A technology is called “disruptive” if it creates a new market that first disturbs and then displaces an earlier technology. Bitcoin is potentially such a technology and much more. The fact that it can disrupt the largest and most interconnected marketplace in the world—money, banking, and finance—makes it perhaps the most promising investment opportunity of our age.

Unlike our current increasingly unstable and unpredictable financial system, Bitcoin has 21st century technologies at its very core. The digital currency and clearing network is open source, mobile, peer-to-peer, cryptographically protected, privacy oriented and native to the Internet. The fusion of these technologies allows for a level of security and efficiency unprecedented in the world of finance. These are some of the areas in which Bitcoin-oriented technology can directly compete:

• $2 trillion annual market for electronic payments,
• $1 trillion annual e-commerce market,
• $514 billion annual remittance market,
• $2.3 trillion hedge fund market,
• $7 trillion gold market,
• $4.5 trillion cash market,
• $16.7 trillion offshore deposit market.

Its potential is not going unnoticed. After it had been praised by tech moguls as Bill Gates (“A technological tour de force.”) and gmail founder Paul Buchheit (“Bitcoin may be the TCP/IP of money”), the money started speaking. We saw investments into Bitcoin by top venture capital brass such as Marc Andreessen, Reid Hoffman, and Fred Wilson; by billionaires such as Richard Branson (Virgin) and Li Ka-shing (richest man of Asia); by iconic executives such as Vikram Pandit (Citigroup), Max Levchin (PayPal), Tom Glocer (Reuters), Bill Miller (Legg Mason Capital); and recently also by large cap companies such as Google, New York Stock Exchange, USAA (American bank & insurer), BBVA (2nd largest bank of Spain), and NTT Docomo  ($75b Japanese phone operator).

The core value proposition of this network is the fact that, in the words of IBM executive architect Richard Brown, “Bitcoin is a very sophisticated, globally distributed asset ledger.” What Brown and others hint at is that Bitcoin will in the future be able to serve not only as a decentralized currency and payment platform, but also as the backbone for an “Internet of property”.

This entails a decentralized global platform, smartphone- accessible, on which companies and individuals can issue, buy, and sell stocks, bonds, commodities and a myriad of other financial products. The effect will be to remove much of the current bureaucracy and barriers to entry, presenting a huge opportunity for the world’s 2.5 billion unbanked people.

This raises the question: why Bitcoin, and not some other cryptocurrency? The answer may lie in the network effect: of all the cryptocurrencies, Bitcoin is the one with the highest adoption rate and the strongest security. The combined computing power of the Bitcoin mining industry serves as a protective firewall around the payment network, with a replacement cost of nearly $1 billion—and it is growing quickly. In short: no other cryptocurrency is as secure as Bitcoin. This attribute in itself attracts more capital, which in turn makes the network even more secure and performant.

Because of its robustness, the Bitcoin network is now the reference protocol for the new paradigm in finance. And just like TCP/IP became the mainstay for the Internet of information, the Bitcoin network will likely become the value anchor for the Internet of money and finance. Speed may be provided by off-chain or side-chain transactions, but for the high-value transactions of tomorrow, Bitcoin could very well become the security-providing reference currency.

So, how much of all this potential is already realized?

Well, since inception of Bitcoin in 2009 to January 2011, its market cap grew to $1.5m. From there, it rocketed to $145m in January 2013, to reach $4 billion in early 2015.

Despite a steady price decline in the 12 months following the fall 2013 rally, year on year adoption trends markedly point upwards: as of early 2015, there are 7.9 million bitcoin wallets (+148%), the trading volume on exchanges is $23 billion (+57%), Bitcoin is accepted by 82,000 merchants (+128%), there are 320 bitcoin ATMs (up from only 4), and the network hash rate is 335 pth/s (+8,500%).

Enticed by its great potential, the investments in the Bitcoin ecosystem are taking off rapidly. In 2013, little over 40 VC deals were made that raised a total of $96 million. That number nearly quadrupled over 2014, with $335 million invested. Based on these numbers, VC’s such as Marc Andreessen compare the Bitcoin system in 2014 with where the Internet was in 1993.

Furthermore, the Bitcoin price has been rising at an exponential rate. This can be explained mostly by the fact that it is a scarce commodity (maximum supply is 21 million) with a rapidly growing user base. Here are a few possible scenarios for the future value of one bitcoin:

The scenarios projected above are, of course, not cast in stone. Bitcoin faces several risks going forward. These include:

• The emergence of a much better digital currency that steals its market lead,
• An undetected bug in the system,
• A sustained attack by an organization with substantial computational resources,
• A coordinated clampdown on Bitcoin by a multi-national entity such as the G20.

How serious of a risk do these challenges pose? Let us examine them.

A better currency is possible, but experience shows that disruptive protocols—such as SMTP for email and TCP/IP for Internet—have proven to be very resilient once adopted by a critical mass of the population.

An organized attack on the network is possible but expensive, and there are many potential defense mechanisms.

As with any software application, the discovery of bugs may destabilize the system, but the open source nature of Bitcoin allows for many eyeballs to help track problems, and many brains to help figure out a solution.

That leaves government clampdown as the most likely risk to Bitcoin. However, with many regulators implicitly or explicitly already accepting Bitcoin, and the robust, decentralized nature of its network, such a move would have little long-term structural impact and is thus unlikely.

Because of its strong network effect, the outcome of the Bitcoin story is likely to be binary: either it will experience a downfall as it is superseded by a vastly superior technology, or the value of bitcoins will rise dramatically over the coming years as an increasing share of the global population adopts the currency.

In any case, to me it’s exceedingly clear that the technology of the cryptocurrencies is here to stay. Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold. With a risk-reward proposition this attractive, holding a small percentage of bitcoins in one’s portfolio as a speculation on increased adoption may be one of the wisest investment decisions of our age.

 

This article originally appeared in yBitcoin magazine.

January 29, 2015

Toronto – Decentral.tv is excited to announce that it has entered into a partnership to become the exclusive video content provider for BTC Media LLC, the world’s largest Bitcoin media group. BTC Media LLC is the parent company of financial technology magazine yBitcoin and its website www.ybitcoin.com, as well as the recently acquired Bitcoin Magazine and www.bitcoinmagazine.com.

“ yBitcoin has always stood out as a well-run publication,” said Anthony Di Iorio, founder and CEO of decentral.tv. “Now that Bitcoin Magazine is also in the capable hands of BTC Media and Calli and David Bailey, I’m excited to see where he’ll take this publication moving forward. This partnership between BTC Media and decentral.tv has great potential to provide a valuable service to the bitcoin community.”

David Bailey, CEO of BTC Media, was equally enthusiastic about the prospect of co-operating with decentral.tv. “For us, partnering with decentral.tv was a no-brainer,” he said. “Live video is the next step in delivering high quality content to the community in real time, and is sorely needed in the Bitcoin space. Given Anthony Di Iorio’s proven track record of executing and delivering on challenging projects, we jumped at the chance to bring our readers first hand access to decentral.tv.”

As part of this alliance, decentral.tv will provide exclusive video coverage of major events on behalf of BTC Media, as well as contribute weekly written content to Bitcoin Magazine, including  recaps of Decentral Talk Live episodes, information on upcoming shows, and articles highlighting topics featured in selected DTL episodes.

Decentral Talk Live is a daily talk show that airs Monday to Friday. Hosts Anthony Di Iorio and Ethan Wilding, along with a rotating panel of guest hosts, cover a variety of topics relevant to the Bitcoin community by interviewing prominent names and companies in the crypto space.

Decentral.tv is a 24-hour interactive dashboard featuring video segments, interviews, curated news and information, a Twitter feed, charts, and customizable exchange tickers. It delivers globally relevant content with news about Bitcoin and other decentralized and disruptive technologies.

For media and partnership inquiries or to suggest news and story ideas, please contact Ethan Wilding or Anthony Di Iorio at info@decentral.ca or call +1-416-831-9593.

Bitcoin Exploration

The Bitcoin ecosystem has many different types of platforms such as exchanges, payment service providers, reporting platforms and an array of other supporting services. Every time you create a new account your online profile expands, increasing the risk of breach with one or all of your accounts. Private keys and passphrases should be managed as securely as possible, and the same for login credentials. The following tales are filled with valuable lessons for stepping up your game with digital identity management.

Gone Phishing

Paul Boyer, creator of the “Mad Money Machine” podcast on the “Let’s Talk Bitcoin” network, learned a tough lesson recently. Paul happily received donations totaling 3.3875 bitcoins, about $2,000, from loyal listeners until he discovered a zero balance in his wallet at the end of June 2014. He collected donations using a payment service provider normally paying out bitcoins in U.S. dollars on a daily basis, but he never submitted a bitcoin payout address, so the coins just accumulated, awaiting the attention of hackers. That was his first mistake.

A creative BitPay look-alike phishing scheme cleverly disguised an email with a “View Invoice” link requesting the refund of a customer payment. Unfortunately, Paul took the bait by clicking the link and unknowingly handed his password to the hacker who changed the payout address and received 3.3875 bitcoins the following day.

One last mistake: Paul hadn’t activated a security feature for his account known as “2-factor authentication,” which would have prevented hackers from cashing in his bitcoins, even if they had hacked into his computer.

Fortunately, 2-factor authentication is becoming more widely used on Bitcoin platforms. After a standard username and password login, a 2-factor box pops up asking for a code generated by a smartphone app such as Authy or Google Authenticator. If hackers obtained your login credentials, they couldn’t log in without your smartphone and the code. The lesson here is to activate every 2-factor authentication available upon setting up a new account—and beware of downloading overhyped free software.

Identity Ransom

Longtime Bitcoin evangelist Roger Ver was attending a conference when friends started messaging their suspicions of a Facebook imposter. Someone hacked into his old Hotmail account using it like a master key to retrieve logins for other accounts. The hacker demanded a 37.6-bitcoin identity ransom worth $20,000 at the time. Roger offered up a 37.6 bitcoin table-turning reward via Facebook and Twitter for info leading to the hacker’s arrest. The viral bounty was too much for the hacker to bear, so he or she quickly bowed down, handed over login credentials and disappeared.

No bitcoins were stolen, but this tale shows how a single email account can be an attack vector or weak point for exposing an entire online digital identity. When the same email is used for all accounts it effectively weaves everything together with a single thread. In addition, the more well-known and the more perceived wealth someone has, the greater the risk for getting attacked.

A Tale of Social Engineering

Sam Lee, CEO of Bitcoins Reserve, and his company were victims of a creative social engineering attack starting with the U.S. Marshals’ public email leak of the Silk Road Bitcoin auction list. Hackers were licking their chops over a juicy list of high rollers handed to them with a white glove.

Sam then got an email from a hacker asking for a media interview while proceeding to open a Google docs link supposedly containing interview questions. The link unleashed malware that sucked out all the usernames and passwords from his Chrome browser, leading to control of all the company’s email addresses. The hacker then sent an email from Lee’s account to the CTO requesting a client withdrawal of 100 bitcoins— worth about $65,000. In this case the “client” was actually the hacker and the bitcoins evaporated.

Browser-based password managers are convenient but non-secure ways to store passwords. The hackers took over Lee’s entire digital identity but still couldn’t penetrate the company’s securely stored bitcoins. However, it’s hard to defend against a hacker falsely posing as a trusted party, one of the slickest tools in a hacker’s toolbox. “This is a weakness in our internal processes and procedures; it has nothing to do with weaknesses in Bitcoin because frankly Bitcoin so far has none,” says Lee.

Keys to the Kingdom

Androklis Polymenis, aka klee, is an early Bitcoin adopter and NXT stakeholder who recently discovered his $1 million stash of bitcoin and NXT, another cryptocurrency, had vanished. The breakdown likely came from a hacker who found klee’s unencrypted plain text password file sitting in Dropbox, where klee had left it exposed. He responded by putting out a 500-bitcoin bounty, worth nearly $300,000, for return of the stolen crypto and identification of the hacker, who eventually returned 462 of 1,170 bitcoins while keeping the rest as the bounty in exchange for klee calling off the hunt. In the meantime, the NXT community was able to rally together and retrieve some of the stolen NXT tokens.

Although about two-thirds of the cryptocurrency wasn’t recovered, it could easily have been a total loss. The keys to the kingdom were practically sitting on a park bench waiting to be picked up.

It’s a painful lesson highlighting the importance of safeguarding bitcoins and other cryptocurrencies. Armory founder Alan Reiner, a self-proclaimed ultra-paranoid crypto-nerd says, “Holding your own bitcoin is like harnessing fire,” and then adds: “Sometimes the biggest threat to users is themselves.”

Conclusion

There are many great password managers, however LastPass has multiple two-factor authentication options with a free version available for individual users and an enterprise paid version for businesses. The paid version, only $24 per user per year, has an admin dashboard for multiple users and access controls. It even has a security scorecard showing the strength of your overall password profile. The free personal version can plug into a separate enterprise account for a seamless user experience. In addition, install anti-virus and anti-malware software on your computers.

You can’t afford to waste another day. If one account gets hacked they can all get hacked. Your password manager contains the keys to your kingdom so create and remember a good password. Start securing your digital identity and your bitcoins with these seven easy steps and go on more vacations with all the time you save. The average person has 25 logins per day, so one minute of fumbling per login multiplied by 250 working days equals 2.6 wasted weeks per year logging into websites. Enjoy peace of mind on your newfound vacation instead!

Seven Steps to Digital Security

Let’s put some golden security nuggets to use before we end up as another cautionary tale. Best practices for digital identity management are encompassed in the following seven steps.

Step 1: Choose Platform

Select a password management system such as LastPass, Secret Server, OneID or Roboform, create an account, activate two-factor authentication and start adding website and login credentials. Browser-based password managers should not be used, so just do a Google search for reviews on the best password managers. Businesses should create an enterprise level account with an admin console for managing users. You are 100% responsible for managing your bitcoins, so reducing the risk of compromising your entire online profile starts by managing one account at a time.

Step 2: Add Sites

Once the password manager is set up, you can easily add sites by logging into an account as you normally would. Most systems will prompt you to save the site with a simple click. You can also add sites manually with the URL, site nickname, username and password. If you previously saved all your usernames and passwords in a spreadsheet, adjust the columns to the import format and upload. Easy tutorials are usually available for mastering the setup.

Step 3: Test Sites

Always go back and test-click the site after saving it whether you save sites one by one or import a list. Sometimes little nuances like the login URL or username need to be adjusted. When you create new accounts the URL automatically picked up by the system is often not the login URL, so testing and correcting helps to avoid frustration.

Step 4: Delete the Old List

After you’ve successfully transitioned from a password list it’s time to delete the file. If you set up a password manager and keep your old file then you have not reduced any risk. If you’re among those who have a difficult time parting with the old for fear of losing access to something or wanting to keep it just in case, you can get over the hump by copying your old password list and pasting it into a secure note available in most password managers.

Step 5: Create a Unique Email

Email is the golden thread that weaves your entire digital identity together, and unfortunately, most folks use the same email and the same or similar passwords for all their accounts, including social media, financial accounts and everything in-between.

The critical distinction is understanding how emails are used for both communication and account creation. Securing your online identity means that these two roles must be separated by using two different email addresses.

In other words, the email you use for communication should be different from the one you use for new account setup. Create a new second email account without using your own name or a word that could be associated with you. For example, set up an email like (any word)admin@gmail.com or use the random password generator to create an email “prefix” such as 3rxyHk4p98@gmail.comrather thanJohnSmith@gmail.com. Then swap the email on each site with the new email the next time you log in. It will be easier to change accounts one by one instead of turning it into a major all-at-once project.

Step 6: Change Passwords

Hackers can simply use brute force to break an easy-to-remember password. Change all of your passwords to a minimum 16-character, hard-to-break random password using the random generator provided within the password management software.

Password resets should be done in conjunction with the new email resets described above. If you can’t remember the password then it’s harder to break. If you use a password manager you no longer have to remember passwords because the system keeps them encrypted.

Step 7: Secure Bitcoin Wallets

Bitcoin-related sites may require special attention beyond standard login credentials. Sometimes a passphrase, a group of random words, is required to access your bitcoins. If you lose the passphrase you lose your bitcoins, period, so it must be handled very carefully.

Some sites don’t have standard login credentials and only require a passphrase. In either case, the passphrase should be saved in the encrypted password field in the password manager. Also consider writing down your passphrases and keeping them in a safe.

There are many other advanced techniques that are beyond the scope of this article, but these strategies are meant to significantly reduce risk for people who would otherwise keep login credentials in a text file, spreadsheet, on scrap paper or in draft emails.

 

This article originally appeared in yBitcoin magazine.

I awaken this morning feeling optimistic. I’d seen last night that a big announcement from Coinbase was coming, and the Wall Street Journal appeared to confirm that the announcement was to be a fully regulated U.S. exchange. The price shot up immediately and was still rising when I went to bed.

Now, I look at the price widget on my phone and my optimism vanishes. If Bitcoin price is any measurement of enthusiasm, it’s clear before I get downstairs that Coinbase’s big revelation hasn’t quite lived up to expectations.

I head to the new exchange site, log in with my Coinbase credentials and…

I suspect this explains the lack of enthusiasm.

I turn to Reddit, Twitter—all my usual sources—and hear many other voices telling the same story: Coinbase’s Exchange isn’t available in their state. A friend on Twitter links me to a map from a Coinbase blog post (http://blog.coinbase.com/post/107618322282/usd-wallets-in-7-more-states)

That’s their service area.

To be fair, this looks worse than it is. Our population isn’t evenly distributed here in the U.S. and they did get California, the most populous state…but they also missed Texas and Florida, Nos. 2 and 3 on that list. A Wikipedia article and an Excel spreadsheet later, I discover that your odds of being in Coinbase’s service area are basically 50/50. I seem to have lost the coin toss.

 

Thankfully, the world is a connected place these days and it isn’t hard to find someone in one of those green states who will let me digitally shoulder-surf. I’m irritated, but if I really cared I could incorporate in California or something. There are always ways around these things.

Access problems (sort of) bypassed, I begin to feel more optimistic. The interface is simple, elegant and clean. There aren’t an overwhelming number of options presented, but that’s not a bad thing. Simplicity is the cornerstone of user experience, after all. But even this small positive experience would prove ephemeral.

Coinbase accounts and Coinbase Exchange accounts are separate entities. I suspect this is for regulatory reasons, and you can transfer funds between the two with a few clicks, but it does add a little friction to the experience—and you’ll probably have to make transfers often. More on that later.

My friend and I throw a little bitcoin into the exchange account and make a few test trades. The interface is simple, minimalist and obvious in all the right ways. The trades execute precisely as you’d expect them to. The order book continues the trend of simple design. For all its failings, it is abundantly clear that a lot of design work went into this interface. “Responsive” and “flat” are both buzzwords that apply here. Unfortunately, so is “minimum viable product.”

I don’t want to put this thing down too much. It’s a work of art, and as far as I can tell, it has a rock-solid infrastructure. Thus far it has chewed through more than 5,000 BTC worth of trade volume without any noticeable hiccups. The front end appears to be socket-driven, meaning it updates in realtime as events occur, not every n seconds. That feature is bound to be a day trader favorite. The foundation of this system is excellent—but there’s not much there besides foundation.

For example, this is what the buy/sell interface looks like:

Two big tabs, two textboxes, one big button. That’s simplicity, which is a good thing. But wait, what if I want to place a market order?

(A quick aside, for the non-traders in the crowd. There are typically two kinds of orders you can place on an exchange: market orders and limit orders. A market order is what most people are referring to when they say “buy” or “sell—you’re telling the exchange “Here’s $500, buy bitcoins until it runs out.” But to do that there have to be outstanding sell orders. Where do those come from? Limit orders. A limit order has conditions. On the buy side, it says, “Here’s $500, buy bitcoins with it if the price goes down to $250.” On the sell side, it says, “Here are 10 bitcoins. Sell them when the price goes up to $250.”)

 

I hunted for a market order option. There were none to be found. Remember when I said you’d be transferring funds a lot? That’s because if you want to place a simple market order, you have to do it here:

As previously mentioned, Coinbase and Coinbase Exchange appear to be separate-but-connected systems. Market orders and limit orders are the two most fundamental operations on any exchange, and Coinbase has split this functionality across two websites. This is where “minimum viable product” (MVP) comes into play.

MVP is a product development strategy. In simple terms, it means you build only the core features necessary to deploy. Since Coinbase already handled market orders, the MVP for Coinbase Exchange wouldn’t duplicate that feature. MVP is a great way to create a “starting point” that you build on later—but you should never release an MVP to a general audience. MVPs are usually released to limited audiences of devs and early adopters—beta testers, essentially. These audiences know they’re looking at unfinished software, and they tend to be a lot more forgiving than the general public.
I highly suspect, for these reasons, that we’re actually looking at unfinished software to match the incomplete licensing. Some big names have invested a lot of money in Coinbase, and it got a lot of media attention as a result. My best guess is they released early to preserve that media “momentum” (maybe a touch too early).

O.K., so it failed to live up to the hype—but there was a lot of hype. At the end of the day it’s a pretty solid offering. I traded on Mt. Gox back when Dwolla was the only funding option; I know what bad looks like, and this isn’t it. This is a hot rod engine and a gorgeous paint job on a car with no seats or doors. It’s the first half of a beautifully written but entirely unfinished symphony. Not bad, just…incomplete.

For more posts from David, visit Coding in My Sleep.

London, January 24, 2015 — LazyCoins demoed their killer Bitcoin app LazyPay at the BitcoinExpo 2015 in London last weekend. The company has spent months carefully and quietly planning to take the app public. Including running the payment and merchant services app through testing with a security firm. And holding Q&As in order to perfect their software and get everything right before debuting to the world.

The free conference ran from January 24–25 at the Central Foundation Boys’ School on Cowper Street, London. LazyCoins Founder and CEO Danial Daychopan calls London, “a great place for bitcoin businesses and entrepreneurs.”

Daychopan began his talk at the conference on the importance of security. He stressed this is the number one focus for both their exchange and their merchant services app, to guarantee “rock solid security” for their users.

LazyCoins announced the beta version of their new exchange six months ago in July, but they chose not to go public right away in order to learn from and avoid the mistakes of other exchanges. They launch in direct competition with similar-service industry leaders BitPay and Coinbase.

The goal with the LazyPay app is to make Bitcoin use a part of everyday life, increasing its volume of use in the in-person merchant market, getting more people to use digital currencies as a form of payment, rather than just as a speculative investment tool.

Their secure mobile wallet and user-friendly merchant app aim to make doing business in digital currencies simple and safe for both merchants and customers. The aim is to “make buying and selling goods as easy with bitcoin as it is with cash and credit cards—only faster, safer and more convenient.”

The average person needs to be able to find more places to spend bitcoin, they don’t know how to obtain it, and transactions seem too complex. Lack of education among retailers and the lack of an easy-to-use, trusted merchant platform are also problems.

LazyCoins and LazyPay are designed to fix such issues, with security at the top of their priorities. Cold storage wallets and two-factor authentication for accounts, fingerprint access for the app, and multi signature keys are just some of the many features. And a policy of crediting a merchant account on the day of their transactions, by the exact amount that the user pays, will eliminate the risk of price fluctuations.

They are on a mission to sign up merchants and educate them on the benefits and ease of accepting Bitcoin. The app is free, offers zero-transaction fees, daily direct payments to bank accounts and no chargebacks. LazyPay will demonstrate how credits cards are slower, riskier and more expensive in comparison. Operating the app will be intuitive for the non-tech person; easier than using a cash register or credit card point-of-sale terminal.

On top of all these features, the app will include a live, automatically updated map showing the locations of local Bitcoin merchants and businesses. It will offer NFC-enabled payments for super fast POS transactions, the ability to buy and sell bitcoin from the app and a direct in-app link to bank accounts. And the merchant will require no hardware and not be asked to sign contracts or make any commitments.

“We’re on a mission,” says Daychopan, “to spread the word and sign up as many merchants as we can. And London is our chosen starting point for this crypto-crusade… Then we can give those Silicon Valley lot a run for their (digital) money,” becoming “a dominant force in crypto.”

For more information:

blog.lazycoins.com

www.lazycoins.com

www.lazypay.co.uk

www.lazynews.tv

Congratulations, virtual currency world—New York wants to expressly regulate you! That’s how important Bitcoin and other digital currencies have become in recent years. And as we know, what happens in New York’s financial world often has implications for the wider world. All the recent attention New York has paid to virtual currency is raising many important legal questions, with potentially profound implications. This article will offer a brief survey of just some of them.

A Cryptic History of Money

Bitcoin is the latest and best known in a long line of digital currencies. The basic premise of digital currencies is that they try to establish a medium of exchange based on immutable mathematics, thus putting the currency beyond the control or manipulation of any government. Not long after the computer was invented people started discussing the development of currency based on that series of zeroes and ones called “bits.”

But mediums of exchange go back to the first bartering by cave people. When A and B first exchanged goods, each was getting something from the other that he wanted. Soon, there came a point when B didn’t really want more apples but knew that he could exchange them with C for the tomatoes B really wanted. Soon he had an inventory waiting to be bartered. And shortly after that B needed some means of storing his accumulating wealth other than in the tomatoes and other produce he had bartered for.

Initially, B’s excess wealth might have been represented in certain beads or special rocks. Next came smelted copper and eventually gold and silver. Then there was the problem of storage for this wealth

inventory. So here came banks and coins minted by governments, followed by the age of paper or fiat money, checks and credit cards. Today, instead of masses of paper moving through the banking system, all this transfer of wealth—debiting and crediting—takes place electronically.  That means we are already in the digital currency era.

A Few Legal Questions

The introduction to the original white paper by Bitcoin’s pseudonymous founder “Satoshi Nakamoto” states:

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud … . The fraud system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

What Nakamoto could not address at the time was Bitcoin’s legal status in the currency and taxation worlds. What exactly is Bitcoin for legal purposes? This is a critical question, because Bitcoin’s legal characterization makes a difference as to whether it is regulated, how it is regulated, and who regulates it.

Thus far, Bitcoin has been regarded as both a currency and a commodity. In SEC v. Shavers, a federal court in Texas held that since Bitcoin could be used to buy things other than Bitcoin itself, it was money. The court found that paying in bitcoins for shares in a business run by others for profit was buying a security and subject to SEC regulation. The court did not deal with the nature of what the business was going to do with the “money.” The business intended to deal in bitcoins.

The court could have classified the transaction as an investment in commodities, as a Bitcoin trading business, or as trading in forex. The case presented different ways of looking at Bitcoin, along with several possible regulatory schemes: currency, securities, commodities and forex.  All of that suggests another question: Who has legal jurisdiction over Bitcoin transactions? Suppose Company A, physically in country X, uses the Internet to find an exchange, “GiveandTake,” upon which it can offer its shares. It accepts payment only in Bitcoin. The exchange is only virtual and Company A does not know where the exchange is located.

Company A offers its securities, and investors pay for it by depositing bitcoins into Company A’s electronic wallet. The wallet is administered by “Maybesafe,” thought to be in country Y. Company A does not have the physical name and address of “Maybesafe” or the investors. All it has is email addresses. Of course, the securities the investors purchase are really electronic entries. Later, Company A pays dividends to the investors by sending the dividends to their virtual wallets via their email addresses. These recipients could be anywhere in the world.

Suppose things go wrong. Perhaps some of Nakamoto’s “honest nodes” succumb to “attacker nodes.” Maybe the business simply goes bankrupt. What government(s) can take jurisdiction? To what court can the injured party go to seek justice? Where the physical offices of the various participants are located, or the location of their servers?

The New York Story

New York, Wall Street’s home, has published proposed regulations defining its jurisdiction as covering any transaction “involving New York or a New York resident.” There are stated limits to “involving,” but even so, anybody in the Bitcoin business “involving” New York will have to obtain a license. The only real exclusion is for “merchants and consumers” who “utilize Virtual Currency solely for the purchase or sale of goods or services.”

In the banking world, New York’s highest court has ruled its courts have jurisdiction over Lebanese Canadian Bank sued by U.S., Canadian, and Israeli citizens resident in Israel who were victims of Hezbollah rocket attacks. The claim was that the bank assisted Hezbollah by “facilitating international money transactions” by using its New York correspondent bank to transfer money to Hezbollah agents. This approach could be applied to Bitcoin. Beware Bitcoiners!

In our hypothetical case, New York’s proposed regulations could require that Company A know the physical address of the exchange, that the exchange and wallet be licensed, and that all parties, including the investors, know with whom they are dealing beyond mere email addresses.

The proposed regulation requires all advertisements by licensees to include their name and a statement that they are licensed to engage in a “Virtual Currency Business” by New York. The license will serve as an advertised badge of integrity, like a bank saying it is a member of the FDIC. Hopefully, there will be no Mt. Gox or Silk Road fiascos by New York licensees.

But it’s a tough regulation. Applicants must submit fingerprints, extensive personnel background information, certification of an outside investigator, a detailed business plan, and audited financials—much like a bank.

Once in business, a licensee must have a written compliance plan, maintain compliance personnel, be audited, and report frequently to the regulators. Among other things, if for instance, $10,000 in bitcoin or money is transmitted in “one day by one person,” as in buying shares “involving New York or any resident of New York,” the licensees will have to report the transaction to the New York regulators.

Some Laws That Might Apply

The Treasury’s Financial Crime Enforcement Network (FinCEN) requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering and other criminal activity. Under the Electronic Funds Transfer Act, any transfer of funds, other than a transaction originated by check, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer, must be reported. “Money transmitting” includes transferring funds on behalf of the public by any and all means within this country or abroad. These laws would ostensibly cover Bitcoin transactions such as the illegal drug dealings in the infamous Silk Road case.

Bitcoiners, like all businesses, will have to comply with the securities laws, privacy, tax, health, Social Security laws, and money transmitter laws, and honor their contracts—or risk being sued. For Bitcoiners, regulation will greatly compromise the vaunted anonymity of the currency. This is a matter of more than a little concern for many in the Bitcoin community. Will a New York badge of integrity be worth it?

And About the Rest of the World …

New York isn’t the only jurisdiction considering whether and how to regulate Bitcoin, but with New York being the 800-pound gorilla of the financial world that it is, you can bet that the rest of the world is watching very closely. Given Bitcoin’s endurance and ever-evolving prominence on the world’s financial stage, governments everywhere are considering regulation, and they will most certainly be closely observing what happens in New York.

As it stands now, Russia and others may criminalize Bitcoin in the future. On the other hand, they may find that tactic to be unsustainable and a bad move for their own financial system. The best advice from here is to stay tuned. Bitcoin remains an ever-evolving legal quandary.

Bitcoin Snapshot: Russia

The situation in Russia has many players, and has shifted ambiguously in 2014. In January, the Bank of Russia issued a statement discouraging the use of bitcoins, warning that Russians who use them risk becoming unwittingly involved in illegal activities. After a meeting with the Bank of Russia, Russia’s Prosecutor General announced in February, 2014 that with the ruble being the official currency of the Russian Federation, existing Russian law categorically prohibits Bitcoin. The Bank of Russia, however, came away with a different interpretation of that meeting. In March the bank clarified that it had not concluded that all “cryptocurrencies” were prohibited, and that the meeting was merely intended to develop a regulatory framework to combat illegal operations and protect the rights of users.

It seems that the matter will be settled soon enough, though, as Russia’s Finance Ministry is now backing a bill that would fine individuals involved with virtual currencies the equivalent of between $100 and $840, according to the nature of the offense. Officials and legal entities would face substantially higher fines, up to $12,500.  While the Finance Ministry has backed off of its earlier attempts to impose more severe fines, its underlying hostility to virtual currencies remains intact.  Its position is, however, opposed by the chair of the Duma’s Committee on Financial Markets. Given Russia’s well-documented ambivalence on the matter, the bill’s fate remains uncertain as a vote looms soon.     

Double standards are like mosquitoes to me: after hearing their buzz for a while, I want nothing more than to shine a flashlight their way and swat them down mercilessly. One such double standard is the harsh way in which economists and commentators criticize Bitcoin technology, while at the same time taking for granted the financial system that they live under every day.

Yes, the value of Bitcoin and other cryptocurrencies is very volatile still, and the ecosystem that develops around them has been a Wild West so far. But in the six years of Bitcoin’s existence, the underlying technology—decentralized and open source in nature—has proven itself to be extremely robust and constantly evolving. Bad computer code is replaced over time by good code (or at least by a stable workaround), and likewise, bad companies are forced by the market to make way for better ones. Creative destruction rules the cloud.

The same things cannot be said about the fiat currency system. Banks and central banks are still running old cranky software, with systems that sometimes haven’t been updated since the 1960s. Vital parts of the service and technology is centralized and therefore frozen in time, in a spiderweb of ever-expanding bureaucratic rules. And bad banks don’t die; they are kept alive with “Bailout IVs” from the government, and they become zombie banks. In Fiat Land, it’s King Inertia who waves the scepter.

 Fiat money itself is also increasingly fragile. According to a study of 775 fiat currencies, there is no historical record of any that have held their value:

“Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes…The average lifespan of a fiat currency is 27 years.”^[1]

The post gold standard U.S. dollar is no exception. Despite being 44 years of age, which makes it a true veteran of the fiat space, it has lost 97% of its value since inception.^[2]

And that is just touching the surface of the kind of problems the fiat system produces. As we’ll see in a moment, debt levels, certainly not a sign of economic health, are higher than ever before in history. Inflation is also on the rise in many nations—melting away people’s savings and pushing them into the arms of speculative money managers. And central banks around the world are preparing for bank holidays and bank defaults.

When a system is virtually frozen in time and changes only for the worse, it is fair to say that it is broken, and that it needs replacing. That is exactly the state of the financial system today.

Now, over to the nitty gritty. Let’s crunch some numbers to see how big the problems really are.

The Biggest Debt Crisis in History

In 2008 we saw a ferocious banking crisis, the worst since the crash of 1929. In response, central banks around the world, including those of the U.S., China, and Europe, printed unprecedented amounts of money to shore up the banking system, and governments wrote out bailout subsidies like never before.

In Europe, for example, governments committed 1.3 trillion euros^[3] to prevent the eurobanks from failing. This led to the 2011 sovereign debt crisis, which was was barely contained by the ECB. It scrambled to put together another 500 billion euro bailout program.

What have all these programs, with a combined value of at least $9 trillion, really achieved?

 Well, since 2008, “leverage” in the system has dropped from 25:1 to 20:1. This means that for every $20 a bank owes to customers or other banks, it has $1 in hard cash in its own possession. To adequately convey the absurdity of these numbers, an average non-financial corporation in the emerging world (not known for prudent risk management) has a leverage ratio of less than 3:1.^[4] In other words, without a central bank as a backstop, most multi-national banks would have been long bankrupt.^[5]

Given the avalanche of bailouts and stimulus programs unleashed since the 2008 crisis, government debt in the developed world has now risen to a record level 111% of GDP.

Let’s also not forget the extremely high private debt everywhere, now at 129% of GDP in the world, and at 300% of GDP in the United States.

With all this data, it should be no surprise that the BIS estimates the size of the total debt securities market at $100 trillion. That is about $40,000 for every person in the world who has a bank account.^[6]

The only way for countries to accumulate so much debt is for them to print money indefinitely, and to continuously drop interest rates. And indeed, interest rates are the lowest they have been since the Middle Ages.

 From the 1700s onwards, leading western nations borrowed at rates between 3%-7%, whereas recently we saw a drop in interest rates down to below 1% in the U.S. The rates are a little above 1% now, but German 10-year bonds are trading with interest rates as low as 0.5%. This trend is unprecedented in world history.

Governments, banks, and households borrowing from institutions that can create money out of thin air leads, of course, to inflation.

Illustrating this is an inflation world map that I made in May 2013:

Here is the updated January 2015 version:

Now, one could argue that this just shows the dollar’s strength rather than actual inflation, but consider that the U.S. dollar still is the world’s reserve currency, and the most important way for foreign central banks to defend the value of their currency is to buy back their own currency from whomever offers them U.S. dollars. As was the case with many other collapsing currencies, the hyperinflation of the ruble in 1998 started when the Russian central bank had no more dollars with which to buy back its own currency.

 That said, the long-term value of the U.S. dollar is highly questionable. Since the U.S. went off the gold standard in 1971, central banks have been increasingly diversifying their reserves, as shown below.

Whereas in the 1970s central banks had no problem with holding up to 65% in U.S. dollars, that amount has now declined to 40%-45%. That certainly doesn’t signal a vote of confidence in the greenback.

National central banks are also increasingly moving physical gold back within their own jurisdiction. We’ve seen both Germany and the Netherlands repatriate 120 tons each, as well as Poland, Venezuela, Ecuador, Mexico, Switzerland and others participating in the “gold repatriation movement.” It is no coincidence that this movement started in 2011 at the time of the sovereign debt crisis in Europe; governments are afraid of defaults, devaluations, and/or hyperinflation, and want to prepare for the launch of a new currency.

Seeking “Stability”

Take a moment to absorb how gargantuan the problems of the financial system have become.

Now consider this: central bankers often contradict each other and themselves, but one thing they unilaterally stand for is “stability.” The U.S. Federal Reserve, for example, says its goal is “a more stable monetary and financial system.”^[7] Its European counterpart, the ECB, has as its mission statement “to maintain price stability and to safeguard the value of the euro.”^[8]

Where is this “stability” central bankers keep talking about? How can we believe in a system that achieves exactly the opposite of that which its leaders proclaim?

Over the last 10 years, central banks have created new money to the tune of $14 trillion, and that amount is still growing. Just this week, the ECB announced that over the next 18 months it will pump another €1.1 trillion into the eurosystem.

 

Here is what Gideon Gono, Zimbabwean central banker and father of the $100 trillion bill, has to say about the newfangled post-2008 financial paradigm:

“I’ve been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”^[9]

 Gono is right: his example is being followed by every prestigious central bank in the world. And when journalists dare to mention the elephant in the room, they are scoffed at. In fact, this happened just this week, when ECB chairman Mario Draghi was asked whether his policy of money printing would lead to hyperinflation. He dryly responded that despite the massive stimulus programs, “Somehow this runaway inflation hasn’t come yet”.^[10]

 In 2008 it became clear that the emperor had no clothes. By now, it should be clear that his entire court is also threadless.

Conclusion

I will keep my opinion about what all these financial omens forebode for another time, but it should be clear by now that the fiat system is anything but stable.

In fact, the stability in our financial system only exists to the extent that people believe in it. It is a mirage much like Bernie Madoff’s “empire” was: as soon as enough people withdraw, it will come tumbling down.

A new crisis is brewing in the system, as has happened every 40 years since governments started monopolizing the industry of money and banking. But this time truly is different. For the first time in history, the people have access to a decentralized, open source and globally accessible backup financial system.

There may be some problems that arise when Bitcoin technology is scaled up for millions, and then hundreds of millions of users. No doubt there is angst and volatility ahead, and for all we know the Bitcoin network will fail and some other cryptocurrency will take over. But there is no way this ingenious technology is going back into the bottle.

We now have access to a protocol that allows for honest global banking with or without intermediaries. For those eager to divest from a financial system of falling cards, I highly recommend drawing from an alternative deck: the exciting world of cryptocurrencies.

---

Jan 22. 2015 for BitcoinMagazine.com

Those within the industry understand that one of Bitcoin’s most important features—and perhaps its true core innovation—is its decentralized structure.

Bitcoin has no central control: no central repository of information, no central management, and, crucially, no central point of failure. And yet, most of the actual services and businesses built within the Bitcoin ecosystem are centralized. They are run by specific people, in specific locations, with specific computer systems, and they are susceptible to specific legal entanglements.

This situation creates tension and certainly a little irony—we have a decentralized technology, yet most things existing upon it are centralized.

To a casual observer, and even more to a cynical one, it may appear that the claim of Bitcoin’s decentralization is a myth—an overstated feature conjured up as a bullet point in Bitcoin’s marketing brochure, but suspiciously not apparent in the actual product.

Consider the structure of CoinBase, which is arguably the most successful Bitcoin wallet and payment service in existence. There is nothing decentralized about it.

Consider CoinBase’s internal policies—they resemble PayPal’s, not the distributed utopia Bitcoiners imagine. Coinbase wants to know who you are. They want to know what you’re doing with your money, and they’ll block you if they disapprove. They spy on you and control you as much as any traditional financial institution (and to be fair, it’s not really their fault—enforcers with guns will throw them in a cage if they don’t do these things; it occurs under duress).

So the question arises: How can Bitcoiners claim decentralization when the premier Bitcoin service has essentially become a bank itself?

Critics point to centralized exchanges, wallets, and payment processors to condemn Bitcoin’s claims of decentralization. When Mt. Gox exploded, losing half a billion dollars of customer money, critics expressed immense skepticism that Bitcoin was really anything unique at all—to them, it looked like just another new medium by which people are spied on at best, and ripped off, scammed, and defrauded at worst.

So isn’t Bitcoin’s claim of decentralization a lie?

No.

And here’s why: to understand Bitcoin one must understand the difference between coercive centralization and market-based centralization. Bitcoin possesses the latter, but avoids the former, and that is a crucial distinction.

Coercive centralization is what we all experience in the legacy financial industry. The world’s monetary system, based upon national fiat currencies created and managed by government-sponsored central banks, is coercive. It is coercive because the entities with the power over money’s creation, regulation, and transfer have the will and the power to hurt you if you disobey. Not only that, but you are coerced into it in the first place, being forced to pay taxes and settle debts using only your government’s anointed currency.

If you’d like to experience the coercion first-hand, try creating some dollars, and you will find yourself thrown in prison, your property taken from you. Or try transferring dollars in any way that is “unauthorized.” Then you will see what coercion means.

The entire financial system as it exists today rests upon this anti-market model of coercion—money moves only with the permission of those in control, and they’re not in control by mutual contract, but by the privilege of violence. The various poisons such coercion bestows upon society are a topic for another essay, but the only reason people suffer this system is because it’s been the only game in town.

Market-based centralization is fundamentally different. Its key feature is the ability to opt out.

Yes, CoinBase is a centralized entity. But you needn’t use CoinBase to use Bitcoin. Yes, a Bitcoin exchange or web wallet is centralized, but you can always trade coins with a friend directly over the blockchain, or store it in a local wallet, without the permission of any third party.

A user of fiat is always forced to utilize a centralized service. A user of Bitcoin is never forced to utilize a centralized service. This is the key distinction between centralization found in Bitcoin (which is market-based) and centralization found in the traditional banking industry (which is coercive).

And this ability to opt out, while it may seem modest, enables wonderful things to happen, for the discipline of the marketplace can be realized. Consider: since every CoinBase user can opt out and leave the platform, this presents a natural check on CoinBase’s ability to act with impropriety, and makes coercion impossible. Compare this to the model of a bank, which is able to burden its customers to a far more significant degree because it knows that if the customers want to participate in a meaningful way in the financial system, they have to use a bank and its associated fiat currency system.

It should thus be clear that Bitcoin enables users to withdraw into the neutral pasture of decentralized finance at any time, which means that any centralized service within the sphere exists only at the pleasure of its customers.

And thus the forms of market-based centralization found within Bitcoinland needn’t be feared or condemned as one would the coercive centralization of the legacy financial system. What we have is indeed something fundamentally different, which is wholly compatible with the free-market structure and intent of Bitcoin’s genesis. Indeed, a free market will inevitably lead to some points of market-based centralization when economic efficiencies can be found. Every voluntary organization of people or resources is market-based centralization, and by definition, there’s an inability to coerce those who partake.

The key to judging the legitimacy of centralization is always the ability of users to opt out. Bitcoin provides this, while fiat and central banks do not.

That is the difference, and it is one that the world will soon come to appreciate.

January 21, 2015
FOR IMMEDIATE RELEASE
Contact: Tyler Evans 256-539-6100

BTC Media Acquires Bitcoin Magazine

NASHVILLE, TN—BTC Media LLC, parent company of financial technology magazine yBitcoin and its website www.ybitcoin.com, has as of January 21, 2015 completed the purchase of Bitcoin Magazine from Coin Publishing LLC.

Bitcoin Magazine is the first publication devoted exclusively to Bitcoin, the digital currency that burst onto the international economic scene as open source software in 2009. Magazine founders Mihai Alisie and Vitalik Buterin published their first issue in May, 2012 and later joined forces with Orlando, Florida-based Coin Publishing LLC to produce 22 issues. The magazine is mailed to subscribers worldwide, sold at Barnes & Noble bookstores and published online at www.bitcoinmagazine.com.

BTC Media founders Calli S. Bailey and David F. Bailey plan to capitalize on the acquisition by increasing their company’s online news and analysis, among other benefits of the merger.

“This purchase and the enhanced resources it brings into our fold make BTC Media the world’s leading Bitcoin media group,” said CEO David Bailey. “Our readers will now have access not only to the same in-depth feature stories they’ve always found in yBitcoin, but also to breaking news about a cryptocurrency world that is growing exponentially. We aim to be the most trusted source for news in this field by offering relevant information to every reader, regardless of their familiarity with Bitcoin.”

Tony Gallippi, co-owner of Coin Publishing LLC and executive chairman of BitPay, commented, “The BTC Media publication yBitcoin has played an instrumental role in introducing Bitcoin to the world. We knew this would perfectly fit our effort to spread the Bitcoin story to a larger audience. We’re extremely proud of Bitcoin Magazine’s accomplishments, but know that we’ve only scratched the surface. The opportunity to join forces with BTC Media’s extremely capable and visionary team was the strategic move we needed to fully realize our potential.”

BTC Media plans to relaunch Bitcoin Magazine and add a lineup of industry experts as contributors. The company is also expanding its team to manage the expanded joint publishing effort. BTC Media is committed to investing heavily in BCM’s digital offerings and establishing BitcoinMagazine.com as the leading brand in cryptocurrency news and analysis.

yBitcoin will continue its editorial strategy of informing a general readership about Bitcoin.

“Our mission is to educate the world about Bitcoin and expand its reach,” said BTC Media Publisher Calli Bailey. “Bringing yBitcoin and Bitcoin Magazine under one united media group provides us with multiple platforms for doing just that.” The company also plans to begin publication of yBitcoin in other languages which will significantly expand its international presence.

BTC Media has also established a partnership with decentral.tv, a leading video content provider, and is co-hosting a “Bitcoin House” at this year’s SXSW™ music, film and interactive conference in Austin, TX. “Between print, digital, video and events, BTC Media is prepared to engage our audience through every medium and carry cryptocurrency forcefully into the mainstream,” said David Bailey.

The company plans to establish new headquarters in Nashville, Tennessee, where it will avail itself of the vibrant publishing and tech sectors flourishing there.

###

Bitcoin has taken the world by storm. Yet when most people hear about it, whether for the first or the tenth time, they have one simple question: “What is it?”

Like an automobile, Bitcoin is very technically advanced, and it can be extremely complicated, depending on how much you want to know about it. But also like an automobile, you don’t actually need to know much about Bitcoin’s technical details in order to use it—and in order for it to change the way you look at the world.

Here’s what you need to know. Generally speaking, Bitcoin is two things:

1. A payment network (“Bitcoin”);
2. The currency unit used on that network (“bitcoins”).

Thus, as both a payment network and the specific currency used on that network, you use “Bitcoin” to receive and send “bitcoins” to and from other people.

“The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.”

To clarify this, consider a comparison to items with which you’re already familiar: PayPal and U.S. dollars. PayPal is a payment network, but not a currency. On the flip side, the U.S. dollar is a currency, butnot a payment network. You use the PayPal payment network to make transactions in U.S. dollar currency with people.

Now, note that the PayPal payment network is operated and centrally controlled by one company (PayPal Inc.), and the U.S. dollar is created and centrally controlled by one organization (the U.S. federal government).

Here’s where things get important, and revolutionary—and a little weird.

With Bitcoin, the payment network is decentralized. It is not controlled by any company or organization.

Think of it like filesharing—a network of computers that talk to each other, but nobody controls the network itself (there is no central server). The currency unit, called bitcoins, is also not created or controlled by any central party. Bitcoins are created by the network itself over time, in a somewhat random process that distributes the new coins to those computers that are supporting and operating the network. The number of coins created in this way is limited by a clever mathematical system. As of this writing, there are roughly 12 million bitcoins in existence, and this will continually increase over time to a maximum of 21 million bitcoins many years in the future.

Unless you care about how Bitcoin accomplishes this, the above is really all you need to answer the question, “What is Bitcoin?” Answer: It’s a payment network, and a currency used on that network, which are controlled by no central party. The number of bitcoins in existence is limited by mathematics.

Perhaps the more important question, of course, is, “Why should you care?”

While computer engineers and mathematicians might find Bitcoin’s technical details fascinating, most people don’t really care about that.

And while it’s true that Bitcoin permits financial transactions that have essentially zero cost, and which occur instantly any- where in the world, these consumer benefits are not really what’s important, either.

The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.

The fact that Bitcoin is decentralized, with no controlling entity, has fundamental implications. Because there is no central control, the power of the currency and its payment network belong to the people who use it. And this power is tremendous indeed.

Bitcoin enables any two people, anywhere on earth, to transact with each other freely. They cannot be censored. There are no rules for their exchange except those they set between themselves.

With Bitcoin, there is no third party watching over the participants of economic activity, approving their conduct and charging a fee for doing so. With Bitcoin, one does not need permission to direct one’s own financial life. This means people can contribute to controversial causes they believe are important, with no government agency or financial company able to cut off the payment flow. It means an entrepreneurial child can start an Internet business before he or she is 18. It means a rural African farmer can receive payment for crops from a neighboring city, even with no bank account. It means a citizen of a tyrannical nation can hide his financial assets from seizure.

Bitcoin means that for the first time in history, every person has financial sovereignty. Private property can now truly be controlled by the owner, and nobody else. The rules of finance, and our economic relationships, now become set and regulated by markets instead of by politicians. By the individual, not the collec- tive. The value of one’s savings now cannot be reduced through monetary debasement (i.e. inflation). Trade between individuals is now the business of only those individuals.

Certainly, some of these implications are controversial. Indeed, they will have profound consequences on human society, just as do all great technological achievements. A good way to think of it is that Bitcoin represents the separation of money and state—the ability to “practice one’s own economic behavior” without the permission of anyone else. It removes the power over money from governments and banks, putting it in the hands of anyone who learns how to use it. It brings privacy in an age of surveillance, and honesty in an age of manipulation.

So what is Bitcoin? It is an experiment. It is a project that, if successful, will change the economic relationship between humans on a fundamental level. Its implications have just barely been explored.

Like any experiment, it can fail, but the genie is now out of the bottle. While this genie goes about its business, many things you take for granted will likely change, so it may be wise for you to educate yourself on the technological, mathematical, and economic phenomenon that is Bitcoin.

 

Originally published in yBitcoin Magazine.

 

We all have what feels like an intrinsic understanding of value, though it is actually learned as we come to know our world. A gold bar has value, an empty soda can, not so much. When we encounter new things it’s usually fairly easy to assess what kind of value they might hold, but Bitcoin is a different beast. Bitcoin is harder to define and understand, and for many beginning Bitcoiners the question of value is one of the most puzzling. So why does Bitcoin have value?

To begin, we really need to understand why anything has value. Fans of post-apocalyptic fiction will often point out that in the end, the only things of real value are those that sustain and defend life. Perhaps they’re right on one level, but with the rise of civilized societies things got a bit more complex, because the things that sustain and defend those societies also gain a certain degree of value. It is in this context that all moneys, Bitcoin included, gain their value. Since our societies rely heavily on trade and commerce, anything that facilitates the exchange of goods and services has some degree of value.

From Barter to Money

Imagine, for example, a pre-money marketplace where the barter system is king. Perhaps you’re a fisherman coming to mar- ket with the day’s catch and you’re looking to go home with some eggs. Unfortunately for you, the chicken farmer has no use for fish at the moment, so you need to arrange a complex series of exchanges to end up with something the egg seller actually wants. You’ll probably lose a percentage of your fish’s value with each trade, and you also must know the exchange rate of everything with respect to everything else. What a mess.

This is where money saves the day. By agreeing on one interme- diate commodity, say, silver coins, two is the maximum number of exchanges anyone has to make. And there’s only one exchange rate for every other commodity that matters: its cost in silver coins.

In truth there is more complexity involved—some things, like your fish, would make very poor money indeed. Fish don’t stay good for very long, they’re not particularly divisible, and depending on the exchange rate, you might have to carry a truly absurd amount of them to make your day’s purchases.

On the other hand, silver coins have their inherent problems too, when traded on extremely large or extremely small scales. This is what is truly valuable about Bitcoin: It’s better money.

The Evolution to Bitcoin

It’s been a long time since those first “hard” moneys were developed, and today we transact primarily with digital representations of paper currency. We imagine bank vaults filled with stacks of cash, but that’s almost never the case these days— most money exists merely as numbers in a database. There’s nothing wrong with this type of system, either; it works fantastically well in an age where physical presence during a transaction is not a given. The problem is that the system is aging and far too often plagued by incompetence or greed.

Every IT guy knows that from time to time you have to take a drastic step: throw the old system in the trash and build a new one from scratch. Old systems, such as our current monetary system, have been patched so many times they are no longer functioning as efficiently as they should.

We previously patched our problems with gold and silver by introducing paper banknotes. We patched further problems by removing the precious metal backing those banknotes, then patched them again and again to allow wire transfers, credit cards, debit cards, direct deposit and online billpay. All the cornerstones of modern life are just patches on this ancient system.

But what would you do if you had the chance to start over? What if you could make purely digital money based on modern technologies to solve modern needs? What if we didn’t need those dusty old systems or the people making absurd profits maintaining them? This is Bitcoin.

Replacement, Not Repair

Bitcoin isn’t another patch, another layer of abstraction added on top of an aging and over-complex system. Bitcoin isn’t another bank or payment processor coming up with new ways to move old dollars. Bitcoin is instead a simple, elegant and modern replacement for the entire concept of money. It has value for exactly the same reason as the paper money in your wallet: It simplifies the exchange of goods and services, not in the antique setting of a barter system bazaar, but in the current setting of modern Internet-enabled life.

“But that’s only why it’s useful,” I hear some of you saying. “Why does it actually have value?” The two-word answer is one most economists are familiar with: Network effect. The network effect is a lovely piece of jargon that refers to the quite commonsense statement that networked products and services tend to have more value when more people use them. The most common example is the telephone: During its early days when few people had access to telephones their utility, and therefore their value, were minimal. Today practically everyone has a phone, so their utility and value is so high as to be unquestionable. In this way the value of Bitcoin is directly tied to the number of its users and the frequency of their use.

Of course Bitcoin’s value stemming from the network effect is not without its own unique difficulties. When the network is still relatively small, each new group’s entry or egress can create massive price fluctuations, resulting in huge profits for early adopters. Unfortunately, this makes Bitcoin look, on the surface, too good to be true—a bit like a Ponzi or pyramid scheme.

Ponzis and pyramids are distinct and different forms of fraud, but they share one thing in common: The first ones in make a lot of money while the last ones in foot the bill. Both feature initial “investors” being paid out directly from new investors’ money. The return is always too good to be true and the gains (for those who actually get gains) are exponential.

Because Bitcoin’s value has risen so dramatically since its 2011 debut, it seems to fit this sort of a profile at first glance, but then so does every new technology. It’s just not normally the case that we get to invest in this sort of technology and profit as it’s adopted. Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use primitive multi-user computer systems to pass messages. It might have seemed like a silly waste then, but owning even a tiny percentage of the rights to email today would make one wealthy beyond imagining.

Technologies follow a known adoption curve, which tends to include a period of exponential rise. Bitcoin is no exception. Ponzis and pyramids both create value for their oldest investors by stealing from the new. There’s no economics involved—just theft.

Bitcoin creates value for the old investors and the new by splitting a finite currency supply more ways. That’s not trickery or theft, just good-old-fashioned supply and demand at work— a basic and ancient economic principle applied to the world’s newest currency system.

 

Originally published in yBitcoin Magazine.

I had the opportunity to sit down at Premier Studios with  Trace Mayer as he got ready to attend this year’s Money 20/20 conference.  Join us as Trace Mayer discusses the CEO panel of Bitcoin companies for Money 20/20, Bitcoin security, Bitcoin for beginners, investments in Bitcoin and much more!  This is one interview you will not want to miss!

 

 

For more info: Trace Mayer
www.bitcoin.kn
www.freebitcoinguide.com