The Bitcoin Saga

Is anyone else fascinated by the parade of Bitcoin drama that’s been going on lately?

Some background:

What the hell is a bitcoin?

Bitcoin is a purely-digital currency that was invented a couple of years ago. All transactions are publicly posted and validated by a peer-to-peer network in ‘blocks’. Part of the generation of blocks is the solving of a hash-function challenge, and the first node to solve the challenge (the ‘mining’ aspect) gets to issue the block and put 50 coins in their own wallet, and this serves as both validation of the transactions since the last block and how new coins are injected into the system. The full details of how it works are in this white paper.

But why?

The primary advantages of the system are supposed to be:

  • Anonymity: transactions are purely between uniquely-generated wallet addresses, with no other identifying information, and the peer-to-peer network obfuscates the network origin.

  • Decentralization: there’s no central authority that controls bitcoins, just a purely peer-to-peer network that polices itself.

  • Non-inflationary: the system is designed to stop generating coins once 21 million have been created, and then that’s it. It’s supposed to prevent coins from losing value since you can’t mint new currency arbitrarily.

  • No chargebacks: All transactions are permanent and irreversible unless you can convince the other party to do another transaction back to you.

It’s very libertarian and largely driven by a distrust of how government, banks, and payment processors have handled currency in (in their opinion) disastrous ways.

So what’s the problem?

Well, 1) Almost nobody’s using it, very few merchants support it, there’s relatively little traffic actually occurring and most of the generated coins are just sitting idle in people’s wallets. You can probably divide Bitcoin users into three main groups: the pragmatists, who are using it mainly for its anonymity to conduct shady deals (i.e., drugs); the speculators, trading it against its US dollar value like a commodity; and the True Believers.

The True Believers are counting on how its value is deflationary. As time goes on and the usage and market expands, Bitcoins should only ever increase in value, and if they could capture even a small fraction of the US economy, Bitcoins would become worth the equivalent of thousands of US dollars each. Manage to fulfill their dreams and switch the US entirely to a Bitcoin economy and those coins will be worth millions! And you made 50 of them just by running this mining program! What an investment! So instead of actually spending their coins, increasing the flow of money and attracting more merchants, they’re just sitting on their stockpile of coins, waiting for the glorious future. Even better if you were an early adopter and generated a large pile of coins when the difficulty was low.

  1. It’s not really as anonymous as you might think. All transactions are on public record, so you can trace them as far as you want, and if you want to actually do anything practical with the coins, you’re going to have to turn it into cash or goods and create some kind of link with your identity. When it comes to things like buying drugs, it mainly protects the sellers, not the buyers that’ll have to provide some kind of contact info. (And did the seller rip you off? Too bad, no chargebacks!)

  2. There are various impractical aspects to using it, like how transactions are not processed immediately. You have to wait for a block to be issued for the transaction to be validated and accepted into the network, and that could take 10 minutes or more, depending on how lucky you are. Internet access is also mandatory, transactions can’t be queued up for later processing.

  3. And the elephant in the room is, of course, the government. Governments kinda like being able to control monetary policy through currency, and they’re not going to cede that control without a fight. There may not be any central authority or critical servers to Bitcoin, but the government can still make it difficult to actually use Bitcoins in any practical way, at the points where it meets with the real economy. That they haven’t intervened yet is not a guarantee that they never will.

But what happened that’s so interesting?

The Bitcoin market has been chugging along for a while now, mainly driven by the pragmatists and the speculators, but a couple months ago the value of a Bitcoin shot up from around $1 to nearly $30, probably not-so-coincidentally around the same time as some big articles about the drug connections. It then quickly fell down to around the $15 mark and has been slowly decreasing since then.

Soon after, Mt.Gox, the biggest Bitcoin exchange by far, got hacked and user IDs and passwords were leaked. They managed to clean it up within a few days; there are limits on how much money can be extracted out of a Mt.Gox account per day and transactions within the exchange were reversible since they were between wallets all owned by Mt.Gox. Things continued on as normal, though still steadily declining.

And then, just within the last week or so:

  1. It was revealed that Dwolla, one of the USD payment processors used by the biggest exchanges, has done chargebacks on behalf of their users against the markets, when they thought that wasn’t possible. Tradehill admitted losing $37k USD, and Mt.Gox hasn’t admitted anything yet, but it is speculated that their loss is much, much bigger.

  2. Mybitcoin, a large ‘bank’ that people had been depositing their coins in rather than manage their own wallet (if you lose your wallet.dat file, those coins are gone forever) disappeared. The site owner had been incommunicado for around a month, and then a few days ago the site just vanished. Nobody knows why, nobody’s heard anything, and nobody can get their deposited coins. One person admitted they had 25,000 coins in there and is…somewhat distraught.

  3. The bitomat exchange, third-largest of them all, lost all of its coins. They supposedly mismanaged their Amazon EC2 server, and when they shut it down it erased everything. No external backups.

And all of that finally culminated in a massive crash in Bitcoin value today. It started off around $12.16 today, but has dipped as low as $8.xx, and is still rather unstable. I don’t know if it’s really The End of Bitcoin, but I think people’s confidence is pretty shaken. Bitcoin users have been strangely all-too-willing to turn their coins over to unknown, anonymous third parties up until now.

Whew, I hope that was actually worth reading… (Full disclosure: out of curiosity, I ran a Bitcoin miner for about a week. I made 0 coins.)

A number of online poker players were pushing bitcoins hard on the 2+2 forums over the past few months, but they were generally met with the same mix of skepticism and derision that I’ve always felt towards the things. No government is going to approve of or tolerate their usage if they become widespread, and of course they seem insanely vulnerable to hacks and criminal manipulation–which seems to be happening right now on the basis of your post.

I looked up what a bitcoin was today for the first time because I didn’t know what an was or why they would be dropping $4,100 on the HumbleBundle 3.

Turns out the answer was for advertising.

This is where I go for all my Bitcoin news.

Only by the endless gullibility of the libertarian and anarchist types pushing it. Don’t get me started on the complete insanity of running a currency economy on a by-design hyper-deflationary currency.

God help us, Angie.

I have also been following this for the past few months. Complete lunacy. The enthusiasts sound like losers caught up in an MLM scheme cross-pollinated with LOLbertarians, so pretty much the worst kinds of idiots you can imagine.

I listened to this interview with one of the guys in charge of bitcoin a few months ago. He seemed like a relatively sane individual who was mostly interested in it as a fun open-source cryptography project. Then I saw some of the forum posts from the true believers, and realized they were guaranteed to ruin it regardless of whether or not the idea had any merit on its own.

It’s a fascinating experiment. The concept alone makes for a great science fiction premise.

Let this be an object lesson in … oh fuck it, who am I kidding?

So it turns out private unregulated banks are maybe not that great after all.

Oh, but over time, people will realise which private, unregulated banks are the reputable ones and which aren’t and then everyone will know to only use the reputable ones and then the regulation problem will be solved. Complete information is free in the long run, see?

Just a little expensive in the short term.

I’m unclear as to why this is a “feature.” I use credit cards and PayPal precisely because I do have a third-party recourse in the case of fraud. If I were buying something with Bitcoins, I wouldn’t complete the transaction until I had the actual merchandise in hand - which is not something any sane seller would agree to.

The NPR Planet Money podcast did a thing on Bitcoin a few weeks ago.

I had heard about it but I was really surprised by the level of gullibility and greed surrounding it.

The currency of the Libertarian cruise ship/platform off California?

Doesn’t this mean that, given enough time, the economy (such as it is) would actually run out of BitCoins? I mean, they eventually stop making them, but it is possible for users to accidentally destroy them.

It probably ties back to the libertarian aspects of it, but some of them have a real hate-on for places like Paypal and credit cards that allow chargebacks. In their mind it erodes the power and security of the position of the seller, so of course the best thing to do is flip it around and put all of the risk on the buyer instead, right? Caveat emptor!

In the aftermath of this, one guy tried setting himself up as a kind of Better Business Bureau for rating businesses and investigating accusations. But wait, how do we know his reports are trustworthy? Maybe there ought to be multiple such bureaus and a metarating agency that oh god it’s turtles all the way down…


To them it just means that the remaining coins become even more valuable, and now everyone’s a bit richer, woohoo! They intentionally designed it to be deflationary like that, which some economists might take slight issue with. And of course, if you lose your coins it’s your own damn fault, and surely they’re going to be more careful with theirs. In fact, they just opened an account at the First Bank of xXDoomSlayerXx

I think so.

I don’t really understand what the point of the non-inflationary design is. I guess the idea is that they hold value, but it makes them useless as a currency. Since there’s no way to subdivide them, eventually in their best case scenario it’ll be impossible to make any purchase of less than the value of one bitcoin. So, too bad if you want to buy that Amazon paperback for $1.99, unless you want to buy 200 of them.

Also, the 21 million limit seems (and I assume is) completely arbitrary. I just wonder what, if any, design considerations were put into this other than “interesting peer-to-peer verification protocol”.

They are divisible down to 8 decimal places in the current protocol design, and the expectation is that if the economy grew enough, you’d be buying things in ‘millibitcoins’ or whatever instead.

But yeah, it’s a currency designed by engineers, not economists. It successfully implements a list of specific criteria, but without any apparent thought as to the broader economic effects beyond simply having those properties.

The whole bitcoin thing is a crazy mish-mash of fairy tale dreams, greed, and hacker shenanigans. It’s pretty hilarious once you start reading about it.