Is Bitcoin’s bubble finally bursting?

Bitcoin is a digital currency based on some fancy cryptography that is designed to facilitate anonymous transfers, and resist regulation by government.

A Bitcoin is essentially a claim on a string of numbers (that take the place of a physical coin) that can be bought and sold. There are exchanges that will convert between bitcoin and other currencies, and even some merchants who will take bitcoin in cash.

The idea of an anonymous digital currency itself is not new. David Chaum proposed the concept of electronic cash and developed a scheme in the 1980′s. Chaum’s currency proposals never did really get off the ground, but his keynote address at the first World Wide Web conference had a major impact on the development of the Web.

Bitcoin itself is largely based on hashcash, a ‘proof of work’ scheme proposed by Adam Back in the 1990′s as a way to stop spam. The idea behind hashcash was to increase the cost of sending email to the point that spam became uneconomic by requiring each sender to perform a quantity of computational make-work.

Before the rise of Bitcoin in 2009, the most successful scheme of this kind was E-Gold, which operated from 1996 until it was shut down by the Secret Service in 2007. E-Gold tapped into the libertarian ideology of anonymous cash, but their technology fell far short of the rhetoric. E-Gold wasn’t really anonymous, and wasn’t even located outside US jurisdiction. The company was registered in St. Nevis and Kitts, the datacenter was located in Florida. The idea that E-Gold somehow operated outside the scope of US regulation was a spectacular example of self-delusion by their management.

Computer generated Bitcoin via Shutterstock

Computer generated Bitcoin via Shutterstock

E-Gold wasn’t an anonymous currency as such, it was an exchange that allowed customers to transfer ownership of gold between them. Which was sufficient to allow its use as a means of avoiding government controls on money transfers. When the system was shut down, some of the largest complaints came from Iran, where citizens had been using it to evade US sanctions, and were left unable to access the money in their accounts.

The E-Gold episode had two curious aspects. One is that the exchange was permitted to operate for so long, when it was obvious that it was operating illegally. In my work stopping Internet frauds, I would meet Secret Service, FBI and Postal Inspectorate officers on a regular basis, and the conversation would almost always turn to the ongoing mystery of why the scheme was allowed to keep running.,,The authorities did not act until their hand was forced by the collapse of ‘Solid Investment,’ a Ponzi scheme that had made extensive use of E-Gold to conceal money movements.

Another mystery is the sentences that the perpetrators received. Instead of 10 years in jail and a $500,000 fine, the CEO received 300 hours community service, six months home detention and a $200 fine. It is difficult to imagine that one of two things didn’t happen. Either the organizers of the exchange coughed up some very valuable information as part of their plea bargain, or the cooperation with the authorities had begun long before the exchange was finally shut down.

Many people in my field suspected that E-Gold was allowed to operate because the Fed preferred to have the money laundering activity happening in a flawed exchange, than see the rise of a genuinely anonymous electronic cash system. If so, the concern was justified. The rise of Bitcoin came hard on the heels of the collapse of E-Gold, and Bitcoin’s promise of anonymity is backed by some real cryptography.

If I had had the good sense to ignore the libertarian ideology surrounding the launch of Bitcoin, I might have bought a thousand bucks worth when the coins were fetching $0.02 each. Such a stake would be ‘worth’ $6.25 million today. Who knows what Bitcoin might be worth tomorrow? The answer could be $250 or it could be $0.00. Nobody knows because Bitcoin is a currency without any intrinsic value. Unlike a government minted currency, you can’t use Bitcoin to pay taxes or pay fees for government services. Unlike bank issued scrip, there is no promise to redeem Bitcoin in gold or specie.

This lack of intrinsic value had initially led me to dismiss Bitcoin as broken. But I now understand that it is the real genius of the scheme, as it allows the value of Bitcoin to soar as long as there are more punters eager to throw money into the expanding bubble. In effect Bitcoin replaces both the E-Gold system and the Solid Investment Ponzi scheme in one stroke.

The Bitcoin bubble is even better than a Ponzi scheme or a mere stock bubble as there is no expectation against which the performance of Bitcoin need to be measured. The ‘value’ of Bitcoin will increase for as long as there is more demand to buy than to sell. As long as the value of Bitcoin appears to be increasing in value (or at the least not losing value), Bitcoin users are encouraged to keep part of their funds in Bitcoin.

Another factor that encourages Bitcoiners to keep their money in the system is the sheer difficulty of transferring money in and out. This is largely due to US government actions that have shut down many of the ingress and egress portals in the Bitcoin ecology. Barclays Bank in the UK and the Dwolla money transfer service have already closed the accounts of Mt Gox, the largest Bitcoin exchange. The lowest cost means I could find of transferring $1,000 into MtGox from the US would cost me at least $50, possibly more (the sites are not exactly transparent about fees). Allowing for another 5% overhead to transfer money out, Bitcoin is an expensive way to move money.

If Alice offers to pay $20,000 in BitCoin to Bob for his crack cocaine, the actual value of the Bitcoins themselves does not matter very much to either party as long as Bob is reasonably confident that it won’t drop too much before he can redeem his coins for cash. Traditional money laundering techniques such as buying and selling valuable goods can easily eat up more than half of the amount transferred. BitCoin does not need to be perfect to gain users, it just needs to be a little more efficient than existing options.

As far as the use of Bitcoin as an exchange medium is concerned, the nominal price of the coin does not matter except to the extent that the current price of about $125 makes it impossible to use BitCoins to buy a hamburger. But not to worry, the Bitcoiners insist, we can make change! What they don’t mention is that once change is added into the system, the cryptographic proofs of anonymity that the system purports to offer become faith based.

You can watch Bitcoin transactions in real time at blockchain.info. Some of the transactions are quite high value.

Bitcoin-live-transactions

 

In the last hour (as of this writing) there were ten trades over $50,000, one of which was for $669,999.05. Just what is the economic activity that is driving all these trades? Given the cost and inconvenience of transferring money into and out of the BitCoin system, one might be tempted to presume that much if not most of the economic activity is criminal.

Many of the customers left with money stranded in E-Gold accounts lived in Iran. Last year the administration ratcheted up sanctions against Iran to an unprecedented level, attempting to sever Iran’s connections to the international banking system. These sanctions have limited effect on the government, which can make alternative arrangements, but the private sector is left to fend for itself. Bitcoin provides the Iranian merchant class with an escape mechanism.

As with E-Gold, the question is not whether US authorities will act, but when, how and whether the action will be effective.

The first blows have already been struck as the Department of Homeland Security has begun legal action against the Dwolla payment service, pressuring them to stop Bitcoin transfers to Mt. Gox. US currency reserves held by Mt. Gox were also seized for failing to register with the Financial Crimes Enforcement Network.

On Wednesday, DHS moved against the Costa Rica based ‘Liberty Reserve’, another anonymous payment transfer scheme, that also served as a means of transferring money into and out of the Bitcoin system. Arthur Budovsky, the founder of Liberty Reserve was already on the run from a five year prison sentence, reduced to probation, for his involvement in an E-Gold like scheme called Gold Age.

The DHS began its action against the gold-based exchange schemes from the bottom up, taking out the small players like Gold Age before the raid on E-Gold. It seems likely that enforcement action against the Bitcoin system is following the same pattern.

Bitcoiners assure me that their system is government proof, but I have heard the same arguments about crypto-anarchy for years, and law enforcement has won every single time the theories have been tested.

Rolling up the Bitcoin system would be more difficult than the action against E-Gold and Liberty Reserve, but not impossible. If all else fails, DHS can ask Congress for legislation. It is unlikely that any member apart from Rand Paul would object. The raid on Liberty Reserve provides DHS with an excellent pretext for legislation, and that may well have been one of the reasons for the timing.

If DHS does not act soon, Bitcoin might become too widespread to be stoppable. Iran is holding its presidential election on June 14th, and there are several important national days before that. The end for Bitcoin might be coming quite soon.

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  • Sheesh 2

    Bitpay alone facilitates over 4,000 VENDORS including WordPress, the EFF, and Namecheap.

    Not to mention, back when the Silk Road really was the biggest vendor using Bitcoin, the price of a bitcoin was under $5. It stayed in that range for a very long time. Since then, the price of bitcoin has grown over 26 TIMES. So are you suggesting that the amount of people using bitcoin for the black market has grown something like 26 times? Or even 13 times?

    This whole article was slander based on opinion.

  • Sheesh

    I counted like 18 or so incredibly stupid comments in this blog post. That’s either a stupidity record or just a darn good job trolling.

  • anonymous

    Most likely that $670k was really a 20$ transaction where the 670k was “change”.

  • Neal Gafter

    No, that’s sales this quarter toward their quarterly goal. Last quarter they had more than that. See http://bitcoinmagazine.com/bitcoinstore-sells-500000-renews-ingram-contract/

  • MagicTheGatheringOnlineXchange

    So the feds were selling magic the gathering cards while waiting for bitcoin to be created? makes sense

  • MyrddinWilt

    The store states that their lifetime sales are $450K.

    There was a $670K Bitcoin transaction in the hours worth of data I reviewed while writing the article.

  • Timo Yy

    “the current price of about $125 makes it impossible to use BitCoins to buy a hamburger”

    Yeah, just like the current price of the Japanese Yen of $0.01 makes it impossible to use Yen to buy a house in Tokyo.

    Or like nobody could buy a loaf of bread in 19th century England because one pound sterling was more than a day’s wage.

    Nice logic.

    PS. Millibitcoins are already a well recognized unit in some places. I use them for tipping.

  • http://adgitadiaries.com/ karmanot

    :-)

  • http://adgitadiaries.com/ karmanot

    True and change would probably consist of picking out the raisins, almonds or peanuts.

  • Neal Gafter

    Right, neither gold nor Euros are “money” because the U.S. government will not accept them as taxes.

  • Neal Gafter

    I’ve spent a few thousand dollars on electronics at bitcoinstore.com and saved about 10% compared to the best prices I could find elsewhere. I’ve spent zero on drugs etc. I think it strains credulity to claim that even half the real economic activity is criminal.

  • MyrddinWilt

    That was John’s edit.

    My original statement was that I think it strains credulity to claim that even half the real economic activity is not criminal. By which I mean that if you exclude the volume of transactions due to speculation, miners trading for cash etc. I think that over half of what remains would be criminal.

    There just isn’t a large enough base of legitimate merchants to believe otherwise. Sure you can buy a pizza with BitCoin and there are a handful of coffee shops. But other than to say you did it, why bother when conventional cash works?

    for the past 15 years practically every email client has supported encryption technology that I and others designed. Less than 1% of users are aware that it is there and less than 1% of those have used it. We don’t even use it ourselves. So no, I don’t believe the claim of a thriving legitimate BitCoin economy.

  • Neal Gafter

    Your complaint that Bitcoin’s “proof of anonymity” is undermined by the way that change is returned in a transaction is meaningless, as Bitcoin does not have a “proof of anonymity”. Perhaps you are confusing it with earlier e-cash systems that did have such a proof. Bitcoin should be evaluated on its own merits. There is a proposed extension to Bitcoin called Zerocoin that would provide anonymity, but that’s another story.

    You “might be tempted to presume that much if not most of the economic activity is criminal”. It doesn’t get any FUDdier than that! (I might be tempted to presume the opposite)

  • timeofmind

    The weeds in my garden require a large extended infrastructure to keep running… they are unstoppable because there is no fixed channel through which they must spread and the system is isotropic. Anyone can exchange cash for crypto-coin, anywhere, just like your PGP applications. There is also much talk about building out mesh networks, but I don’t think that will be necessary. I don’t think the government really wants to encourage the crypto-coin community to fight against it… such a dynamic stimulates too much innovation and risks the governments chance to control it. I think the government tactic will be actually be to try to gain the trust of the crypto-coin community and offer it options for adoption through government mediated channels (like convincing exchanges to comply with anti-laundering regulations which is exactly what they are now doing). Eventually, if the government offers a path of least resistance for bitcoin adoption that is in its favor, the government will win over the users of the currency, currency will become more centralized, and government will win. You think government try to shut it down. I don’t think government is that stupid. The government knows it can instead win by taking control of it gradually.

  • MyrddinWilt

    Yes, yes, cryptolibertopia forever. I have been hearing the same from John Gilmor and co since I was on cipherpunks 20 years ago.

    What is rather interesting about the Bitcoin conference is that none of the speakers comes from the cipherpunks world. So maybe you folk will do what we didn’t.

    After all we took on the NSA and the FBI and we won in the cryptowars. So the DHS does not necessarily win. But we had a lot of advantages, not least support from Vice President Al Gore and senators on both sides of the aisle in Congress. We also had a more favorable legal situation, use of strong crypto was unambiguously legal, it was the application to the export control laws that was a stretch.

    I don’t think BitCoin has any political allies apart from maybe Rand Paul. There is another important difference in that the FBI is a lot more tech savvy today than they were in 1992 when PGP launched. When the phishing issue started to explode in 2003, many in the FBI, Secret Service and the rest turned to people like me that they knew from harassing us during the cryptowars.

    There is a big difference between open source software and open services. Distributing an application program for free is easy because the marginal cost of distribution is zero. The marginal cost of supporting a service is usually negligible but quickly mounts up. So open source applications like Linux are still open twenty years on but there are no long lived Web Services that don’t have a solid business model.

    So I think that you will find that there is a big difference between our fight which we could win by just handing out applications like PGP and your fight which requires you to keep a large extended infrastructure running.

  • timeofmind

    They could put Gox out of business. Many in Bitcoin are really unconcerned about this. Many would even like to see it happen. Though, I think Gox will put itself out of business. It is losing market share quickly. Many ideas for decentralized exchange platforms are coming out. I have an idea in the works that utilizes something similar to Ripples “gateways”… basically many places and ways to “cash-out”, or to get in. It is all being discussed on bitcointalk. Apparently an organization in the UK is also in the works on an escrow-based decentralized system that relies on a trusted 3rd party to release funds on either side. Ultimately, a decentralized exchange allows all the exchanges to ride the same exchange network, so that there are many entry points, and starting up new exchanges become very straight forward.

  • MyrddinWilt

    I got the same type of comments from the gold bugs in 2011 when I suggested that the gold bubble was bursting when the price dropped to $1,700. Gold did manage another rally after but it didn’t match its earlier peak and it is currently at $1,400. So the folk who bought coins from Glenn Beck’s pals in the past six years are all under water since they pay double the value of the coins and the price of gold is only double its 2006 price.

  • MyrddinWilt

    Interesting comparison.

    The games companies have been having some real problems with their in game currencies being (potentially) used for money laundering and there are of course the gold grinding operations.

  • Myrddin Wyllt

    I think the government will shut down BitCoin the same way they shut down most of the offshore casinos. They will make it impossible for US citizens to trade directly with the unregistered exchanges like MtGox and then they will make it impossible to deal indirectly. They will put pressure on the Japanese govt to put Gox out of business.

    It really isn’t such a mystery unless you decide ahead of time that doing so is impossible.Its like the arguments of the folk who claim that Sealand is a real state despite the fact that no other government recognizes it and HMG could take the platform in half an hour if they ever really wanted to.

    Cryptography does not defend against an attack with guns and badges and warrants.

  • timeofmind

    Nicho, there are already quite a few stores accepting Bitcoin. I think you will find that as long as the government gets its taxes it won’t make a fuss. You can call it whatever you like, but people use it to buy stuff, and it turns out to be way more convenient than packing around physical paper and coins; while useable in far more situations than a credit card. Anyone with a smart phone can exchange bitcoin. They can be used anywhere there is cell phone reception.

  • timeofmind

    OK. I’ll bite. Sure it is conceivable that the government would like to shutdown bitcoin use in the US. I can understand why there are so many alarmists who are concerned about this possibility. The only legitimate argument I’ve heard for how they might do this is that they may try to make it difficult to exchange Bitcoin for US dollar in the US, but I think it is highly improbable for the following reasons:

    1. I think the government has studied the possibilities and realizes that any attempt to stop bitcoin use will actually backfire on them and increase its publicity for use in black-market/under-the-table type activity.
    2. Bitcoin is highly traceable if people enter the bitcoin market through the proper channels, and the government knows that if it can promote more convenient and legitimate channels for bitcoin adoption, it could potentially track all bitcoin business in the US by using its super-computers to analyze the bitcoin ledger. Bitcoin could actually reduce tax-evasion by making it the most convenient option for consumers to make purchases (credit cards have helped with this, but bitcoins are even more convenient than credit cards, because they can be used in any conceivable exchange – no fancy POS terminal equipment needed).
    3. The government (FinCen) has already released guidelines for legal use of virtual currencies and has stated that it will not try to stop them as long as those transacting in them abide by anti-laundering laws.

    If the government tried to do anything, it will likely be to make their own such currency to compete with bitcoin… I don’t think they will take on the battle against Bitcoin or crypto-currencies, it is just not worth the effort for them. Canada has already stated that it is researching the potential for electronic currency and has been putting out proposals for ways of storing its currency digitally on special storage chips released by the canadian mint (ie. it would be minting currency in digital form, rather than in tangible form).

  • Jean-Claude Morin

    World of Warcraft money can be created in infinit by Blizzard. They can create a dungeon that give a zillion gold. Bitcoin not that easy, it’s 1 block every 10 minutes.

    World of Warcraft money can be seize/shut down by the company or goverment anytime for any reason… Bitcoin is decentralized, no web site to shut down, no company or bank account to close.

    I’m not sure how about are the same beside they are virtual currency. And as of today money currency ARE virtual anyway that include USD (physical cash is only a small percentage of the total money “printed”).

  • timeofmind

    Your original statement is still highly confused… buying a hamburger at $125/bitcoin is not impossible, so the first sentence is simply false. The system does not “purport” to offer any such “cryptographic proof of anonymity”. And the system was built this way from the start. It was never changed. Who ever “purported” to offer any such thing? I think it is quite common knowledge that transactions are fully traceable in bitcoin, and frankly, I’m totally fine with that. I’ve never had any delusions about it. I don’t see how this detracts from bitcoin. I really don’t care that someone can discover that I “bought a hamburger on Thursday”. Lastly, what has faith to do with any of this? Are you trying to argue that some users were tricked into believing that transactions cannot be traced? I’ve never known anyone who was not aware of this property of bitcoin protocol. As you say, the chaumian scheme you described above is completely impractical. It would not only require indivisible amounts but it would also require a centralized backer of the coins. What the bitcoin protocol makes possible, is for the ability for any client on the network to “mint” new coins, as long as every other client approves of it. It is like you are going off on some random tangent… describing technologies that are completely unapplicable to bitcoin… no wonder why I’m totally confused… Ultimately your article speculates that bitcoin could be stopped, but it fails to explain how… crack the cryptography used to secure individual bitcoin addresses? You do mention that US authorities my try to make it more difficult to get US dollar in and out of Bitcoin…. they haven’t actually done such a thing, their recent actions have been way over-hyped. There are many Bitcoin startups that allow people to trade US dollars for bitcoins that are working very professionally and within US law (ie. coinbase, coinlab). In addition, bitcoin adoption is growing quite well outside the US, and it is relatively easy to obtain bitcoin on the street in any US city. I just don’t understand where you are going with this article. It sounds like a bunch of hot air.

  • mpeasee

    Was just reading that this can only be done because of the Patriot Act.

    http://www.reuters.com/article/2013/05/28/net-us-cybercrime-libertyreserve-charges-idUSBRE94R0KQ20130528

  • MyrddinWilt

    What I was complaining about is the conflation of the features of BitCoin that make it difficult to trace users with the features in anonymous digital cash systems such as those of Chaum and co that make them impossible to trace if the volume of transactions is sufficiently high.

    So in a true Chaumian digital cash scheme a ‘coin’ is represented by a string of numbers and we transfer the coin from one person to another by using Chaum’s ‘blind’ signature scheme. This lets me transfer the coin to you in a secure way without us knowing each other’s identity. I can do that via any communication medium and without the need for the transfer itself to be mediated by the registry.

    Chaumian schemes have been around since the 80s and they are totally cool and utterly useless for almost any purpose other than collecting tolls. The coins really behave like coins, you can’t divide them into smaller denominations. And that makes the system almost impossible to deploy.

    The novelty in BitCoin is that it allows the coins to be split into smaller amounts. But that comes at the cost of having all the transactions being funneled through the BlockChain logs. I can send you the details of my BitCoins and let you spend them for me. But the only way you can prevent me from spending them first is to get them chained ASAP. So unlike in Chaum’s scheme you don’t have the ability to do anonymous offline transfers.

    It is quite possible to use BitCoin once and preserve your anonymity. But if you use the system repeatedly you leak small quanta of identity information with each transaction. If the adversary is sufficiently well resourced and has the ability to track your local behavior the probability of disclosure rises over time.

    There is a purported fix for this problem called ZeroCoin but I haven’t analyzed it and can’t say whether it really fixes it or just pushes the problem further under.

    Crypto protocol design is a really hard field to get right. If you look at the recent CRIME and BEAST attacks on SSL/TLS you will see that even the most widely used crypto protocols can be vulnerable to attacks.

  • MyrddinWilt

    Interesting that you would make that claim as the only dispute I can find in the comments here are from the people who take issue with my pointing out that a $125 coin is not very useful claiming that I am unaware that BitCoin permits change only that is precisely what I address in the very next sentence.

    I took a look at the comments in my last four posts and didn’t see any real factual disputes there either, not unless you count the wingnut/troll trying to tell us that anyone who disagrees with Sowell does so because they are racist.

    It seems rather ironic to chose this topic of all topics to attack someone for using a pseudonym.

    If you like BitCoin and think that it is a good system then by all means go invest all your life savings in the system as soon as possible. But if you believe that the value of your BitCoin ‘investment’ might somehow be put at risk by the pseudonymous comments of someone who merely claims but cannot prove to be well known in the field that rather makes my point.

  • Indigo

    The Lindens in ‘Second Life’ function as currency inside the game and can be exchanged for real world money. I don’t know what the current exchange rate is but it’s alotta Lindens for a dollar. I think this entire realm of exchange is fascinating and I look forward to learning more about it. For example, does Mitt Romney hide money in one of these cyber-holding operations? What crypto-banking is actually happening and where? Do US or Chinese or Euro-funds invested amount to a Trillion or is this the realm of a cheap lottery, churning 5 or 6 million on a good day?

  • Indigo

    I cannot speculate as to whether your credential support the very
    impressive claims you make about yourself, it’d be interesting to see
    how that plays. It’d be great if you were to present your distinguished credentials to John. He might be willing to take you on as a commentator on these issues or even point your towards a suitable professional niche in cybercommentary.

  • jared

    +1

  • jared

    And if you actually practiced the field (this one in particular, not the other 10 that you purport yourself to be an expert of), you wouldn’t be authoring blog posts on gov’t capabilities on cryptography or mentioned nsa or security clearances (not here, but in another post). The Myrddin doth protest too much, methinks.

  • jared

    +1

  • MyrddinWilt

    There is an important difference.

    SF property prices are at least bounded by what people can afford to pay for a house. The price could go from $700k to $1.4 million but not $1 billion. There is a limit to the utility in a house in SF and everyone knows that.

    There is really no limit to the price of a bitcoin in either direction. They have no utility they have no intrinsic conversion to gold or any other physical denomination. So there is no reason why the price of BitCoins should not go to $1 million and there is no reason why they shouldn’t drop to $0.01. The system can keep on working just the same regardless and provided prices don’t drop by more than 10% in a day the drug dealers etc. can still use BitCoin to launder money without any real inconvenience.

    When there are transfers of $670,000 taking place in a system like BitCoin it really stretches credibility to say that it is not drug money or other illegal activity. There are much cheaper ways to move that type of money around.

    The lower bound on the value of BitCoin is probably underwritten to a certain degree by the drug traffickers who can afford to buy up all the coins in the system if they really need to. And they have an interest in keeping the value of BT high as they likely have considerable reserves to protect.

  • timeofmind

    I read that part, but it is completely unintelligible. I suggest you express yourself more clearly. ie “change” WTF are you talking about? The concept of “change” does not exist in bitcoin. What “cryptographic proofs of anonymity” are you referring to? Bitcoin is anonymous simply by the fact that your identity need not be tied to your wallet address. What faith are you talking about? Faith in what? How can you expect anyone to understand what you are talking about when you assume the reader perceives from inside your detached little bubble or is capable of mind-reading?

  • http://adgitadiaries.com/ karmanot

    True, the techies ruined the Mission, South of Market , Noe and the Castro in the 90′s and are back for re-runs.

  • http://adgitadiaries.com/ karmanot

    Did you catch the joke?

  • http://adgitadiaries.com/ karmanot

    yep

  • nicho

    Probably people with a lot of Bitcoins who are hoping — like Ponzi scheme operators everywhere — to keep the scam going until they can get out.

  • MyrddinWilt

    I did not want to get into the details of the architecture. But the short version is that if you wanted to have a BitCoin like system that didn’t have the ability to make change you could make everything a lot simpler and there would be no need for the log chains or the ‘wading through treacle’ as Ben Laurie described the mining process.

    Adding the requirement to make change is what makes BitCoin new. But that requires them to have the logs and the whole block chain thing going on and once you do that…

    Tor is a great service for Iranian dissidents to connect to the outside world. But I would really not want to bet keeping out of jail on the operators of the onion routers not being the US government.

  • nicho

    If enough people were trading in chocolate, then yes. Not banned, but tightly regulated.

  • nicho

    Which is why the government won’t let it happen.

  • MyrddinWilt

    How do you know when they started taking an interest?

    DHS issued a report in 2008 on the use of digital currencies for money laundering. I assume that their investigators continued to look at developments since. The launch of BitCoin made something of a splash. I didn’t track it until 2010ish but I would expect someone focused on digital currencies to be aware of it earlier.

  • MyrddinWilt

    Funny that you would suggest that expressing skepticism about a cryptosystem is reason to think I am not an expert.

    If you actually practiced the field you would surely have noticed that pissing an moaning about such things is mostly what we do.

  • http://www.rebeccamorn.com/mind BeccaM

    It’s all about conversion and exchange rates.

    If I walk into a store here in New Mexico and try to buy something with one of the 1000 Rupee notes we brought back from India, they’d refuse to accept it. But if I go to a Forex or bank, I can exchange that Indian currency for American.

    Presumably your theoretical store would have to take some of those Bitcoins and exchange them for a medium acceptable as taxes. Of course this then begs the question as to how one would calculate profits based on a non-recognized currency medium.

  • pliny

    There are services that let you short Bitcoins. While there haven’t been any raids, there have been well-timed DDoS attacks against exchanges to make people panic and manipulate prices.

  • nicho

    Nothing is “money,” unless the government will accept it as taxes. Suppose a store does all its business in Bitcoin. At some point, the government is going to want its sales taxes, property taxes, income taxes. If it won’t take Bitcoin as taxes, where does the store get the money?

  • pliny

    Actually, the process for making change is identical to making a payment. You’re just paying yourself on a different address. The only people who get your IP address are the node(s) you are directly connected to that pass the transaction into the network.

    If you’re the paranoid type who runs Tor on your phone, you can stay anonymous.

    Now once you connect that string of transactions to something, like an exchange or a service like Gyft, then things start getting more identifiable.

  • nicho

    Part of the SF phenomenon can be explained by the fact there is an awful lot of money in the hands of people who are smart in technical matters, but immature and stupid in the ways of the world.

  • pliny

    Mostly because Gox predated government agencies taking an interest.

  • MyrddinWilt

    The problem is that the reason people are willing to use credit cards at online merchants is precisely the fact that their interests are protected against fraud, negligence, pretty much anything going wrong for them.

    Sure the merchant is left holding the bag if there is a problem. But that is exactly what the customers insist on. Why would I offer to pay Amazon in BitCoin and have no consumer rights at all when they have to accept payment by credit card where I am protected?

    I once argued that particular point with Chaum. I think that a certain degree of ‘slop’ is actually necessary in a real world system. If you reify all your requirements in cryptography the result will work really well if you got the requirements exactly right and will be utterly impossible to change if you were wrong. BitCoin does have a lot more slop in the gears than earlier proposals which is one of the reasons it works. But that compromises the guarantee of privacy.

  • jared

    Not in the least. I happen to like AB (avid reader), and just feel like Myrddin’s contributions are doing the blog (and John) a great disservice. Take a look at the comment section of Myrddin’s posts. They are frequently filled with people pointing out factual errors. I’m also very weary of someone who feels the need maintain anonymity and consistently spout off credentials in an attempt to persuade the reader to believe the presented argument. Either reveal yourself and let me verify or let your writing stand on it’s own two legs.

  • http://adgitadiaries.com/ karmanot

    ppppffffft Just a ‘bit’ jealous?

  • http://adgitadiaries.com/ karmanot

    Great post Myrrdin!

  • jared

    Funny, because from my perspective Myrddin is the biggest expert troll on Americablog. His posts are consistently riddled with errors or opinions spouted off as fact. This entry is no exception. For someone of his (claimed) background (expert in just about every scientific field) he demonstrates, yet again, a complete lack of understanding about what he’s writing about.

  • Myrddin Wyllt

    And why is everyone sure that Mt Gox is not run by the Feds? It is what I would do in their situation.

  • http://www.facebook.com/stephen.fowler3 Stephen Fowler

    PS often I get paid in Chocolate, will that be banned too

  • JimboToronto

    I’m sure the Bitcoin bubble will burst again, as it did in June 2011 and again in April 2013.

    And it’ll burst again and again until the value is high enough and the satoshis are distributed widely enough that it stabilizes.

  • Myrddin Wyllt

    The author of the comment has clearly not read my article as the very next sentences are:

    “But not to worry, the Bitcoiners insist, we can make change!
    What they don’t mention is that once change is added into the system,
    the cryptographic proofs of anonymity that the system purports to offer become faith based

  • http://www.facebook.com/stephen.fowler3 Stephen Fowler

    Hell I have read so many of these articles it is almost as though people want it to fail, I just cannot understand why!

    From an online retailers point of view it is perfect because there are no claw backs, basically if you are paid by credit card or PayPal if there is an issue they can claim the money back….what that means you have sold a product and sent it off and Barclay’s and all will reclaim your money. With bitcoin when you get it it is yours so much safer when it comes to doing business.

    It is of no surprise that Amazon would be interested and any retailer would if they knew the benefits.

  • Myrddin Wyllt

    What would be the point of praying for a bubble when you can’t short a BitCoin?

    Even if you could go short there is no upper bound on what some idiot might think a Bitcoin is worth so shorting BitCoin would be very foolish unless you knew the exact date and time of the FBI raid.

  • Myrddin Wyllt

    I don’t worry about the identity of Nakomoto because it really doesn’t affect the security of the system at all.

    It is very a small field and we almost certainly know each other. If not they will tell sooner or later. For a field that exists to keep secrets we are terrible gossips.

  • Myrddin Wyllt

    As I say in the next sentence over, the Bit Coin system does allow for change. But oh dear, then what was a clear cut proof of anonymity suddenly becomes rather cloudy. It isn’t just the bitcoin any more, its all the IP addresses and communications and all the traffic required to maintain that change system.

    Hey it might work. You might be able to preserve anonymity in that situation but I wouldn’t want to be a risking my neck on it working…

  • http://adgitadiaries.com/ karmanot

    It’s just insane as you say.

  • http://adgitadiaries.com/ karmanot

    I rather like the idea of bit anarchy, and foresee a whole new lexicon rising: bitinflation, bitdeflation, bitcrash, bitponzi, bitscam and ultimately— bitloser and bitter.

  • http://adgitadiaries.com/ karmanot

    Very like+++++ As if anybody but Trump could put 4 hotels on Boardwalk in the real world.

  • http://adgitadiaries.com/ karmanot

    Thank you Bitroll for the vitriol.

  • http://adgitadiaries.com/ karmanot

    Thank you downer Debbie. Nothing like scold to teach a point.

  • nicho

    All real estate is in a bubble today, although I’ll grant you that SF is what is technically referred to by economists as “fucking batshit insane.” It’s simply amazing. It’s really hard to figure out why the new bubble when we haven’t finished picking up the pieces from the last one. Stuff around here that you could have picked up for $300k a year ago is now in the market for $700k. A friend is looking for a place. He saw one come on the market for $325. The following day, they raised the price to $350. It went under agreement within days.

  • Monoceros Forth

    Weird how this Monopoly money has developed such a bizarre cult following. It’s good in a way, since as long as the cult exists the fake money will have value, but only in the same way that tulip bulbs had great value upon a time, because for a limited period there was a sufficient population of lunatics to give them value.

  • Indigo

    Even more fascinating! The one thing you accomplished, Myrddin, that I certainly did not foresee, was how you brought out the cyber-high-fliers. I had no idea of all that and now you’ve got self-identified “expert” trolls lecturing you on how it really works. I’m impressed! A+

  • Monoceros Forth

    Bitcoin is basically like “World of Warcraft” money only a bit more respectable. It has value in the way that WoW money has: because the game is so widespread and popular there’s a market of people who are willing to accept it as valuable, the same as any other commodity. WoW money does have an equivalent value in real-world currency, a value dependent entirely upon what the WoW-playing market is willing to trade for it. Once that market falls away the value will disappear. The same is true of Bitcoin.

  • Elwar

    ” the nominal price of the coin does not matter except to the extent that the current price of about $125 makes it impossible to use BitCoins to buy a hamburger”

    That statement alone shows that you have absolutely no clue whatsoever. Not in the least. Load up the Gyft app on your phone and head on over to Burger King, you will be able to buy a hamburger with your bitcoins. It may only cost .02 bitcoins, but bitcoins are divisible down to .0000001 bitcoins so even the smallest transaction is viable.

    And then you point to a few $50k plus transactions and state “Given the cost and inconvenience of transferring money into and out of the BitCoin system, one might be tempted to presume that much if not most of the economic activity is criminal.” Do you realize that there are several large businesses who’s sole purpose is accepting bitcoins and paying merchants in dollars? BitPay is doing several million dollars worth of transactions each month. And you point to the blockchain as if that is a transaction into and out of the Bitcoin system? Those are transfers between bitcoin addresses. I could send my whole $50k plus wallet from one address to another for free and it would show up on the blockchain. That could easily be someone moving money from their cold storage wallet to their hot wallet.
    Stick to ripping on the unknown hacker Satoshi Nakamoto. You are trying too hard to move from the government media rulebook and failing.

  • pliny

    Bitcoin isn’t really anonymous unless you make an effort. The transaction history for the entire network is open and public. It like an electronic version of cash that remembers every hand that touched it, even it doesn’t know the real legal names attached to the hands. They’re not just marked, they’re frikkin’ lojacked.

    Someday soon, some dealer from the SIlk Road is going to get busted with an unencrypted hard drive, and the DEA or FBI will get their account info. Those transactions will be traceable back to the exchanges where people switched their dollars for bitcoins. Unlike MtGox, the other main US exchanges do comply with FinCEN, and there will be records.

  • Elwar

    I am disappointed. Most Bitcoin hit pieces at least throw in the dooming question of the mysterious hacker Satoshi Nakomoto that cannot be identified. Did you not include that because you have used it in a previous hit piece or just because it has been overdone in other government media articles?
    A ponzi scheme implies that the initiator of the ponzi scheme can take all of his marbles and go home when it is all done. That would require thousands of Bitcoin users all selling their bitcoins to other people who are willing to buy them.
    Praying for a Bitcoin bubble does not make it happen. Your little blog will not have any affect on the price as you are likely hoping. But at least it gives you another step forward to getting that great opportunity at Salon or the Washington Post. Maybe even MSNBC or work directly for the White House.
    All of the propaganda in the world will not make 2+2=5.

  • http://adgitadiaries.com/ karmanot

    SF real estate is in a hot bubble at the moment selling 20-30% above asking. The market is above 15,000.00. Crash anybody?

  • timeofmind

    The author of the article clearly has not looked much into bitcoin. He makes rudimentary mistakes, such as “the current price of about $125 makes it impossible to use BitCoins to buy a hamburger” (actually, you can buy hamburgers at many popular food chains using your bitcoins, a cell phone, and the gyft application). Bitcoins are divisible. Many people, including venture capitalists are investing in Bitcoin, not because they expect the value to increase, but they have the vision to see the potential applications for this new technology. If you have any technical understanding of bitcoin at all, and you start to think about the potential applications for this payment network, the implications are staggering. People, in the near future, may be using bitcoins or other similar electronic currencies without even realizing it.

    A note for those who think authorities can break down a peer-to-peer system: p2p download software is still being used for illegal software downloads, regardless of authoritarian disapproval of them. No authority has been able to stop p2p software from operating on computer networks; and the way in which cash is being exchanged for bitcoins is becoming increasingly decentralized. As bitcoin popularity spreads, the ease by which they can be changed for cash increases.

  • http://www.rebeccamorn.com/mind BeccaM

    I’m reminded of this truism in capitalism: Where there is a demand, someone will try to find a way to fill it.

    In both criminal and marginal enterprises, untraceable cash will remain king. But there remains a desire to have a means of exchanging currency electronically. Governments have increasingly been tracking all ‘legit’ transactions, so there’s your demand: An untraceable, unmonitored shadow economy.

    I remember a few years ago with the clampdown on P2P file-sharing, including the various high-profile but small-potatoes prosecutions of individuals and the shutdown of what was a popular platform at the time, Limewire. And then more recently the cases against Pirate Bay and Demonoid. Each time, it was said this had broken the back of illegal file sharing — and each time, new sites sprang up in countries that would not cooperate with the Powers That Be.

    The DHS was lucky in that Costa Rica is willing to do their bidding. But what happens when a new service pops up in some other country? DHS can ask Congress for whatever legislation it likes, but those laws, unless backed by other means, stop at our shores.

  • nicho

    If the government can’t “wet its beak” as Don Fanucci says in The Godfather, any scheme will be shut down.

  • Indigo

    Fascinating. I’m glad I’ve already read Stephenson’s novel ‘Reamde’ because that gave me a background in fantasy cyber-gaming at the fictional level that includes money exchanges outside the cyber-game reminiscent of what you’re reporting here. That’s one mighty fancy crowd of cyber-high-fliers, that is. The new socio-economic science fiction/reality happening in the real world is much more interesting than the monster-horror pablum on the ScyFy Channel. Good report! Thanx!

  • http://parkandbark.wordpress.com/ Houndentenor

    Yet another bubble. When will people learn. for those who haven’t followed business news for the last 30 years I’ll explain how it works.

    1. Unscrupulous people buy into something they can get relatively cheaply. It doesn’t matter if it has any actual value. That’s irrelevant.
    2. The price goes through the roof.
    3. People who don’t know any better buy into this “investment opportunity” usually near the peak price.
    4. The people from #1 sell their shares/copies/properties/etc.
    5. The whole thing goes bust and the rubes who bought into the hype wonder what went wrong.

    Seriously, it’s not rocket science and yet people keep falling for these scams.

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