Welcome to the CoinDesk Weekly Review 6th December 2013 – a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law.
Bitcoin in its present form has a number of weak points, but the most notorious – and weakest – is the exchange mechanism that converts bitcoin into real-world currencies. Like the transporter system on the Starship Enterprise, you’re not always guaranteed to get out what you put in, arrive where you expected, or even get through at all.
This is partly due to the uncertain and frequently hostile regulatory environment of the existing cash control networks. This environment makes it hard to run an exchange which has normal bank accounts and legal safeguards in all the markets where you’d like to exchange your bitcoin.
This is also due to the currency's 'frontier' nature: a great deal of its attraction lies in its extra-legal aura. However, the exchanges themselves do not always avoid the same shimmery vagueness.
This week’s worry is BTC-e, Europe's second-biggest exchange, which is seeing a lot of consumer dissatisfaction because, well, their money isn’t turning up.
Fierce debate continues over where exactly the problems lie on the spectrum of overloaded systems through to out-and-out mobsterism. BTC-e isn’t helping matters by not having a bank account, not answering questions and not revealing who’s behind it.
If you don’t plan to turn your bitcoin into fiat cash - the part of the translation that always seems to cause the most problems - then you needn’t worry: if you’re holding it for fun or if you’re using it to buy stuff from bitcoin enabled retailers, then none of this is your problem.
However, if you do need to see the hard stuff, then for your future happiness,you may wish to apply some simple tests to anywhere you’re planning to send large amounts of money. Who are they, what are they going to do with your money, when will they do it, and what do you plan to do if they don’t? Failure to get a decent answer to any of those questions and just remember there’s a reason Kirk always took a phaser and two redshirts into the transporter booth with him before energising.
But, alas, such questions don’t always help. John Law remembers one online discussion he was part of a few years back, where a blatant too-good-to-be-true online deal was being offered on some particularly desirable mobile phones. The website owners didn’t check out, the contact details weren’t valid, the company was unknown and the prices were so far below wholesale that even if the goods were actually as offered, they had to be hooky. John Law and others searched out and provided all this information, and presented absolute cast-iron reasons why none of this could be remotely true.
“Yes,” said one online denizen. “I know. But I’m going to send them my money anyway. It might be true, and if it is - wow, what a deal!”
There's only so much you can do to keep the redshirts away from the Klingons.
A typically balanced piece by the Economist on bitcoin canters calmly over familiar territory - is bitcoin safe, does the maths work, is there a bubble, and so on. But it also raises two questions connected with mining, one also familiar – but one less so, and worth a good look. The familiar one is that the arms race among miners is making it impossible to invest the time, energy or custom hardware costs to see a decent return; for now, the bubble-icious nature of the beast is keeping people keen. But that’s not guaranteed.
The less familiar, and more intriguing, question is about the block chain. It records all transactions, which is dandy, but as bitcoin gets more popular the block chain grows like Topsy. Currently at 11GB, this is now a seriously large chunk of data to move about the place – and it does have to move about, as multiple nodes have to keep copies to keep things verified. Yet there’s no obvious motivation or reward to node owners to participate; miners, yes, but as noted that’s not guaranteed to remain a widespread activity.
The Economist notes that a number of proposed fixes are in the works – so nodes could be paid a tiny fraction of each transaction – and that the protocol now has a track record of successfully overcoming problems. But it frets, as only the Economist can, that it’s all a bit fragile and run by people who can’t control it.
John Law cannot predict the future. But he does remember the past: in particular, the past evolution of the Internet. As he has repeatedly noted, many of the same issues now confronting bitcoin were previously raised as serious reasons why the Internet itself would fail. Nobody controlled it. It didn’t have the capacity to carry huge amounts of data – for graphics, say, or audio, or even (as some visionaries recklessly claimed) video. It couldn’t cope with the huge numbers – some thought there might be millions – of users if it was opened up to the general public, and the economics just couldn’t work.
As you will have noticed, none of this actually broke the Internet. Threats do remain, but they aren’t technological – they’re more along the lines of corporations and governments trying to balkanise the Internet for reasons of control and profit, and trust being lost due to spooks and crooks mucking about where they’re not welcome. Expect the same basic class of threat to be the biggest real issues bitcoin – or bitcoin-like systems – face, and expect them to be fiercely resisted, much as the elder tribes of the Internet are even now marshalling their forces to make the place secure, private and impossible to traduce.
Broken hearts, broken banks
In this wicked world, money and sin are often found in bed together. And thus the question arises: is bitcoin a sensible place to hide assets from the law – especially when one is preparing to divorce the other half while keeping rather more than your half of the marital assets.
The question has been answered: no, not really. Hiding stuff from courts is all perjury-fraudery jaily-waily, and you’ll have to answer embarrassing questions about where it’s all gone no matter how you’ve tried to disguise your intentions.
John Law would put bitcoin quite a long way down the list of portable high-value disguises for cash, independent of whom you are trying to hide it from. Traditional and more congenial alternatives include diamonds, gold and art – the latter especially tempting at the moment – provided you always establish a conduit in good time into which regular, large sums of cash can vanish in an untraceable way. Get known as a bon viveur with a taste for expensive booze and slow horses. (The real specialists appear to sink so much money into these and other reprehensible hobbies that their spouses divorce them for recklessness, which makes it twice as hard to argue that the dosh still exists somewhere.)
For those with stronger nerves, however, bitcoin does offer an intriguing possibility: you could short yourself. The principle’s simple. Openly buy a bunch of bitcoin. Immediately sell them, and stick the resultant cash in a sock somewhere. Then, when bitcoin crashes, buy back the number you first thought of. You still have a fully-stocked wallet when the lawyers come knocking, but your real stash will be silently waiting for you after the dust dies down.
Of course, if you get your timing wrong or bitcoin never crashes you’ll end up with an empty wallet and no way to buy back enough bitcoin to replenish it. In that case, you can sadly reveal you bottled out early, and cough up. And if you have no fraudulent intent - you’re planning a nice surprise for your golden wedding anniversary - then sell high, buy low is a perfectly respectable investment strategy.
John Law earnestly recommends you do none of the above, and conduct both fiscal and marital matters with utmost probity. Personally, he has his hands entirely full doing just that without introducing any complications to do with bitcoin, perjury and general dodginess, and can assure all concerned that any cash that appears to vanish in large quantities into the bank accounts of the wine merchants of Soho is doing precisely that.
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