Guest Post: Bitcoin - Revolution Or Trap?

Tyler Durden's picture

Excerpted from The Money Bubble by James Turk and John Rubino,

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

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

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

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

ENTER BITCOIN

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

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

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

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

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

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

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

The Comeback

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

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

 

The market appears to have spoken: Bitcoin is for real.

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GrinandBearit's picture

Bitcoin is anything but real.

hmmmstrange's picture

Just like email is anything but real.

SilverIsKing's picture

Does fonestar's bookie accept Bitcoin?

If so, if like to know how many Bitcoin fonestar bet on the Broncos.

fonestar's picture

fonestar is not titillated by men in tights throwing balls around.

boogerbently's picture

Bitcoin reminds me of "Farmville".

fonestar's picture

Most of you have never used Bitcoin, would not be capable of grasping why it is valuable.

Boris Alatovkrap's picture

Most of no one is not ever use BitCoin, never will, and that is problem. Since "not to be capable of grasp", please to explain underlying value to fellow ZHer.

CH1's picture

Good for you Jim Turk!

A gold guy with room in his mind for more than one thing!

eclectic syncretist's picture

Bitcoin is yet another form of fiat currency as far as the banksters are concerned.  It's all you need to know in deciding whether or not you should approve or disapprove of it.

ultraticum's picture

Nothing, really, about the teaser title:  "Revolution or Trap" in the article.   This is just a regurgitation of widely known history - maybe worthy of a mainstream newspaper or magazine.

ParkAveFlasher's picture

To CH1's point, it's James Turk saying it.  Wait a sec, doesn't he have a new book out now?

mumbo.jumbo's picture

the most important underlying value is the refreshing ability to peacefully cooperate with your fellow men while making it very hard for evil parasites to exploit your cooperation at the point of a gun.

 

the progress of tyranny has made this free cooperation close to impossible in the past decades, and bitcoin cracked a hole on that.

 

for how long it will last is anybody's guess, but if a fair part of the population starts to live by the non-aggression principle, then its value may easily fall apart and give place for third party trust based digital gold transactions. but until then...

Boris Alatovkrap's picture

Boris is not like bankster more than other fellow, but Boris cannot put "refreshing" under mattress for day when bank and fiat currency is fail. Perhaps maybe BitCoin is too much reaction to fiat currency and is too little fix real problem of fiat currency... no underlying value. One day BitCoin holder is realize no direct connection of bit stream and tangible wealth and like bankster, flee shadow bank soft asset for pursue hard asset, then like fiat currency, Bitcoin is not provide for safety haven.

hot sauce technician's picture

Fiat currency works because people have faith in it. The principle is the same with BTC. The only thing that has to happen is for some type of john q friendly client to be developed so that its usage won't be so mysterious to the average stiff. And speaking of safety havens, can you eat gold? Can you keep warm with it? What gives it its value anyhow? The main reasons it was used as a medium of exchange in antiquity were its physical beauty, scarcity and portability (with the majority of coinage actually being in bronze and copper). Nothing intrinsic . The same, more or less (and barring the reckless printing of central banks), goes for fiat. People still need an efficient medium of exchange and fiat accomplishes this somewhat satisfactorily. There's no reason why BTC wouldn't be able to either. It just needs a wider userbase so it can become more stable.

dark pools of soros's picture

fellow ZHer shits pants and drags saggy nut sack across floor wearing slippers and waits each month for government check

Bizaro World's picture

Parabolic should be a sign of caution....regardless of the "asset". I use quotes because I'm still not convinced Bitcoin is an asset. Seems easily manipulated.

Stackers's picture

Bitcoins use a currency is only the beginning. There are many features in the bitcoin code that are not even being used yet.

TheHound73's picture

For instance, remote control of pacemakers.  It has been shown and is well known and I used bold font.  That's why I stick with statist currency.

Stackers's picture

More like for instance "Transfer ownership of a car in the same transaction as paying for it" ..... I used bold and quotes. It is bitcoins ability to transfer ownership of an "asset" in a peer to peer fashion with no guaranteeing counter party needed that is it's true "value"

 

The programmer currently in charge of the bitcoin code explains it better than I can

http://www.youtube.com/watch?v=zSWFqC-0hK8#t=620

wintermute's picture

Great info Stackers.

That is why Mastercoin and Protoshares are dirt cheap at $80 and $12 respectively. If anyone wants to know where the next Google or Facebook is coming from then one of these companies is the answer.


Metal Minded's picture

But not traditional companies, as are GOOG and FB . Mastercoin and Protoshares are what the Bitcoin folks refer to as Distributed Autonomous Corporations. No current .gov regulation. No Wall St control- which, at this time, makes every investment in the Bitcoin space like a pre- IPO private placement at which usually only insider Angels and VC's get a chance. Could be very lucrative or could be a big bust. I also have the stomach for a bit of penny stock plays. I hold Mastercoin and Protoshares. I am optimistic about the Bitcoin space, believe it is a brilliant and very positive innovation, but only have fiat involved which I can afford to lose.

funthea's picture

Bitcoin is tulip mania. When it costs $1000 to mine a bit coin, I might will agree its valuation for a time. Problem is, bitcoin has plenty of competition that runs on the same encryption, no better, no worse... but a fraction of the price. So the only advantage is early adoption, which has its perks to be sure. But in the end the barrier to entry and prudence, will drive participants to the next best thing without the premium. Now, all the early adapter bitcoin millionaires may not like that, but then their dreams of grandeur are not my problem.

TheHound73's picture

Do you even FOMO?

Why should I put my hard earned money into Tulip Mania B when millions of investors and merchants are already using Tulip Mania A?

Tulip Mania lasted for less then a year from 1636 to 1637 geographically isolated to The Netherlands.  Bitcoin is a worldwide phenomenon and  has received the tulip moniker since its inception in 2009. It has experienced multiple crashes of over 50% in a single day and has always recovered to twice above its previous highs.

Spring is Coming.

Boris Alatovkrap's picture

Crash of 50% in single day, multiple time. Hmmmm, that is building of confidence. Is sound dangerous to receive wage in BitCoin on certain day or for merchant selling of good. Stability is not important criteria for ubiquitous currency, yes?

TheHound73's picture

Ubiquitous?  Is this that is word that is Big?  Long way to go for that, buddy.  However, a phase change may occur and it becomes ubiquitous enough.  Much like the internet and cell phones, or, going back further, microwaves, color TV, radio.  S-Curve.  Anyways, volatility does not prove or disprove Tulip Mania hypothesis.

I know no merchants (except perhaps bitcoinstore.com) that currently expose themselves to significant BTC volatility risk.

I have been receiving 100% of my wages in Bitcoin currency since $130/BTC and have no complaints thus far.  Sometimes if I feel the market is running a little hot, I'll convert some of my weekly earnings to local currency (Yen paper rectangles) but usually buy back in at profit if my gamble is proven correct.

aminorex's picture

overstock.com takes bitcoin now.  they used to convert it to usd.  now they don't.

Boris Alatovkrap's picture

Boris is watch for if Overstock is price fluctuation in BTC v $USD. Maybe Overstock is take big risk, or maybe Overstock is full of future vision...?

dark pools of soros's picture

go to TigerDirect and buy espresso machine with bitcoin and put down vodka

Boris Alatovkrap's picture

You are proving of point! You are protect self against BitCoin volatility by frequent currency exchange. This is prove BTC is not trust for receive wage. At least volatility range of Petro dollar is single digit percentage. Maybe Boris is just boring, but Boris is not gamble with non-discretion fund use for food and rent.

TheGoldMyth's picture

Boris Alatovkrap, i spoke to Vladimir Putin on youtube the other day while watching max keiser on RT. I aggreed with his comment Americans have no energy, but i add that these one are mainly American who are privatised by mortgage/debt/or are financially stressed. I do not think all are like this . I use my code name, but Vladimir does not need this.

I practice amateur economic climate psychiatry all the time, and agree with you that bitcoin is gambling. In economic climate psychiatry, we study that gambling attracts many that like to use many reasons for support of gambling habit. Many still use the wrong 'ordinary' psychiatrist for this problem
Economic climate psychiatrist's are better. It is a very common mistake in medicine. Thanks!

SoilMyselfRotten's picture

You are proving of point! You are protect self against BitCoin volatility by frequent currency exchange

 

Before the massive takedown in PM's, they raised margin calls on silver something like 7 times due to its upward trajectory/volatility. Nobody was calling silver and gold tulip mania at the time. My only point is volatility doesn't preclude it from being taken seriously.

Boris Alatovkrap's picture

You are to misapply analogous (Boris is not like that word, "ANALogous", is sound creepy) of BitCoin and PM. PM is safety hedge, BitCoin is pretend be currency. PM is insurance against collapse of currency, BTC is replacement of currency, possible cause of collapse of extant currency. But BTC is require same fundamental as extant currency, is require Faith and Trust. Gold, Silver, especial Copper is flourishing in lack of Faith and Trust. So volatility of market, political, social space, is friend of Gold, is not so friend of BitCoin or $USD, Yuan, Yen, Ruble, Rupee. Currency is must have derivative underlying value, PM is have direct, immediate, tangible underly value, itself.

Who Laughed's picture

If you understand the damage BTC could do to centralized banking and flailing/bail-in economies you will understand it must not survive.

BTC has a market cap of about $10B??

The gross amount of coinage used in the fed monthly bond buying program could tsunami the entire BTC market if utilized.

If BTC dealers, acceptors and owners weren't hassled & arrested they would have already died of heart attacks from FED, ECB, BIS manipulation. 

Look at gold. That's a Goliath being held down by the bastards (for now) 

madtechnician's picture

You have just answered your own question. This economic flailing around , bail-out's , bail-in's , QE-infinity , debt ceiling debacle , etc , etc cannot continue indefinitely. At some point the system will need to re-organise , Spontaneous Order - enter bitcoin.

Sheikhspeare's picture

 

Good read, there might be something to this. I can't tell anyone to buy or not to buy BC, but someting seems fishy. I'll stick to long trusted investment vehicles.

 

http://www.globalresearch.ca/will-digital-currency-replace-the-us-dollar-wall-street-strategy-to-make-bitcoin-the-global-currency/5361021

 

 

Crash Overide's picture

"Bitcoins use a currency is only the beginning. There are many features in the bitcoin code that are not even being used yet."

 

Bitcoins worst feature is that it is posing as a "currency", it is more of a service protocol and a framework for other innovations. I have been saying this all along...

 

Exponere Mendaces's picture

@fonestar

Greets man, just checking in to the usual FUD/Trollbox thread that every Bitcoin article becomes. Hope you're doing well. January ticked off a 8.1% gain, while all standard asset classes dragged their feet, even Gold. Somewhat hilarious that even the "thousands of years" of yellow metal can't compete with Bitcoin.

Market action is a bit tight and seems to be coiling in prior to another run-up, which by my estimation will be around mid-March or so. The cycles seem to be shortened, so I think it will happen sooner than the last one.

Anyway, keep fighting the good fight and I'll just keep posting yield percentages - it seems to be the only numbers the financial trolls understand, lol.

fonestar's picture

Systems are very real even though you can't hold them.  You're currently enslaved by a few of them right now as you type.

Crash Overide's picture

PM's, organic gardens, bullets, 3D printers, independent darkwebs, and fusion/plasma energy technology will be rocking the boat in the near future more so than in the recent past.

boogerbently's picture

E-mail has a constant "value".

tmosley's picture

Sure, now that it has ~100% adoption.  Bitcoin's value will be pretty constant once it has 100% adoption too.

Of course, at 100% adoption, that would have it replacing all the cash and bank deposits in the world, which are about $46 trillion, giving BTC a final dollar value of around $2.2 million in todays dollars.

Not saying it will reach that point, but email sure has.  I can't remember the last time I mailed a letter that wasn't a Christmas card.

wintermute's picture

This is an interesting aspect about technological change. The first reaction is to dismiss the idea (email: easily lost, intangible, can't be signed by a pen), but years later it is hard to imagine life without the change.

Muppetrage's picture

Because there can be an unlimited number of crypto currencies and money flow between them, doesn't that make them all essentially unlimited ?

TheHound73's picture

At this point in time the market is saying the Bitcoin network is worth 10 times the rest of the crypto currency market combined.

Spanky's picture

And the market has been known to change its mind. Suddenly.

Crash Overide's picture

...and Bitcoin is swimming in a sea of fiat derived Trillions?