Schlagwort-Archive: Bitcoin

Bitcoin is a Giant Ponzi Scheme – It’s time to get brutally honest about trust-based currencies

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had an interesting conversation with an activist short-seller yesterday. He’s taken down more than a dozen corrupt companies, exposing billions of dollars of fraud, literally saving lives, sending criminals to prison, and personally reaping millions in his efforts to make the world a more ethical place. I asked him if there were any similarities between all of the fraudulent companies, and his answer was immediate:

“Oh, that’s easy. At the end of the day, they were all a variant of a Ponzi scheme.”

Charles Ponzi

The Ponzi scheme was the brainchild of an Italian thief with the grandiosely magnificent name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi.

Ponzi guaranteed his investors he could double their money within 90 days, telling them he was an expert in IRC coupon arbitrage. In reality, Ponzi simply paid his earlier investors with the investments of later investors.

Such schemes obviously cannot last forever — doubling your profit every quarter forever is mathematically absurd. For a while, Ponzi lived like a king, buying himself a mansion, honeymooning in Italy, opening a winery, even buying a macaroni factory on the side. When one reporter grew suspicious of Ponzi’s rapid rise, the con man sued for libel and won $500,000.

In the end, Ponzi’s scheme ran for just over a year before collapsing, shuttering six banks and costing thousands of investors the equivalent of $250 million in today’s money.

Ponzi went bankrupt in the court cases that followed and was sentenced to more than a decade in prison. Upon release, he set up a Florida swampland scheme that also eventually failed. After serving another seven years in prison he was deported back to Italy, before eventually dying in poverty in Brazil.

Charles Ponzi in 1920

How All Ponzi Schemes End

According to my new activist short-seller friend, giant financial frauds typically end in one of three ways:

  1. The company eventually gets shut down and the CEO goes to jail.
  2. The company gets bought out by a bigger company — either a sucker company or a larger fraudulent firm.
  3. The company uses a Black Swan event — like a pandemic or a housing crash — as an excuse to “naturally” go bankrupt, which allows the founder to save face… and then start a new company. After all, who could’ve predicted a recession? Let’s give the guy another chance. (Following 9/11, Bernie Madoff was gleeful that a giant war would give him enough cover to collapse his Ponzi scheme, but when the markets quickly rebounded, he had to keep the charade going.)

Does this sound in any way familiar?

Photo by Moose Photos from Pexels

Right now, Bitcoin is a textbook Ponzi scheme:

  • It has no intrinsic value. You can’t eat it, wear it, or heat your house with it. Unlike gold — which at least feels nice and looks shiny on your spouse’s ring finger — you can’t even see Bitcoin.
  • It is not a productive asset. It’s not a factory that produces an item. It’s not a field that produces cucumbers. It’s not a firm that offers a service. It contributes nothing to society.
  • It has zero underlying value. None. It’s not backed by land or commodities or — as with national currencies like USD or GBP — the threat of violence (in the form of wage garnishment, asset seizure, and imprisonment.)
  • It has minimal utility. Because the price fluctuates so wildly (what healthy currency doubles in a month?), it’s virtually ineffective as a safe representation of value or means of trade.
  • Its value is solely derived from the trust that the price will continue to rise indefinitely. That there will always be new investors to buy out the old ones.

The evidence is crystal clear, and don’t trust any online Bitboy who tells you otherwise:

Bitcoin is a Ponzi scheme… for now.

How Does It End for Bitcoin?

Certainly not like your usual Ponzi scheme.

  1. Bitcoin’s “CEO” Satoshi Nakamoto — whoever he/she/the team might be — might already be dead or imprisoned in Guantanamo. (Heck, Bitcoin might be an invention of the NSA or advanced artificial intelligence for all we know.) Either way, Bitcoin isn’t a company, so it won’t be shut down.
  2. It’s unlikely that anyone will ever “acquire the company” by cornering the market on Bitcoin. (And to do so would make the currency completely worthless because you’d have no one to trade with.)
  3. And since it’s mathematically impossible for Bitcoin to grow forever, that leaves us with option three: A Black Swan event causes its demise as an investment. This is the only likely outcome. Perhaps a wildly superior cryptocurrency makes Bitcoin as irrelevant as the Model T versus a Tesla. Perhaps nations or groups of nations make a concerted effort to destroy Bitcoin, or more likely, Bitcoin owners. Or maybe Bitcoin simply levels out when it reaches max coinage, shedding its identity as an investment and becoming a stable trust-based currency. In doing so, it will drive away all the exuberant speculators who are currently propping up its inflated price. No matter how it happens, at some point, millions of Bitcoin investors are going to lose billions of dollars.

Don’t get me wrong, I am NOT a Bitcoin hater.

Cryptocurrency is a revolutionary technology. Bitcoin is downright brilliant. And there’s the outside chance that Bitcoin might eventually become THE global currency of the Internet. And I really, really hope it does.

But as nations start to roll out their own digital surveillance currencies — China just launched theirs last month — expect governments to do absolutely everything in their power to wage war on trust-based currencies like Bitcoin.

The major problem here is that most unsophisticated investors currently view Bitcoin as an investment. It’s not — it’s a currency, a vehicle of trade, a means to an end. Currency is the oil that keeps the engine running smoothly, but it’s not the engine itself.

The reality is that the majority of current Bitcoin holders see themselves as investors, not users, and have fallen prey to investment bias, sunk cost fallacy, money illusion, escalation of commitment, and a host of other cognitive biases. Not many of us say we’re “invested” in USD or CAD or GBP, because we understand that’s not a national currency’s primary purpose.

As a currency, Bitcoin is an extremely intriguing innovation.
As an investment, it is the biggest Ponzi scheme ever invented.

Bitcoin can only be considered an investment if you treat it like a Ponzi scheme. Which millions of people are currently very happy to do — because the price keeps going up, buoyed by market hysteria akin to the Dutch Tulip Mania.

It’s a story stock, a legal fiction, a collective fantasy.

But at some point, the Ponzi scheme will need to implode in order for Bitcoin to become what it was meant to become: a truly useful and profoundly accountable global currency.

Fraudulent investment, or a useable means of trust-based trade.

We can’t have it both ways.

The Problem is Trust

There are essentially three forms of currency in the world today:

  1. Violence-based currencies (national government currencies)
  2. Trust-based currencies (private and distributed cryptocurrencies)
  3. Asset-based currencies (the future)

Governments like America and China do not have the moral right — nor the permission of the people — to create the violence-backed currencies of today or the digital surveillance currencies of tomorrow.

Private enterprises like Facebook and JP Morgan have not earned the trust to create corporate currencies like Libra.

Both forms of currency must die.

Money was invented to facilitate trade: I have bread, Michelle has cheese, and Andrew has wine. Humans invented money to represent the contrasting value between bread, wine, and cheese, not to say that money is bread, wine, and cheese.

People treat today’s money as though the physical paper (or digital line of code) is the actual thing of value, and not the underlying asset it supposedly represents. No one gets full on francs, drunk on dollars, and fat on colóns.

(In the case of Bitcoin, it’s even worse: almost no one truly trusts it because it isn’t asset-backed, and it has no way to enforce value the way countries can.)

It’s time to eliminate violence and trust from currency.

The reality is that our global family desperately needs an international, accountable, distributed, non-violent, non-surveilled, non-trust-based, enforceable, verifiable-asset-backed currency to serve as a means of facilitating global trade.

Bitcoin isn’t that currency. Not yet, anyway.

In Conclusion

Is Bitcoin’s current price grossly overvalued in relation to its actual present intrinsic worth? 100% absolutely.

Could the price still rise by 5X, 20X, 100X? Absolutely.

Could the price eventually drop to mere pennies on the dollar? Absolutely.

And will a real value-backed currency eventually crush BTC and ETH? Hopefully.

This isn’t an article about whether or not Bitcoin will continue to grow or crash and burn. That will depend on the public’s irrational exuberance versus the iron will of hundreds of governments who want to continue to oppress and control their citizens with a monopolistic currency stranglehold. It will be one of the most violent battles of our time. I hope crypto wins.

All I’m saying is that it’s time for both sides to be honest:

  • The haters need to admit that Bitcoin is a brilliant trust-based currency.
  • The lovers need to admit that Bitcoin is currently being treated as a Ponzi scheme. Because it’s quite simple: The only way to turn a profit on Bitcoin is to sell it to someone else for more than you paid. That’s a Ponzi scheme.
  • Both sides need to take rapid steps toward creating a blockchain-based asset-backed cryptocurrency that actually functions as a currency and not as a speculative investment.

Don’t put your trust in money of any form. Avoid hysteria in all its disguises. Don’t believe the absurd hype on one side, nor the doom-and-gloom on the other. Especially don’t trust people with conflicts of interest. Always ask “who profits?”

Stay safe out there.

source: https://medium.com/personal-finance/bitcoin-is-a-giant-ponzi-scheme-ae4263008220

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Lets Get Rid of the “Nothing to Hide, Nothing to Fear” Mentality

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With Zuckerberg testifying to the US Congress over Facebook’s data privacy and the implementation of GDPR fast approaching, the debate around data ownership has suddenly burst into the public psyche. Collecting user data to serve targeted advertising in a free platform is one thing, harvesting the social graphs of people interacting with apps and using it to sway an election is somewhat worse.

Suffice to say that neither of the above compare to the indiscriminate collection of ordinary civilians’ data on behalf of governments every day.

In 2013, Edward Snowden blew the whistle on the systematic US spy program he helped to architect. Perhaps the largest revelation to come out of the trove of documents he released were the details of PRISM, an NSA program that collects internet communications data from US telecommunications companies like Microsoft, Yahoo, Google, Facebook and Apple. The data collected included audio and video chat logs, photographs, emails, documents and connection logs of anyone using the services of 9 leading US internet companies. PRISM benefited from changes to FISA that allowed warrantless domestic surveillance of any target without the need for probable cause. Bill Binney, former US intelligence official, explains how, for instances where corporate control wasn’t achievable, the NSA enticed third party countries to clandestinely tap internet communication lines on the internet backbone via the RAMPART-A program.What this means is that the NSA was able to assemble near complete dossiers of all web activity carried out by anyone using the internet.

But this is just in the US right?, policies like this wouldn’t be implemented in Europe.

Wrong unfortunately.

GCHQ, the UK’s intelligence agency allegedly collects considerably more metadata than the NSA. Under Tempora, GCHQ can intercept all internet communications from submarine fibre optic cables and store the information for 30 days at the Bude facility in Cornwall. This includes complete web histories, the contents of all emails and facebook entires and given that more than 25% of all internet communications flow through these cables, the implications are astronomical. Elsewhere, JTRIG, a unit of GCHQ have intercepted private facebook pictures, changed the results of online polls and spoofed websites in real time. A lot of these techniques have been made possible by the 2016 Investigatory Powers Act which Snowden describes as the most “extreme surveillance in the history of western democracy”.

But despite all this, the age old reprise; “if you’ve got nothing to hide, you’ve got nothing to fear” often rings out in debates over privacy.

Indeed, the idea is so pervasive that politicians often lean on the phrase to justify ever more draconian methods of surveillance. Yes, they draw upon the selfsame rhetoric of Joseph Goebbels, propaganda minister for the Nazi regime.

In drafting legislation for the the Investigatory Powers Act, May said that such extremes were necessary to ensure “no area of cyberspace becomes a haven for those who seek to harm us, to plot, poison minds and peddle hatred under the radar”.

When levelled against the fear of terrorism and death, its easy to see how people passively accept ever greater levels of surveillance. Indeed, Naomi Klein writes extensively in Shock Doctrine how the fear of external threats can be used as a smokescreen to implement ever more invasive policy. But indiscriminate mass surveillance should never be blindly accepted, privacy should and always will be a social norm, despite what Mark Zuckerberg said in 2010. Although I’m sure he may have a different answer now.

So you just read emails and look at cat memes online, why would you care about privacy?

In the same way we’re able to close our living room curtains and be alone and unmonitored, we should be able to explore our identities online un-impinged. Its a well rehearsed idea that nowadays we’re more honest to our web browsers than we are to each other but what happens when you become cognisant that everything you do online is intercepted and catalogued? As with CCTV, when we know we’re being watched, we alter our behaviour in line with whats expected.

As soon as this happens online, the liberating quality provided by the anonymity of the internet is lost. Your thinking aligns with the status quo and we lose the boundless ability of the internet to search and develop our identities. No progress can be made when everyone thinks the same way. Difference of opinion fuels innovation.

This draws obvious comparisons with Bentham’s Panopticon, a prison blueprint for enforcing control from within. The basic setup is as follows; there is a central guard tower surrounded by cells. In the cells are prisoners. The tower shines bright light so that the watchman can see each inmate silhouetted in their cell but the prisoners cannot see the watchman. The prisoners must assume they could be observed at any point and therefore act accordingly. In literature, the common comparison is Orwell’s 1984 where omnipresent government surveillance enforces control and distorts reality. With revelations about surveillance states, the relevance of these metaphors are plain to see.

In reality, theres actually a lot more at stake here.

With the Panopticon certain individuals are watched, in 1984 everyone is watched. On the modern internet, every person, irrespective of the threat they pose, is not only watched but their information is stored and archived for analysis.

Kafka’s The Trial, in which a bureaucracy uses citizens information to make decisions about them, but denies them the ability to participate in how their information is used, therefore seems a more apt comparison. The issue here is that corporations, more so, states have been allowed to comb our data and make decisions that affect us without our consent.

Maybe, as a member of a western democracy, you don’t think this matters. But what if you’re a member of a minority group in an oppressive regime? What if you’re arrested because a computer algorithm cant separate humour from intent to harm?

On the other hand, maybe you trust the intentions of your government, but how much faith do you have in them to keep your data private? The recent hack of the SEC shows that even government systems aren’t safe from attackers. When a business database is breached, maybe your credit card details become public, when a government database that has aggregated millions of data points on every aspect of your online life is hacked, you’ve lost all control of your ability to selectively reveal yourself to the world. Just as Lyndon Johnson sought to control physical clouds, he who controls the modern cloud, will rule the world.

Perhaps you think that even this doesn’t matter, if it allows the government to protect us from those that intend to cause harm then its worth the loss of privacy. The trouble with indiscriminate surveillance is that with so much data you see everything but paradoxically, still know nothing.

Intelligence is the strategic collection of pertinent facts, bulk data collection cannot therefore be intelligent. As Bill Binney puts it “bulk data kills people” because technicians are so overwhelmed that they cant isolate whats useful. Data collection as it is can only focus on retribution rather than reduction.

Granted, GDPR is a big step forward for individual consent but will it stop corporations handing over your data to the government? Depending on how cynical you are, you might think that GDPR is just a tool to clean up and create more reliable deterministic data anyway. The nothing to hide, nothing to fear mentality renders us passive supplicants in the removal of our civil liberties. We should be thinking about how we relate to one another and to our Governments and how much power we want to have in that relationship.

To paraphrase Edward Snowden, saying you don’t care about privacy because you’ve got nothing to hide is analogous to saying you don’t care about freedom of speech because you have nothing to say.

http://behindthebrowser.space/index.php/2018/04/22/nothing-to-fear-nothing-to-hide/

Bitcoin is soaring due to China and Brexit

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Bitcoin is on a tear.

The price of bitcoin has jumped 42 percent since the beginning of June. It hasn’t been this high since early 2014. It’s moved from a total market capitalization of US$8.3 billion, to nearly US$12 billion. It’s unheard of for a currency – digital or otherwise – to skyrocket this quickly.

Bitcoin Price Indextruewealthpublishing.asia

China has played a big part in this rally. As The Wall Street Journalrecently reported, two Chinese exchanges, Huobi and OKCoin, now collectively account for 92 percent of global trading in bitcoin.

In February, we explained that bitcoin is “cryptocurreny,” or a form of digital money. It’s created and stored electronically through a blockchain database.

Like dollars or yen, you can use bitcoin to buy goods and services. But, unlike paper currencies, which governments can create and print at will, no single entity controls the bitcoin network. Its mathematical rules limit the maximum number of bitcoin units to 21 million.

A network of “miners” digitally secures bitcoin transactions. When a miner completes the complex process of mining a block, he’s paid a fee – in bitcoin.

Every time 210,000 bitcoin blocks are mined, the value of mining new bitcoins is cut in half. There’s only been one “halving” since bitcoin was created eight years ago. It happened in November 2012.

Miners expect the next halving to happen in July. This is one explanation for the recent price surge. Some investors see the imminent halving – which will cut the mining fee from 25 to 12.5 bitcoins – as a reduction in supply. That’s why they’re bullish on bitcoin.

Another explanation is that blockchain, the technology at the heart of bitcoin, is gaining traction in a growing number of commercial applications, stoking investor interest.

Also, concerns over “Brexit” are adding to bitcoin demand. Some investors are worried about the financial fallout if the U.K. leaves the European Union. So they’re turning to bitcoin as a safe haven asset – treating it like a digital alternative to gold.

Yuan, china currencyReuters/StringerDamaged 100 yuan banknotes are seen on a table at a branch of China Bank in Foshan, Guangdong province, June 5, 2013. A woman brought about 400,000 yuan ($65,200), which she had kept at home, to the bank for replacement after most of the notes were bitten by white ants. Her notes were exchanged for new ones but for 60,000 yuan ($9,780) which the bank assessed and declared to be unchangeable. Picture taken June 5, 2013.

That said, the yuan is a much bigger player in this bitcoin rally.
China’s currency has been weak in recent months. It’s down 6.1 percent against the dollar since August.

Investors in China are selling yuan-denominated assets in favour of other currencies, particularly the U.S. dollar. In 2015, Chinese citizens and corporations moved an estimated US$1 trillion in capital out of China. The capital flight has slowed this year. But renewed weakness in the yuan may reaccelerate it.

China’s government wants this to stop. This is part of the reason why it prohibits individual citizens from moving more than US$50,000 per year out of the country. Even so, Chinese citizens have a variety of ways to bypass these capital controls – including bitcoin.

Bitcoin is gaining popularity as a method to quietly and anonymously move money out of China. Basically, a Chinese investor can deposit yuan in a bitcoin account and exchange the bitcoin overseas for some other currency. Fees range from one to two percent.

The price of bitcoin is volatile. So there’s a risk it might change while the transaction is being processed, causing the investor to lose money. Otherwise, it’s a relatively simple way to skirt the rules.

Still, the main reason for bitcoin’s price surge is even simpler: Good old-fashioned speculation.

In recent months, speculation driven by Chinese money has resulted in short-lived bubbles in assets as diverse as iron ore, steel rebar, cotton, and eggs – as well as in bitcoin.

All of these Chinese-driven speculations have the same basic lifeline. Whatever the explanation – lack of alternative investments, a deep-rooted gambling culture, investing naiveté, easy-money loans – each of these market booms played out the same way. Prices shot up in a speculative frenzy, and crashed once the mania faded.

Bitcoin shows all the signs of another Chinese-driven financial bubble.
That’s not to say the price of bitcoin won’t go higher. Bitcoin’s 2013 price surge, as shown above, is the stuff of legend. At the start of 2013, you could purchase a single bitcoin for around US$12. On November 29, you could sell that same single bitcoin for US$1,100.

That’s more than a 9,000 percent gain.

If the yuan starts to freefall, it’s certainly plausible that bitcoin could blast as high as it did in 2013, which would be about a 50 percent gain from current levels.

Keep in mind that China’s economy dwarfs the bitcoin market. Chinese financial deposits total over US$22 trillion. The country experienced capital outflows of US$45 billion in April alone, according to RBS (Royal Bank of Scotland). And by recent standards that’s considered moderate.

If the yuan starts a correction in earnest, and just a portion of the fleeing capital flows into bitcoin, it’s anyone’s guess how high the price of bitcoin might fly.

Nevertheless, buyer beware. When this bubble pops (as they all do), many speculators will wish they had never heard of bitcoin.

This is why China’s investors are crazy about bitcoin

BitCoins 3 Fatal Design Flaws

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For those that don’t know, BitCoin is a digital currency (known as a cryptocurrency) that is not issued by governments or banks. Instead the currency uses some complicated programming to limit the amount of money that can be created. Only 21 million BitCoins will ever be created, and there is no  human decision maker who can influence that. For advocates of the currency, this is a major advantage, as it prevents the abuse of the power to create money. It is easy to see why this would be so appealing – after all, we have recently seen the damage that can happen when commercial banks have the power to create hundreds of billions of pounds in just a few years.

But there are serious problems with BitCoin. This was highlighted most recently when one of the largest exchanges MtGox, revealed that it had lost around $350 million of customer’s money after hacking incident. “Lost” in this sense doesn’t mean they made bad investments that went bad; the BitCoins were literally stolen, now exist on somebody else’s computer, and the exchange has no idea where they are.

I want to look at BitCoin’s design flaws here, so if you want to know more about the details of the currency itself, read How to Explain BitCoin to your Grandmother by Brett Scott or this Chicago Federal Reserve paper for a central bank perspective.

BitCoin is a prototype

The key point to note is that BitCoin is a prototype for what is now known as crypto currency. It was the first of its kind, an experiment designed by someone (or a some group) going by the name Satoshi Nakamoto. The original paper that outlines the proposal for a currency is well written but has the tone of a working paper – an initial proposal, not fully thought out, rather than a fully worked out master plan.

What usually happens with a new idea or product is that you try it out, find that it’s inherently flawed, and then you alter the design to make it work better. Orville and Wilbur Wright’s original plane flew just a few metres. The first bicycle, designed in 1817, involved sitting on a saddle whilst pushing the bike along by running with your feet on the floor:

First Bicycle

The fanaticism of some BitCoin enthusiasts, along with the claims that BitCoin – specifically – will become the currency of the future, is a bit like someone in 1902 insisting that in the future we’ll all be flying across the Atlantic in individual gliders that look like this:

Wright Brothers Initial Plane

Of course we won’t. The first prototype of something should be a test case, which reveals the design flaws then gets discarded in favour of something better.

I believe there are two  design flaws that are fatal for BitCoin.

Design Flaw 1. The rate of money creation

BitCoin is designed so that new BitCoins are created (‘mined’) at a predetermined and gradually decelerating speed. Around half the BitCoins that were ever designed have been created already. The money supply will increase by another 66% between now and 2025, but by then the rate of creation of new BitCoins will have slowed to a negligible amount, essentially making it a fixed money supply by 2025.

bitcoin-monetary-base

This limited supply was supposed to be a clever design feature, but actually it’s turned BitCoin into a speculative asset. The problem with this is that the amount of the currency doesn’t increase in line with the number of people using it. Economists from the Austrian school would argue that this is fine: just allow prices to fall relative to the currency. Indeed, that’s what has happened with BitCoin – each BitCoin now buys you more real “stuff” in the economy than it did in the past.

The problem comes when the limited supply affects the way people use the currency. BitCoin users who have seen the currency go from 1 BitCoin = $5 (in 2011) to 1 BitCoin = $445 (as it currently is) don’t think “Great, the price of a Coke is falling in terms of BitCoin”. Instead they think, “If I sit on the BitCoins that I own, in 1 year they might be worth 10 times more. So I won’t spend them.”

This means that BitCoin users don’t want to pay using BitCoin. In other words, they want to use BitCoin as a speculative investment, rather than as a means of payment. 

The only way to avoid this is to ensure that the supply of the currency increases in line with how much it is being used, so that the exchange of BitCoin to other currencies or of BitCoin to real goods and services is broadly stable. Without this design feature, a currency that consistently and rapidly appreciates relative to other currencies will be held as an asset rather than being used to make payments.

This is a design flaw specific to BitCoin. Other cryptocurrencies have different ways of regulating the creation of the coins.

A Note on Volatility

BitCoin is also highly volatile, having jumped from $13.36 at the beginning of 2013 to $1,124.76 in November 2013 – an 8,313% increase – and then back down to $445 today. I don’t list this as one of the currency’s design flaws as it’s largely to do with the fact that BitCoin is new, uncertain, and that the authorities aren’t quite sure how to deal with it, so volatility is a result more of the speculation about whether BitCoin will be banned or accepted, rather than the fundamental issue of the rate of money creation.

Design Flaw 2: BitCoin rewards the adopters and speculators

As with the current monetary system, BitCoin rewards the creators of the currency (the ‘miners’ who use their computers to do complex calculations to create the currency). The early adopters have become very wealthy, along with speculators who sit on their coins rather than spending them. Again, this means that those who benefit from the currency are not those who use it to trade in the real economy i.e. people who actually produce real value and make BitCoin a viable and usable currency. Instead, the benefit goes to those who sit on the currency (which prevents it functioning as a currency and makes it a speculative asset).

I would prefer to see a cryptocurrency that rewards those who use the currency as a means of payment, rather than as a speculative asset. So the more you use the currency to buy goods and services from the real economy, the more you would get rewarded with a portion of any newly created currency, whereas those who sit on their coins and use them as a speculative asset would get no share of the newly created money.

My knowledge of computer science and maths aren’t sufficient to say how this could be programmed, but it doesn’t appear to be too complicated. (There would need to be some kind of check to ensure that you don’t end up with people gaming the system, for example two users trading the currency between themselves at high speed in order to ‘earn’ more of the newly created coins.)

Design Flaw 3: BitCoin is LESS secure that national currencies

Because of the design of BitCoin, each coin should be seen as a physical unit that exists on a specific computer hard drive. In the same way that a house burglar could steal gold coins (which I’m sure you have lying around the house), a computer hacker can steal your BitCoins.

One user left his coins on a hard-drive which went to landfill, and then saw the value of the coins appreciate to hundreds of thousands of pounds. The exchange MtGox has alleged ‘lost’ 650,000 BitCoins as a result of hacking.

Anyone holding a significant amount of BitCoins is advised to transfer them to “cold storage” –  a hard drive or USB disk that is disconnected from any computer connected to the internet, and hidden somewhere secure (eg. a physical safe).

For all the arguments that BitCoin is ‘safer’ because it has no central authority, it certainly isn’t safer in practical terms.

The Way Forward

Cryptocurrencies are fascinating. We’ve made a very clear argument that the current monetary system, in which most money is created by banks when they make loans, has been a disaster. But at the same time, when states have used their power to create money, such as through QE, they’ve used it to inflate financial markets (enriching the already wealthy), rather than benefitting the real economy and ordinary people.

We’re obviously campaigning for national currencies to be created and used in the public interest, but it’s still possible that national currencies might be bypassed completely if a currency comes along that is stable, works in the interest of ordinary people, and prevents abuse of the power to create money.

Since BitCoin was established, literally hundreds of other cryptocurrencies have been designed and released. One of them already out there might have the right design features to make a stable currency that can be a real benefit to society and the economy. Cryptocurrencies have only been around for half a decade; there will be a lot of innovation over the next 5 years and it’s possible that we might see something genuinely socially useful come out of it.

But with regards to BitCoin, it’s time to let it die to make way for something better.

 

PS. This reddit thread by people who lost money when the MtGox exchange shut down shows how BitCoin has become a speculative asset bubble similar to the dot com bubble or any stock market bubble. There are stories of people taking their  kid’s education fund, or partner’s life savings, and investing them entirely in BitCoin. One guy even claims his friend committed suicide after investing – and losing – over $900,000 in BitCoin.

But this is not the fault of BitCoin, or a disadvantage of BitCoin. It’s more a fault of a lack of general financial literacy, in particular an ignorance of the basic point that you should never invest all of your wealth in one single asset, whether it’s BitCoin, or RBS shares (or property for that matter). Many of these people had no concept of risk management. I’m not sure we can blame them – an understanding of money and financial literacy is not something that most people acquired at school.

There’s also the desire to “get rich quick” or even just boost your income beyond what you can earn from working. Again, I’m not sure how much we can blame people for that. When the current monetary system is making it harder and harder for people to save anything after paying the mortgage and the costs of living, it’s natural to look for other ways of making money. If the guy mentioned above genuinely believed that investing in BitCoin would mean that his kids could go to university whilst avoiding being saddled with the debt, then it’s natural for him to take that option. It was the lack of understanding of money, finance or risk management that led to him making such a bad decision.

Source: http://www.positivemoney.org/2014/04/bitcoins-fatal-design-flaws/