in an email from Gary, below:
b) The 2nd article generates alarm at what I consider to be Bitcoin advantages. These alarms generate good press, but they are simply differences in the analogy with paper currency that seem unfamiliar to consumers at first. Let’s look at some concerns:
• If you lose your Bitcoin wallet, you lose your money.
Of course. Isn’t that the same with any physical wallet? But wait!…
With Bitcoin, you can have a backup wallet. Even better, you can configure automatic backups to an encrypted cloud. In fact, with Bitcoin, a properly configured wallet cannot be lost and cannot be spent by the person who finds it. It’s imminently portable, universal and secure.
• [A partner at Bessemer Venture Partners said]: “They’re going to need better tools to connect the transaction ledger and wallet IDs with real world sources.”
Whaa-ah?! Clearly, not every bright individual or power broker gets it. That will take time. Bitcoin defies ties to the “real world” and for good reason. In fact, Bitcoin is the real world! Government issued currency is only a facsimile of this reality.
• Thailand bans Bitcoin
Good for Thailand! This head-in-the-sand approach to governance and representation will be about as effective as controlling the press, banning the Internet or sex. Someday, the people of Thailand will look back on this decree as an economic Stone Age.
Let me add one other difference that causes profound alarm:
• Bitcoins are difficult for governments to tax or trace.
This is absolutely true. Do you think that—in the long run—this will be perceived as a disadvantage? For a great many people, Bitcoins go hand in hand with privacy, liberty, and all the great personal freedoms enjoyed in a democracy.
I hope I’m wrong but my belief is that those who take the bait are on the cusp of a massive financial fraud of epic proportions. Think Bernie Madoff and another order of magnitude.
Look at the way that so many put their life savings into his Ponzi scheme that was backed only by the sham audits of a store-front CPA office.
The lies here are much bigger and the so-called verification is far more illusory than most may suspect. Think, Große Lage
At least that is my suspicion. I hope you keep a safe distance.
Hi Jonathan, Welcome back to AWildDuck.
I enjoy your comments. You are cautious and highly regarded. I respect you.
But, there is a big difference between Bitcoin and Bernie Madoff.
Although we have seen issues with Mt Gox (In my opinion, it is an ill-conceived exchange compounded by poor execution and unnecessary manipulation), an astute observer will not confuse this with the underlying coin.
Yes. It is still early to draw superlative conclusions. But it certainly appears that as an exchange mechanism, Bitcoin is safe and stable. It may be even better as a hedge against inflation. In fact, in the era prior to and during a global transition to pure digital currency, I suspect that it will be a superior investment vehicle (just as one might trade in national currencies).
In short, Bitcoin is brilliant.
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