|The dismal "science"|
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“”Nothing more than a collapsed tower of toxic sludge.
|—Mark T. Williams|
Bitcoin is an Internet-based digital currency and payment network; it uses strong cryptography to prevent users from illicitly duplicating money. Bitcoin's independence from the control of governments, corporations, or other centralized entities tends to appeal to libertarians, anarcho-capitalists, and technophiles. At the same time, it also does not enjoy the security and protection which those large bodies can ostensibly provide, making it a volatile and often insecure asset.
The currency needs lots of computers to process and record transactions. The solution to this is "mining," in which Bitcoin users run software to do all the necessary work. Every time someone successfully "finishes" a work package, they receive Bitcoins in return. This provides an incentive to keep the currency running, but also attracts a lot of prospectors and speculators looking for easy money, and scammers who consider them suitably exploitable suckers.
In early 2014, the cryptocurrency went into epic freefall after a principal exchange, Mt. Gox, shut down following what may have been the largest recorded cybertheft in history, matching the Enron bankruptcy in scale.
“”It's like a house on fire with freshly baked cookies inside.
The notable bit about Bitcoin is that it is entirely decentralised; there is no central bank backing it. Previous virtual currencies, such as E-Gold, Flooz, Beenz, Lindens, or WoW gold have always had an organisation behind them. This lack of a monetary authority means that, were governments to try to do something about it, they would not have a central point of attack.
Bitcoins are an entirely imaginary currency (i.e., they have no use-value), but not particularly more so than US dollars, and could be a general currency if 300 million people similarly behaved as though it was one, i.e., would do work in exchange for it. Its biggest problem as an exchange medium is that it is not widely accepted, and that trading is thus very thin indeed.
There is also the matter of built-in deflation. As more and more Bitcoins get mined, it requires more and more processing power to mine new ones. Also, if your wallet file is deleted, your Bitcoins are gone for good.
"Babbage" at The Economist took it seriously and found it quite interesting, but has since muted his praise. Other economists have criticized the idea (to the point of calling it a scam), citing inherent design problems. Paul Krugman refrains from poking fun at the concept, but considers it a reimplementation of the gold standard, with the economic problems that implies. About 25% of the European Central Bank's report on "Virtual Currency Schemes" is about Bitcoin, and the European Banking Authority has warned about major consumer protection issues.
You can buy actual stuff with Bitcoins! Mostly internet services, geek toys, phone sex, illegal drugs and, of course, Bitcoin mining hardware. And actually useful things like beer. To allow payment with a high-volatility currency like Bitcoin, it is common for merchants to price their goods in fiat currency, but receive payment via Bitcoin converted at current market rates.
The trouble with re-implementing the gold standard in the 21st century is that financial attacks, just like cryptographic attacks, don't get less effective with time — if you apply attacks evolved in a hundred years of Red Queen's race against regulation, then remove the regulation, the subeconomy in question is utterly defenseless. As one quant on HackerNews outlined:
“”Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit. Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well - they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans.
And we can now see this in practice.
So who's doing the maths? The answer is the most powerful distributed computing project in the world. While other distributed computing systems are investigating protein folding or sifting through radiotelescope data for signs of intelligent communication from the stars, Bitcoins are being generated by people running hashing algorithms to process transactions on a poorly-traded virtual currency.
The irony of all this is that once hardware and power costs are factored in, it's hard to make a profit off of Bitcoin mining. Many less-savvy Bitcoiners filch their power from someone else and don't factor in the equipment cost at all.
Bitcoin is also an environmental disaster, using 982 megawatt-hours a day literally wasted on computing hashes. That's about 31,000 homes or half a Large Hadron Collider, spent producing nothing of actual value. (Thus, Bitcoin runs on libertarians externalising their costs to others.) If only someone had come up with a distributed currency based on protein folding.
The mathematics is robust, so many highly vocal internet libertarians think this is all that is needed, because they don't understand people, know very little about economics and apparently nothing of how reliable financial computing infrastructures are built — they tend to use mainframes in highly redundant configurations, not AWS virtual servers without backups — and generally show terrifying naïveté and incompetence. This then bites them in the arse when they discover that running a Magic: The Gathering Online card exchange site is insufficient experience to securely run a currency exchange, or discover they have no backups. Many were sufficiently naïve as to fall for, not just a Ponzi scheme, but a Ponzi scheme that had already been tried in EVE Online's in-game currency. You also have people who understand this level of computer science, but still keep their wallet.dat file in plain text on a Windows box, ready for reaping by malware or DDoS. This is the sort of thing that gets Bitcoins called "Dunning-Krugerrands."
The decentralised nature attracts libertarian extremists (go read the Bitcoin forums for more wacko libertarianism than you ever thought possible). There are Bitcoin advocates who are not annoying Randroid fools, but the ones who are tend to drown out all others.
One of the otherwise-saner advocates is Rick Falkvinge, founder of the Swedish Pirate Party, who has put all his savings into Bitcoins. Though, he also details its problems. He is a big fan of Bitcoin not as a general currency, but as a pure medium of exchange, substituting for PayPal or credit cards and changing back into a more popular currency at each end — as the Visa/Mastercard/PayPal oligopoly's willingness to block recipients they, the American government or fundamentalists don't like, starts to become a practical problem.
There are also Bitcoin banks and a stock exchange, but most of this seems to revolve around doing things with Bitcoins (including Bitcoin mining companies), leading to accusations of cargo cult economics. And scams. Lots of scammers in the Bitcoin community, who are punished by the harshest method imaginable: getting a "scammer" tag on the BitcoinTalk.org forum.
One Bitcoin exchange, Bitcoin-Central, has achieved bank status in France. Their aim is to supply an alternative to PayPal, and their central bank backing on balances only applies to accounts in euros rather than in Bitcoins. On the other hand, other players in the Bitcoin field have had to suspend operations because US banks view companies involved with Bitcoin as too high risk to do business with, or have had to suspend US dollar withdrawals for undisclosed reasons.
 The scheme
“”[This] Bitcoin crash is traumatic. I haven't seen this many libertarians cry since they found out Ayn Rand took Social Security for eight years.
In order to prop up the initial system, Bitcoin mining was designed to bribe early users with exponentially better rewards than latecomers could get for the same effort. This effectively makes Bitcoin a pump-and-dump scheme wherein these early adopters, who have more Bitcoins than anyone else ever will, hype it up so they can offload their Bitcoins onto fools who think they'll strike it rich as speculators, or whomever else will accept them as payment. Basically, this means the system runs on opportunism, especially among people who like the idea of decentralized techno-money. Although this setup is defended as an acceptable trade-off and/or a fair reward for propping up the system, this presumes that it will actually result in a widespread, reliable currency.
In the meantime, speculators and opportunists remain Bitcoin's main users: only 22% of existing Bitcoins are in circulation at all, there are a total of 75 active users/businesses with any kind of volume, the Mt. Gox exchange is responsible for 90% of all Bitcoin transactions ever, one (unidentified) user owns a quarter of all Bitcoins in existence, and one large owner is trying to hide their wealth accumulation by moving it around in thousands of smaller transactions. But go on, dive in and get rich.
 More mundane problems
The real and overriding issue with Bitcoin is that it does practically nothing that isn't already possible, while also introducing flaws of its own:
- For the average person it's far more hassle than it's worth when the rest of the world takes other currencies (or "fiat" on Bitcoin communities, who use it as a snarl word) and that there's nothing they can buy with Bitcoin that they can't buy with the money they already have. Responses to this range from wishful thinking that this will be irrelevant when Bitcoin takes over the world and then goes to the Moon, to assertions that people will choose Bitcoin despite its comparative lack of utility simply because they like the idea.
- Much is made of Bitcoin's efficiency for buying things online, without mentioning that there's nothing you can buy with Bitcoin you can't buy with the money you already have, that a credit or debit or debit card already lets you buy things online with minimal hassle, and that moreover if you get defrauded or scammed and you paid via Bitcoin you are, as they say, shit out of luck, because Bitcoin is by its nature irreversible. Escrow is touted as a solution for this, but such a thing would fail to work for (for example) custom goods where the payment price is required to make the product sold, or for faults which develop months after purchase which would otherwise be covered by chargeback protection. Interestingly however, when Butterfly Labs stiffed people who paid for their mining equipment, Bitcoiners who paid with filthy fiat via the evil PayPal were able to raise chargebacks and get their money refunded, which many did gleefully. Those who paid with Bitcoin had no recourse other than the courts.
- A great deal of online retailers who supposedly accept Bitcoin actually charge whatever the fiat price of the product would be at the current exchange rate, or use services like BitPay which allow businesses to take the Bitcoin but then immediately receive dollars in exchange. This raises the question of what point there is to using Bitcoin when it would be far more efficient overall just to use dollars, since at the end of the day you would be converting dollars to Bitcoin to give to someone who will then convert the Bitcoin back to dollars. It also raises questions about how stable Bitcoin's "economy" is when a lot of its participants wouldn't be involved if they couldn't get actual money out of it.
- Being a distributed computing project means that Bitcoin transactions are at the mercy of not only network latency (like credit or fund transfer transactions) but the time it takes for the transaction to be processed and stored around the network. In most cases, this takes approximately ten minutes — barely usable for network orders, but problematic for point-of-sale use. (The beer-selling example doesn't bother reconciling in real time, as the owner is treating the Bitcoin risk as a marketing expense.)
Whenever some of these objections are raised, the common Bitcoiner reply is to think about things from the merchant's point of view — that they pay less in fees (which isn't necessarily true), that they might get chargebacks (which can be defended against, and generally don't happen to merchants who don't actually scam people or rip them off). This ignores that most people don't care, and the few that do see enough benefit and convenience from being able to get fraudulently taken money returned to them that it doesn't actually bother them.
 Other distributed cryptocurrencies
A number of copycat cryptocurrencies exist, only a few of which, such as Litecoin, are at all notable. A few of these have significant distinctions from Bitcoin, such as Namecoin which is part of a decentralized ".bit" DNS project, Freicoin which incorporates demurrage to discourage speculative hoarding, and Devcoin which was designed to pay as rewards to open source developers, but most of them are simple forks of the Bitcoin code, using "libcoin." Since the media attention on Bitcoin in early 2013, a glut of such "coins" has flooded the market, with increasingly silly names like BBQcoin, Memecoin, Junkcoin, Sexcoin, and Shitcoin. And don't forget Coinye West.
Ripple is a proposed peer-to-peer alternative currency, similar to Bitcoin, only vaguer, with a similar encryption protocol to generate scarcity, and (currently) not fully implemented. It is developed by a business called OpenCoin, Inc. and is supposed to maintain its value by destroying some small percentage of its units whenever a transaction is made with it, thus making individual units of the currency scarcer over time. It is supposed to eventually be open source and distributed P2P; right now it is none of those things.
 The moral of the story
In a gold rush, the money's in selling shovels. Cash up front, please.
- Bitcoin forums, glorious home of the revolution
- Buttcoin.org, criticism by vicious statists who hate freedom
- Bitcoin currency statistics
- Bitcoin scammer database
- Something Awful's Bitcoin thread
- The Bitcoin Bubble and the Future of Currency, Medium
- Folding@Home (Use your computer for something actually relevant.)
- ↑ Bitcoin virtual currency is on verge of collapse, Los Angeles Times
- ↑ The Rise and Fall of Bitcoin, Wired
- ↑ The Gospel according to St. Satoshi (the original Bitcoin paper)
- ↑ Bitcoin Exchange Mt. Gox Goes Offline Amid Allegations of $350 Million Hack, Wired (Now revised to half a billion USD.)
- ↑ What the Bitcoin theft might look like if it happened in the real world, Maclean's
- ↑ Bitcoin hits $1000
- ↑ You would be picturing the Randgasms right about now.
- ↑ The real litmus test for a currency, of course, is whether you can buy sex with it. Bitcoin passes for phone sex, so let's end the Fed!
- ↑ Technically, the more miners, the more processing power is required. If most miners are suddenly raptured in the apocalypse, however, the difficulty suddenly drops. So "more and more" is not always true - if Bitcoin deflates in the future, enough that miners quit mining, it suddenly becomes easier to mine, which seems like a nice negative feedback loop to prevent extreme collapse. (We stress the "seem" here; the very survival of Bitcoin depends on the increase of its userbase, so wanting deflation in this aspect is awfully contradictory.)
- ↑ Bits and bob (Babbage, The Economist, 2011-06-13); print version
- ↑ Bitcoin bank heist (Babbage, The Economist, 2014-02-26)
- ↑ Beware when terms such as "Goldfinger attack" are devised in a non-joking manner. (Also see References.)
- ↑ There Are Smart Kinds of Money and Dumb Kinds of Money, Brookings Institution
- ↑ In Search of a Stable Electronic Currency, The New York Times
- ↑ Golden Cyberfetters, The New York Times
- ↑ Virtual Currency Schemes: October 2012, ECB
- ↑ Warning to consumers on virtual currencies, EBA
- ↑ "Anything goes. Can roleplay."
- ↑ The Underground Website Where You Can Buy Any Drug Imaginable (Adrian Chen, Gawker, 2011-06-01); Silk Road has since been busted by the FBI and revived, and then busted again. (There are also lots of other marketplaces including Black Market Reloaded and Sheep Marketplace.)
- ↑ Anyone want to spare ten grand?
- ↑ And a pool table!
- ↑ How to accept Bitcoin
- ↑ https://news.ycombinator.com/item?id=3787375
- ↑ Bitcoin's Vast Overvaluation Appears Caused by Price-fixing, Falkvinge
- ↑ Wikipedia's list of distributed computing projects lists Bitcoin at 312,000 teraflops equivalent as of November 2012; second place is Folding@Home at 8,588 teraflops as of February 2012. Bitcoin actually uses integer calculations, so that number's fudged, but it's still the largest by a ridiculous margin. Actual participant numbers are much smaller: a few thousand for Bitcoin, a few hundred thousand for Folding@Home.
- ↑ If you should find someone selling dozens of graphics cards for cheap, you might want to avoid purchasing — used Bitcoin gear probably won't live long.
- ↑ The Bitcoin Mining Accidents blog has disappeared, but you may enjoy the most famous tale from it, of heatstroke-induced brain damage from an overheating Bitcoin rig.
- ↑ Somehow he didn't asphyxiate.
- ↑ Bitcoin’s Environmental Problem
- ↑ Inside the Mega-Hack of Bitcoin: the Full Story (Jason Mick, Daily Tech, 2011-06-19)
- ↑ "No database backups ... Everyone had root."
- ↑ Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt, The Verge
- ↑ Bitcoin-stealing trojan spotted in the wild and Mac Bitcoin-stealing malware spreads via cracked versions of Angry Birds and other apps
- ↑ Bitcoin’s skyrocketing value ushers in era of $1 million hacker heists, Ars Technica
- ↑ In mathematics we trust
- ↑ Why I'm Putting All My Savings Into Bitcoin, Falkvinge
- ↑ Parts 1, 2, 3, and 4
- ↑ Ron Paul Slams Stability of US Dollar and Bitcoin in Pro-Gold Rant, The Raw Story
- ↑ Virtual cash exchange becomes bank, BBC
- ↑ Bitspend ceases trading due to frozen accounts
- ↑ Mt. Gox temporarily suspends USD withdrawals
- ↑ https://twitter.com/drewtoothpaste/status/413391995021709312
- ↑ FAQ – Economy on the "official" Bitcoin Wiki.
- ↑ A look at the Bitcoin network transaction history
- ↑ Refunds!
- ↑ https://github.com/libcoin/libcoin
- ↑ The Shitcoin term has already been in use by Bitcoin detractors to describe Bitcoin, and by cryptocurrency enthusiasts for coins with no potential and those which have already failed. In October 2013 someone did the obvious and introduced a Shitcoin for real.
- ↑ Coinye developers say they're abandoning project as Kanye West escalates legal battle, The Verge
- ↑ The average Bitcoin evangelist.
- ↑ Online Donors Send Jamaican Bobsled Team To Sochi, NPR
- ↑ Official site
- ↑ Introduction to Ripple for Bitcoiners
- ↑ Exposing the Ripple Scam