Open Letter to Cryptocurrency Doubters

Adam Ludwin of Chain offers this interesting (and, I believe, effective) attempt to explain crypto to high-profile doubters. It is an open letter to naysayers that argues against extreme positions on both sides of the “money revolution” argument.

Check out 8 quips by Jamie Dimon, CEO of JP Morgan Chase. I believed that he had moderated his position after originally panning Bitcoin / blockchain. These quotes contradict that impression. But, they were uttered before October 2016. They may not represent his current position…

Here at Wild Duck, we aren’t fully on board with Ludwin, because we represent one side of what he suggests are two ‘extreme positions’. But we certainly are closer in spirit to his side—especially, his effort to educate those that see zero value to to Bitcoin and no profound opportunities for the blockchain. They see only fad and frenzy.

Bitcoin and the blockchain are radical, transformative instruments. But they as not as radical as some claim. In fact, they address a profound technical problem that has been the subject of research and debate for more than 2300 years. They are a surprisingly natural product of the internet. With instant, inexpensive, portable and ubiquitous communication, it is possible to distribute consensus. That consensus can be applied to any set of records: ledgers, deeds, votes, and a many things that, at first, seem quite surprising—areas that we never previously thought of as a “ledger” or an ownership stake.

A: Let’s begin by reducing two concepts into the very simplest of definitions:

  • Bitcoin is the original, decentralized, permissionless cash.
  • The blockchain is a social consensus mechanism. It crowd-sources record keeping, commitment and all manner of accountability by adding a distributed and robust log that is fair, immutable, testable and measurable. Most importantly, it is open to public scrutiny. Effectively, the blockchain crowd-sources fair play.

B: Next, let’s set aside some growth pains. They are transient:

Both Bitcoin and the blockchain are a work in progress—and so they are flawed. But that doesn’t mean that their survival is threatened. Let’s dispel two common misconceptions. I won’t argue or elaborate here. The arguments are all over this blog:

  1. Bitcoin cannot be overtaken by a better coin with improved features. This is not a situation like Beta–vs–VHS. The entire community is transparent, open source, unlicensed and without proprietary barriers. Bitcoin will simply fold competitive advantages into its architecture. That process involves a messy democratic process among parties with different interests. But, ultimately, the process works.
  2. The blockchain will correct the energy consumption that is consumed in its current implementation. We have already demonstrated that it adapts and that democratic evolution is possible. Brilliant replacements for proof-of-work are in development.

C: Now, the part that the critics cannot accept:

Both Bitcoin and the blockchain will herald a profound and fundamental shift in offering secure, trustworthy, fair, decentralized and autonomous mechanisms—not just with payments (or currency), but across the board: voting, contracts (including settlement and arbitration), Proving ownership or transactions, including property deeds and corporate stakes, provable jury evidence, administrating & enforcing environmental trade credits, verifying scientific research (especially the outcome of blind tests).

These examples barely scratch the surface of fields that will be transformed or made better by blockchain technology.

D: The really radical application was also the very first implementation:

What about Bitcoin. Is it just a payment instrument, or will it become the money?

Indeed, Bitcoin is likely to replace government issued FIAT all over the world in our lifetime (not only as a payment instrument, but as the actual store of value, without being tied to any national currency or to an underlying asset or promise). But what critics don’t yet appreciate is that this will not impact a government’s ability to tax, spend or enforce tax collection.

It will lead to a deflationary economy and it will decouple a government from its own monetary policy. These are *not* bad things. They are good for all stakeholders. Ultimately, Bitcoin will be recognized as far more of an opportunity than a threat, even by banks and governments.

Even if you vehemently disagree with D, it is difficult to argue against C. The blockchain is as fundamental and profound a contribution to society as the pulley and lever. It it so natural an evolution of the internet, that it is more a discovery than an invention. (I am not attempting take credit away from Satoshi—I am only reclassifying his invention as revelation).

Does decentralized currency thwart crisis intervention?

Here is another economics/policy question that I was asked to address at Quora.

The US used quantitative easing to deal with one monetary crisis, and a bailout of the automotive and banking industry to deal with another. If nations, economies or individuals begin to embrace a decentralized currency, they will inevitably shift away from government issued money. Won’t this hinder a nation’s ability to intervene in a crisis?

Answering this question goes to the very heart of the ethics and politics of cryptocurrency.

Yes. Without centralized control over monetary policy, government options for intervention in a money crisis would be severely limited. But this fact may lead to a false impression…

First, most money crises begin with government, and so there are likely to be far fewer monetary emergencies.

Here’s how the options would be limited:

  • Governments would have fewer ways to manipulate a public resource. They will still have the ability to budget, tax, borrow, build infrastructure and even wage war. But…
  • Governments could no longer amass debts that outstrip their ability to be accountable. That’s because they can no longer covertly tax via rampant printing of money.
  • They could not “raise the debt ceiling” without demonstrating fiscal responsibility, because they no longer control what everyone uses as money.
  • Government spending (and intervention, such as quantitative easing) would have to be balanced by revenue. Borrowing would be limited to creditors who truly believe in their will and ability to repay debt.

All of these “limitations” are good things—even for the governments and banks involved. It only seems limiting, because our understanding of what is money is tainted by millennia of authoritarian systems.

A capped, open source, transparent, traceable, immutable, decentralized, distributed and permissionless money supply is both fair and more robust than Fiat paper, promises or credit.

Let’s explore that last bullet, above. The point is subtle—yet, it is the key to answering your question…

Every individual, household, business, state and NGO must balance its books. If one cannot cover bills, they must find a creditor who believes in their ability to get back to fiscal health. Even nations are eventually forced to balance their books or seek a bail-out from neighbors.

But, this is not the case for the United States. We have had an ability whitewash our largess and declining industrial productivity by printing more money. How has this been possible while retaining a strong dollar?

The US dollar has been the world’s reserve currency for 47 years. This development was one of the most clever, yet potentially damaging developments of the post war order. It led other nations and consumers to treat it like gold (even though the link to any underlying asset or promise was severed by Richard Nixon in 1972).

Now that other nations are shifting this special status away from the US, we are gradually becoming just as susceptible to a house-of-cards collapse as Venezuela, Argentina, Zimbabwe, or Germany between the wars. Our massive consumer market cannot protect us. Eventually, we must ship the fruit of our sweat and intellectual bounty to serve others. After all, for more than a half century, we have been giving them pieces of paper (dollars or treasury bonds) for their TVs, underwear, sneakers, toys and sheet rock.

This unbalanced trade must be reversed. Building walls at the boarder and stiff tariffs are desperate acts that fail to recognize cause or containment. They are certainly not the way to restore a robust economy. There must be a better way for nations to get their houses in order. Fortunately, there is.

A distributed currency built on math, trust and transparency—rather than the integrity of transient elected officials from one nation is far less susceptible to manipulation, inflation or any form of shock. It won’t solve all problems immediately, be it will prevent us from getting further mired in a debt that blows up like a balloon.

The decoupling of a money supply from government will yield benefits that are difficult to imagine today. Money doesn’t need authoritarian oversight like airline safety. The situation is more analogous to the deregulation telephone and package delivery services. Without those blockbuster decisions of the 1980s, we would not have Smartphones or the internet today.


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 blockchain consulting.

Cars, Gold, Houses, Toys & Stock: What gives value?

The title of this post is intentionally misleading. We frequently discuss the traits that lead to value in this Blog. But today, I was asked a more nuanced question: “What things will hold their value?

And there is a ulterior motive in being a Wild Duck contributor. Analyzing the dynamics of durable value leads to some surprising conclusions about the money supply and what a society chooses to use as money. We’ll get to this at end of this post.


We know that value comes from supply and demand. There are no exceptions. But, we have not addressed the properties that make an asset hold value over the long haul. Let’s consider some examples…

Cars

In an affluent, mobile society, most people desire personal, point-to-point transportation — and so there is clearly a demand for automobiles.

But style & technology change rapidly and automobiles deteriorate with use and weather. After 8 to 10 years, their cost and maintenance rise dramatically, and owners lust for a new model. So cars don’t get our award for assets that hold value.*

Popular Toys

In the 1970s, the Cabbage Patch doll from Calico Industries, and later, Tickle Me Elmo in the 1990s created a buyer frenzy that rivaled a lemonade stand in the desert. Shoppers fought each other to grab a limited supply. Clearly, demand was very high. The one shown below is listed at Ebay this week with a starting bid of $5,000. Other, less popular styles can be found for $4.99.

At first, this demand was driven by clever marketing and crying children in the week before Christmas. Demand was driven by a parent’s love. But at the peak of frenzy, demand shifted to buyers without children who felt certain that they could profit from selling the dolls that they snatched up first.

But the demand was not durable. Fads driven by frenzy don’t hold value for the long haul — especially when a manufacturer can simply turn the spigot back on.

Stocks & Bonds

A share of stock represents ownership in a corporation. A municipal bond represents a lien against a city—or the fees generated by an infrastructure project.

In both cases—especially bonds, which are a limited promise—no one expects value to last forever. It is a time-sensitive bet with the intention of expiration, redemption or exchange. So, these things also fail our criteria for durable value.

Houses & Real Estate

Like cars, homes require ongoing maintenance. But, most people weigh the maintenance cost against the benefit of having shelter, rather than comparing it to their gain or loss in value.

On the other hand, real estate value fluctuates in the long run due to things that are difficult to predict — population density, demographics, and quality-of-life issues related to infrastructure: weather, seismic events, politics, and access to health care and education.

Some real estate rises enormously in value over 50 or 100 years. Yet, we have seen boom-and-bust cycles that wipe out substantial wealth. So, real estate does not cut it in our contest for durable value.

Gold

The allure of gold and other precious metals is that their supply is capped — or limited by slow and predictable growth. The asset is difficult to find. It is acquired only from natural phenomena.

So, if we can also make it fungible, divisible, portable and difficult to counterfeit, then it meets most of Aristotle’s requirements for a functional currency. Theoretically, this can lead to widespread demand.

Gold certainly has exhibited its ability to hold value throughout thousands of years. But it is not so easily tested and divided in the field, and the impression that it has intrinsic value is an illusion. That’s because the fraction of gold acquired by investors dwarfs the amount actually needed for dentistry, electronics and even jewelry. In this modern era, even gold is becoming a house of cards, because its value is built upon speculation and emotion.

Oil (aka “black gold”)

With the rise of the automobile and power plants that burn fossil fuel, oil became a reserve currency of the 19th and 20th centuries. But there are two problems with it holding value over the long haul.

First, unlike gold, oil is a consumable in every market. Therefore it is difficult to think of it as an asset. Also, we now live in a century in which energy and transportation is rapidly switching away from oil, while at the same time, new technology is making it cheap to acquire new oil. This (along with a history of violent political theater) dramatically deteriorates its potential as a store of value in coming years.

Money

The supply-demand dynamics of money is widely misunderstood. More than 2,300 years ago, Aristotle defined the properties of a functional currency.

Earlier, we stated that all value comes from supply and demand. But, it is fair to ask “What creates the demand?” or “What backs the expectation of future demand?” Surprisingly, even if we limit our scope to just one country (USA), the value of government-issued currency has been tied to different things over time:

  • Gold
  • Promise of redemption
  • Legal tender (public must accept it for all debts)
  • Settlement of taxes
  • The “good faith and credit” of workers

Ultimately, demand is influenced by oversupply and by public perception more than government promises or laws. The perception that the US dollar has no cap and that its supply can be inflated whenever a body of transient politicians decides to raise the debt ceiling may eventually cause its value to collapse. Although it has not happened yet, at some point consumers (or those holding our debt), will begin to question if Americans have the capacity and will to produce and export the goods & services necessary to balance their mass consumption of the past half-century.

And so, government-issued Fiat does not pass our smell test for durable value. Sooner or later, all national currencies collapse. On a personal level, the only question that matters is if you will be caught by surprise—with a fraction of wealth tied to your favored currency.

What has the potential to meet all
requirements for holding value?

Wouldn’t it be fascinating if we could find an asset that is a product of pure mathematics? A perfect asset would be fair, fungible, immutable, and capped. It could never be inflated or manipulated by politicians. It would decouple governments from monetary policy. It would be politically agnostic.

If correctly designed, it would be capable of absorbing and incorporating improvements developed by any copycat or pretender nipping at its heels. Most important, it would be open source, peer-to-peer, massively distributed, redundant, and completely permissionless.

This perfect asset would derive trust from mathematics and crowd-sourced consensus. It would not require that anyone believe in a government, a bank, a land mass, or the uncertain supply of precious objects. Authenticity could tested easily and its value transmitted instantly. The history of each unit would be completely transparent. With free tools, anyone, anywhere could trace its history of moving from one owner to the next.

Ten years ago, such an asset was unleashed into the wild by a person or team of developers under the pseudonym, Satoshi Nakamoto. It not only meets all of these requirements, it has built-in immunity from competition. It even resolves a technical problem that troubled Aristotle more than two millennia ago.

I won’t name this radical yet natural evolutionary development in this answer—but, I can confidently state that it passes our test for an asset that will hold value over time. Despite a wildly fluctuating exchange rate with Fiat currency, its inherent value has never dropped. Ultimately, you will no longer asses value based on the exchange rate of an anachronistic currency that fails all of the other smell tests. Instead, you will assess value on how many heads of lettuce you can buy or how much that new sailboat costs.


* A classic car avoids the problems associated with use & maintenance—and it can hold value over a long period. But like a Picasso painting, the market for classic cars has a limited audience, especially for the florescent green ’63 Mustang that I found in in my great uncle’s garage. Additionally, it is subject to the whims of popular perception. Styles go in and out of vogue and so we cannot predict how long that car will hold value. (Please call me if you value my uncle’s Mustang at more than $150,000).

Update: Building (and placing!) a Bitcoin ATM

A new section about Bitcoin ATM business models
has been added. Jump to “UPDATE – July 2019

The good news is that building a Bitcoin ATM is easy and less expensive than you might expect. But, offering or operating them engulfs the assembler in a regulatory minefield! It might just be worth sticking to selling bitcoin on PayPal (visit this website for more information on that). You might also wish to rethink your business model —especially user-demand scenarios. See our 2019 update at the bottom of this article.

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 makes all the difference in the world. And your ATM must interface with an exchange—yours or a 3rd party exchange.

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).

Regulations: 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 client (a 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.

_____________

UPDATE – July 2019: ATM Business Model Requires Urgency

The economics of Bitcoin ATMs is thoroughly uncompelling, unless you own or administer a public area with high foot traffic. Even with lots of traffic, the business model has a problem…

Bitcoin is easily acquired and exchanged online—both legally and illegally. Often, I urgently need to find a bank ATM, especially when travelling. But, despite being an avid proponent and adopter of cryptocurrency, I can’t imagine needing a crypto ATM. Needing virtual exchange is rarely urgent, and there are better alternatives than standing in front of a machine. After all, we each have a better machine in our pockets.

Online trading is easier and safer than via ATM. Even user anonymity is better online than standing in a public place and using a kiosk equipped with a camera.

Therefore, the business model of placing equipment requires scenarios in which the needs of prospective clients have urgency. Urgency adds significant value to local service. But again, there is a problem…

The problem with using urgency to build a local delivery model for ATMs, is that Bitcoin is a virtual product. Even a seller or exchange in China can deliver an online money exchange instantly.

Consider this reverse analogy…

Suppose that you are responsible for setting up a video projector in a hotel ball-room. The conference is already in progress and hundreds of people are looking toward a blank movie screen. You suddenly discover that your video cable is defective and wireless options will not work . You need an HDMI cable and a thunderbolt adapter immediately. It must be at least 18 feet long and be a recent model to support the audio channels and resolution of your presentation.

QUICK—Find me an exact match!

The local Best Buy store has the cable in stock. It’s $89.99 and the store can have it at the front desk in the next 10 minutes. Your frugal partner finds the same cable online for $29.99 (2-day delivery) or $9.50 shipped from China (about 2 weeks).

Which do you choose? Is it just a cable that you need? No! The value that you require is a compatible cable in your hands within minutes — preferably from a local and experienced vendor, in case there is an installation or application problem.

In almost any scenario—even catering to impulse buyers—a Bitcoin ATM can’t match the value of someone delivering a compatible cable instantly. If it is a commodity that you are selling (Bitcoin is a commodity), then a profitable business model requires that you sell speed, convenience or privacy. Cryptocurrency ATMs lose on all three fronts.

That last paragraph above is my freebie to the next ATM vendor who seeks my consulting services. Test your model, before seeking help in penetrating a market that is tough to define and defend.


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.

 

Best Bitcoin wallet: Hardware or hosted?

The question asked in the title has been edited from what was asked today at Quora, the Q&A forum at which I participate as expert columnist. The original question was a bit more ambiguous: “Which is better? — a digital bitcoin wallet or a physical one?”

I have included the original question, to better distinguish products and terms.

All bitcoin wallets are all digital—even a paper wallet, whether a character string or a QR code. Conversely, an exchange may use “physical” wallets to host client assets, individual application wallets, or they may simply keep records of client assets that are stored, collectively, in their own master wallet.

To complicate matters, Bitcoin is never really “stored” by you or an exchange service. It is stored on a public blockchain, where assets and transaction history can be traced through time by anyone. Therefore, all forms of user access are “digital”. What the reader really wants to know is “Which form of access control is better?  — custodial or personal?”

Type 1: Custodial Wallets are Managed by a Trusted Party
They hold your assets. You view a statement balance—just like a bank account.

The reader uses the term “digital wallet” to mean a hosted wallet in which a trusted 3rd party holds the private keys, or aggregates the assets of many customers and tracks their individual ownership in their own accounting system, like a traditional bank or broker. In this case, the 3rd party is trusted to maintain security, privacy, and constant, robust user access.

It is possible that the reader may have used the term “digital wallet” to additionally refer to PC and smartphone applications, such as Bitcoin Core, Armory or Electrum. But, these are really personal and private wallets — because they are created and configured by the owner, and only the owner has the private keys. And so, we classify device wallet applications as “personal/private” along with hardware or paper wallets.

Type 2: Personal Wallets are Private
—but with privacy comes risk!

Wallets are personal if the private keys are generated and stored by the user, either on paper, in their PC or smart phone, on a thumbdrive, in a hardware wallet, or even uploaded to cloud storage. As long as the asset owner holds the keys and securely encrypted any uploaded file that contains the keys, the assets are accessible only with his consent.

So, which wallet class is better for securing cryptocurrency access credentials? Custodial or Personal? Which of these models best fits your needs?

  • A custodial wallet is like a bank a statement. Your assets are maintained by an exchange, rather than tucked into your mattress. The wallet and keys are not under your control, but the process that governs backup and security is rigorous & standardized. Availability to your heirs is governed by documents and laws.

—OR—

  • A personal wallet is completely controlled by you. The private keys must be stored where you will always find them (in your head, a lock box or an encrypted file that is distributed to family in a way that they will always be able to unlock it!). Ensuring future availability, swift transactions or passing wealth after death requires careful attention to tools, process and a secret.

A crypto purist or Libertarian might insist on taking full control of the assets. That is, storing them locally and with only the owner having the private keys. This is analogous to storing bars of gold in a safe and then burying the safe in a deep, covered hole in your yard—and in a spot that only you can find. Even if your children can find the safe after you die, it is equipped with explosives that will completely obliterate the gold, if it is unearthed without the correct password.

I am privacy zealot. And yet, to the dismay of some followers, I believe that—for most cryptocoin owners—a hosted, custodial wallet is better than taking possession of a hardware wallet, paper wallet or digital wallet (anything that the user personally stores in a PC, phone, on paper or in a personally encrypted cloud account).

To explain, I shall call out [1] a critical requirement, and [2] the deciding factor in determining this advice applies to you.

1. Critical Requirement

The host must have impeccable credentials, a solid and ongoing regimen of security reviews and unscheduled audits — and they must be sufficiently capitalized by large, respected organizations, such that widely recognized individuals and organizations are at substantial risk if anything were to go wrong.

Trust among strangers is easily scammed. So let me be clear. Regarding the investors, board, executives and security auditors of a custodial wallet service, both their reputations must be at risk as well as their worldwide assets across other business areas.

Coinbase in San Francisco is such an exchange and hosting service. Currently, there are only two others that meet this extreme level of vetting. If Fidelity Investments enters the market as a crypto-hosting service, they would likely meet this bar.

2. Deciding Factor

There are few individuals for whom direct and private ownership makes sense. In fact, until this month, it did not make sense for me. I am only now configuring my first hardware wallet. I still trust Coinbase to host and control most of my assets.

The reasons boil down to security, forgetfulness, errors, legacy ownership and instant access. The ONLY factor that is arguably better with personal custody & control is privacy.

Due to a lack of education, standards, and definitive best practices, this option makes sense for fewer than 5% of Bitcoin owners. Take me, for example… I have been involved with Bitcoin since the first years of its existence, and have been a Bitcoin educator since shortly after Satoshi’s original bombshell. Today, I am a keynote presenter at blockchain and cryptocurrency conferences. I teach blockchain seminars, design courseware for colleges, and am co-chair of the Cryptocurrency Standards Association and partner in Blockchain Research Council.

Yet, I am only now configuring my first hardware wallet. I still trust Coinbase to host and control most of my cryptocurrency.

How do I know if I am a candidate for full / private control?

Using an exchange hosted wallet service is best for most individuals. But, for some, it makes sense to maintain private, local control of blockchain assets. If all criteria in the bulleted list below applies to you, then local and private ownership might make sense. But if you fail even one criteria, then WAIT! Wait until multisig becomes uniform and ubiquitous — and wait until a larger fraction of society is comfortable with the concept and practice of managing private keys. These are gradually becoming new norms. But, it will take a few more years for the world to become comfortable with an unfamiliar concept: personal control of a decentralized asset.

You are a candidate for using a personal wallet if you plan to control and secure your own private keys, and if you meet all conditions listed below. The technical criteria will not be requisite in the future—but they are necessary today, because the market currently lacks simple, standardized, widespread tools and uniform practices for safely securing, accessing and passing on these credentials to your heirs.

Do all of these criteria apply to you?

  • You have a comprehensive understanding of cryptography, including the principals of RSA public-key crypto.
  • You have practiced multisig decryption for at least a year. For now, you will need to roll-your-own multisig, to ensure that your heirs or executor can access your wealth in the event of death, forgetfulness or incapacitation.
  • You have experience and a clear, documented and standardized plan for separately encrypting and distributing your private keys.
  • You understand how to implement a hard fork and have the time to do it after any hard fork split.
  • You have an exceptional need for privacy or anonymity, and you feel that a custodian is more likely to “sing” in the event of an audit or court order.
  • You have a rehearsal plan for testing your multisig recovery and a willing group of trusted friends (most of them younger than you) who can combine their keys to access your wealth.
  • After ensuring that encrypted wallet works, is completely secure and is accessible to your heirs, you have replicated it in a sufficient number of places, that you are certain that your heirs will find it after you die, even if it is 90 years in the future.

    It must not only survive your lifetime, but the knowledge of where to look and *IF* to look, must be certain, even if your home burns down, your cloud accounts have been deleted and/or Google, Amazon, Microsoft & Apple are no longer in business.

If all conditions apply to you (and only if they apply), then you may be among the 5% of enthusiasts for whom a personal hardware wallet makes sense. At some time in the next few years, it will make sense for a far greater fraction of cryptocurrency holders, rather than just the most disciplined and knowledgeable Geek-enthusiasts.

Will we all be using a Blockchain currency some day?

At Quora.com, I respond to quetions on Bitcoin and Cryptocurrency. Today, a reader asked “Will we all be using a blockchain-based currency some day?”.

This is an easy question to answer, but not for usual Geeky reasons: A capped supply, redundant bookkeeping, privacy & liberty or blind passion. No, these are all tangential reasons. But first, let’s be clear about the answer:

Yes, Virginia. We are all destined  to move,
eventually, to a blockchain based currency.

I am confident of this because of one enormous benefit that trumps all other considerations. Also, because of flawed arguments behind perceived negatives.

Let’s start by considering the list of reasons why many analysists and individuals expect cryptocurrencies to fail widespread adoption—especially as a currency:

  • It lacks ‘intrinsic value’, government backing or a promise of redemption
  • It facilitates crime
  • Privacy options interfere with legitimate tax enforcement
  • It is susceptible to hacks, scams, forgery, etc
  • It is inherently deflationary, and thus retards economic growth
  • It subverts a government’s right to control its own monetary policy

All statements are untrue, except the last two. My thoughts on each point are explained and justified in other articles—but let’s look at the two points that are partially true:

  1. Indeed, a capped blockchain-based cryptocurrency is deflationary, but this will not necessarily inhibit economic growth. In fact, it will greatly spur commerce, jobs and international trade.
  2. Yes, widespread adoption of a permissionless, open source, p2p cryptocurrency (not just as a payment instrument, but as the money itself), will decouple a government from its money supply, interest rates, and more. This independence combined with immutable trust is a very good thing for everyone, especially for government.

How so?

Legislators, treasuries and reserve boards will lose their ability to manipulate the supply and demand of money. That’s because the biggest spender of all no longer gets to define “What is money?” Each dollar spent must be collected from taxpayers or borrowed from creditors who honestly believe in a nation’s ability to repay. Ultimately, Money out = Money in. This is what balancing the books requires in every organization.

This last point leads to certainty that we will all be using a blockchain based cryptocurrency—and not one that is issued by a government, nor one that is backed by gold, the dollar, a redemption promise—or some other thing of value.

Just like the dollar today, the value arises from trust and a robust two sided network. So, which of these things would you rather trust?

a) The honesty, fiscal restraint and transparency of transient politicians beholden to their political base?

b) The honesty, fiscal restraint and transparency of an asset which is capped, immutable, auditable? —One that has a robust two sided network and is not gated by any authority or sanctioned banking infrastructure

Today, with the exception of the United States Congress, everyone must ultimately balance their books: Individuals, households, corporations, NGOs, churches, charities, clubs, cities, states and even other national governments. Put another way: Only the United States can create money without a requirement to honor, repay or demonstrate equivalency. This remarkable exclusion was made possible by the post World War II evolution of the dollar as a “reserve currency” and the fractional reserve method by which US banks create money out of thin air and then lend it with the illusion of government insurance as backing. (A risky pyramid scheme that is gradually unravelling).

But, imagine a nation that agrees upon a form of cash that arises from a “perfect” and fair natural resource. Imagine a future where no one—not even governments—can game the system. Imagine a future where creditors know that a debtor cannot print paper currency to settle debts. Imagine what can be accomplished if citizens truly respect their government because the government lives by the same accounting rules as everyone else.

A fair cryptocurrency (based on Satoshi’s open-source code and free for anyone to use, mine, or trade) is gold for the modern age. But unlike gold, the total quantity is clearly understood. It is portable, electronically transmittable (instant settlement without a clearing house), immutable—and a precious substance needn’t be assayed in the field.

And the biggest benefit arises as a byproduct directly of these properties: Cryptocurrency (and Bitcoin in particular) is remarkably good for government. All it takes for eventual success is an understanding of the mechanism, incremental improvement to safety and security practices and widespread trust that others will continue to value/covet your coins in the future. These are all achievable waypoints along the way to universal adoption.


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

Ric Edelman: Bitcoin will become asset class

Kudos to WallStreet analyst and advisor, Ric Edelman. He drank the Kool-Aid, he understands a profound sea change, and he sees the ducks starting to line up.

Check out the clearly articulated interview, below, with Bob Pisani at the New York Stock Exchange and legendary Wall Street advisor, Ric Edelman, (Not my term…That’s what CNBC anchor, Melissa Lee, calls him). Read between the lines, especially the last words in the video, below.

Ric Edleman has just joined Bitwise as both investor and advisor. This lends credibility and gravitas to the organization that created the world’s first cryptocurrency index fund. Bitwise benefits from Edelman’s affiliation, because the US has been slow (some would say “cautious”) in recognizing the facts on the ground: Cryptocurrency is already an asset class.

Edelman fully embraces a strong future for Bitcoin—not just as a currency or payment instrument, but as a legal and recognized asset class; one that is at the starting line of a wide open racetrack. He explains that the SEC sets a high bar for offering a Bitcoin ETF, but that this will be  achieved. It will pave the way for large institutions, pension funds, etc to allocate a portion of money under management for blockchain products.

At timestamp 3:39, Melissa asks Edelman “Why wait for an ETF?” and “If you believe this strongly, why not advise clients to invest a portion of assets into Bitcoin right now?

Edelman’s response is stunning. He explains that he is frustrated, because this is what he wants to advise. But, his firm is bound by the Investment Act of 1940—and so, they cannot tell a client “Go to Coinbase” or “Invest in a private fund such as Bitwise—that I am such a big fan of. We don’t have that ability in our practice.” [i.e. until the SEC recognizes Bitcoin as an asset].

In my opinion (and in the opinion of Edleman), SEC recognition of Bitcoin as an asset can’t be far off…

  • It’s already happening in other countries. Reputable exchanges and index funds exist today.
  • Unlike a traveler’s check or Amazon gift card, it is inherently a store of value, whether or not you believe that its value is intrinsic;
  • The IRS already considers it an asset for tax purposes (What an odd schism in definition & treatment!)
  • It is legal to pay staff in Bitcoin and use it to settle debts, for any recipient that accepts it. For employees and consultants, it is a wage or stipend, just like FIAT. They can convert into cash immediately—or retain crypto it to pay their own bills)

It’s not difficult to read between the lines. Edleman makes a clear recommendation, although he can not yet advise this—certainly not on the record. His personal forecast for long term adoption and appreciation, especially of Bitcoin, matches my own analysis. His new affiliation with Bitwise (a pretty bold move) demonstrates certain commitment.

This ends my analysis of Edelman’s strong endorsement. But it raises another important question:

If large financial institutions are likely to offer Bitcoin products and services—and if credible analysts & advisors are chomping at the bit to recommend this new asset class—shouldn’t we invest in Bitcoin now?!

Ironically, I do not recommend hording or investing in cryptocurrency, even as a collectable. Why?! Because of the big “Investment Catch-22”. I don’t discourage investing in Bitcoin because I fear that its value will lessen. It is for a completely different reason. And so, my advice against investing is half-hearted.

Currently, Bitcoin and altcoins are widely misunderstood. Many people have these false impressions…

  • It is not backed by anything
  • It interferes with tax collection
  • Cryptocurrency facilitates crime
  • Governments will never allow it
  • They do not convey compelling benefits over government-issued currency
  • They water down the overall money supply
  • Their deflationary nature threatens economic growth
  • They are easier to lose and subject to scams & hacking
  • They do not facilitate refunds, rescission, recourse and customer claims
  • They interfere with a government’s ability to control its monetary supply

All of this is untrue, except the last item—and that one is a tremendous benefit.

Additionally, blockchain currencies fluctuate widely in real market purchasing power, many altcoins and all ICOs are scams, and acceptance is far from being ubiquitous. Clearly, widespread adoption requires stability, infrastructure, trust and ubiquity.

This cannot happen until two things occur:

  1. The fraction of transactions in normal business and retail commerce (purchases, salaries, debt payment and settlement) must significantly dwarf the fraction that is driven by investors, hoarders and speculators.
  2. A significant number of established brands, services or retailers must begin publishing prices in Bitcoin and honoring those prices throughout a defined sale period (e.g. until the next catalog is published or until the next production run).

Things are beginning to change, but for such a positive and transormative mechanism, that change is frustratingly gradual.

A series of falling dominos is already in process. But, the end game is retarded by those of us who invest in Bitcoin, because we are removing a limited resource from circulation and contributing to volatility. We do this, because we realize that—in the long run—Bitcoin can only go up in value. Yet, our investment at such an early stage (before consumer adoption) makes the infant sick.


Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top Bitcoin writer at Quora. Book a presentation or consulting engagement/.

Still haven’t written for Medium? Be the content, instead!

Are you worried about Bitcoin dipping to within pennies of $6,000 today? That’s a magic buy alarm for me—and it looks like I may not be alone.

Perhaps it is no coincidence that a student intern (and budding author) from Portugal interviewed me today. He is quite knowledgeable about Bitcoin and the blockchain. I did not feed him the questions. It was a standard “Ask an expert” format, and I didn’t think much of the interview at first.

My interviewer, Diogo Fierreira, rolled out a phalynx of questions longer than my arm. They were sweeping and thorough; general and specific. Still, I wasn’t sure how much time I could afford to devote. In the end, I am glad that I stuck with the young columnist and remained cogent. I now realize that this fellah really knows how to market his interviews! By end of day, the entire interview was published at Medium.com.

I have never been published at Medium, but I certainly enjoy the quality and diversity of thought provoking content. Now my little pearls of wisdom are forever enshrined in stone, (Well—at least sandstone!)

Warning: Medium.com claims that this is a 12 minute read. At just over 3,000 words, it is a bit longer than most of my own articles.

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. There are also plenty of incentives or people to invest for example free stellar lumens.

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 (aka: facts-based) approach.

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


Investment advisers often classify their approach to studying an equity, instrument or market as either fundamental or technical

  • 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? Does fundamental research include an analysis of history and trends? Sure; a bit. For example, a good market analysis takes into account the evolution of consumer demand and the likelihood of continued demand. But this is very different than the “trends” that interest technical proponents.
    .
  • Technical approach tries to divine trends from recent performance—charting statistics and pointing to graph traits such as resistance, double shoulders, candlestick patterns and number of reversals. This approach eschews a fact-based analysis of customers, products and market demand. Rather, it is based on past unit value—astrological hypotheses and superstition related to numerology. (If the tone of this definition seems sarcastic, it is because technicians try too hard to frame their alchemy as a serious art—and many have deluded themselves).

Do you see the difference? Fundamental analysis is rooted in SWOT: A study of 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 adviser 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 advisers 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 past ones. That’s why legitimate economists call short term movement 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).

TIP: If you still believe in technical
analysis, reread that last sentence
.

Decisions based on a technical analysis—instead of solid research into fundamentals—is the sign of an inexperienced or gullible investor. Some advisers 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. Even here, there is no correlation.

The problem with focusing on short-term movement is that you will certainly lose to insiders, lightning-fast program trades, 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 (helps 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
  • Use dollar-cost-averaging. It reduces risk of end-point volatility
  • Reevaluate semi-annually, when significant new information arises, 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.

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 adviser. That’s true…

I do not have a degree as 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 advisers 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.

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

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:

Building a Bitcoin ATM is easy, but…

…But offering or operating them engulfs the assembler in a regulatory minefield! It might just be worth sticking to selling bitcoin on PayPal (visit this website for more information on that).

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 portable printer that can produce receipts with 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 makes all the difference in the world. And your ATM must interface with an exchange—yours or a 3rd party exchange.

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 client (a 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. It’s worth contacting estate planning lawyers austin to help you with these tasks (also, you should probably find one familiar with cryptocurrency). 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 CRYPSA, hosts 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.

Is Cryptocurrency 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. Any questions you have regarding taxation should be directed towards Dave Burton.

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. Furthermore, Bitcoin was by no means the first form of cryptocurrency, but it has become the most successful and, of course, alternatives have been developed over time (if you’re interested in finding out what they are then click the link to find out the most promising altcoins for investment.)

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.

Should we ‘out’ Bitcoin creator, Satoshi?

Everyone likes a good mystery. After all, who isn’t fascinated with Sherlock Holmes or the Hardy Boys? The thirst to explore a mystery led us to the New World, to the ocean depths and into space.

One of the great mysteries of the past decade is the identity of Satoshi Nakamoto, the inventor of Bitcoin and the blockchain. Some have even stepped forward in an effort to usurp his identity for fame, infamy or fortune. But in this case, we have a mystery in which the subject does not wish to be fingered. He prefers anonymity.

This raises an interesting question. What could be achieved by discovering or revealing the identity of the illusive Satoshi Nakamoto?…

The blockchain and Bitcoin present radically transformative methodologies with far ranging, beneficial impact on business, transparency and social order.

How so? — The blockchain demonstrates that we can crowd-source trust, while Bitcoin is much more than a payment mechanism or even a reserve currency. It decouples governments from monetary policy. Ultimately, this will benefit consumers, businesses and even the governments that lose that control.

Why Has Satoshi Remained Anonymous?

I believe that Satoshi remains anonymous, because his identity, history, interests and politics would be a distraction to the fundamental gift that his research has bestowed. The world is still grappling with the challenge of education, adoption, scaling, governance, regulation and volatility.

Some people are still skeptical of Bitcoin’s potential or they fail to accept that it carries intrinsic value (far more than fiat currency, despite the absence of a redemption guaranty). Additionally, we are still witnessing hacks, failing exchanges and ICO scams. Ignorance is rampant. Some individuals wonder if Satoshi is an anarchist—or if his invention is criminal. (Of course, it is not!).

Outing him now is pointless. He is a bright inventor, but he is not the story. The concepts and coin that he gave us are still in their infancy. Our focus now must be to understand, scale and smooth out the kinks, so that adoption and utility can serve mankind.

Related Ruminations:


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