Bitcoin: More ideology than trustworthy currency

Bitcoin: More ideology than trustworthy currency

Summary: Bitcoin's appeal is its promise to fulfil certain libertarian geek fantasies, but right now, there's little to distinguish this digital currency from an elaborate scam.

TOPICS: E-Commerce

The four-year-old digital currency Bitcoin is riding an all-time high right now. As I write this, a single Bitcoin buys more than US$125, valuing the total Bitcoin circulation at more than $1 billion. But I won't be buying Bitcoin any time soon, because it seems little more than hype built on a fantasy.

I can understand Bitcoin's appeal. It's supposedly untraceable, allowing you to buy illegal drugs online — or trade in more legitimate products and services without having to pay those pesky taxes. You can make your own Bitcoins out of processor cycles, like some fiscal perpetual motion machine.

And, perhaps more importantly, Bitcoin is an embodiment of disruption — in the strange, mutated startup-speak understanding of that word, where disruption is apparently a Good Thing in and of itself.

"Soon, whether via Bitcoin or whatever comes next, it will be possible to strip banking away from bankers and money away from governments," wrote Hugo Rifkind in conservative British publication The Spectator. "There's a whole emerging political philosophy here, similar to the crypto-anarchism of the likes of Julian Assange."

Rickard Falkvinge, founder of the first Pirate Party, went even further, claiming that Bitcoin will change society more than the internet itself. "The net, after all, only allowed people to talk and shop more efficiently. By comparison, Bitcoin eradicates the government's ability to operate," he wrote.

Now, the urge to eradicate governments run deep through internet culture, or at least certain parts of it. I've written previously how Silicon Valley culture was, in part, a collision of the freedom-loving hippie counter-culture and the freedom-loving geek followers of Ayn Rand — neither of whom were fans of The Man. Once more, I recommend Adam Curtis' three-part documentary, All Watched Over By Machines Of Loving Grace. And let's not forget John Perry Barlow's overblown A Declaration of the Independence of Cyberspace of 1996. Read and laugh.

But I don't want my money to make some crypto-anarchist political statement. I just want to use it — to get paid for the work I do, to pay for the stuff I buy — and then get on with my life. I want a currency I can trust — and Bitcoin fails to deliver.

It's not that Bitcoin is a "made-up" currency, because every fiat currency is essentially made up. But when I pull some banknotes from my pocket, it's pretty clear who I need to trust: the nation-state whose central banker's signature sits in the corner. I can look at the world around me and decide that, yes, Australia, or the United States, or Singapore looks like a thing that exists and will last long enough to back up the promise implicit in those coloured rectangles. With Bitcoin, I have to trust some damnably obscure mathematics, and hope that the crypto never gets cracked. Yeah, right.

When something goes wrong with a transaction in boring old traceable dollars, euros or yen, it's their very traceability that helps me get my money back. As F-Secure's Mikko Hypponen tweeted just hours ago, "When you have highly valuable, completely virtual, and almost entirely untraceable currency, there will naturally be a lot of theft". I'm not sure that a decentralised, anonymous network of untraceable anti-authoritarian players will be interested in helping me out.

Even Falkvinge admits that Bitcoin is "still far from ready for prime time", hardly a ringing endorsement. Witness its wild swings in value this week as Mt Gox, the biggest Bitcoin exchange, suffered a denial of service attack. Why did that happen, exactly, and who profited from those sudden surges? The Economist reckons we're looking at a bubble, noting that Bitcoin's price seems to track the number of people searching for it on Google.

And then there's the fascinating little fact that there'll be fewer new Bitcoins available over time. Bitcoin enthusiasts reassure us that early adopters aren't unfairly rewarded by this scheme, and that it's not a Ponzi scheme. But then, they would say that.

"In more pragmatic terms, 'fairness' is an arbitrary concept that is improbable to be agreed upon by a large population. Establishing 'fairness' is no goal of Bitcoin, as this would be impossible. By starting to mine or acquire Bitcoins today, you too can become an early adopter," they write. Gosh.

There may well be an anonymous digital currency in our future, but I'm leaving Bitcoin well alone.

Topic: E-Commerce


Stilgherrian is a freelance journalist, commentator and podcaster interested in big-picture internet issues, especially security, cybercrime and hoovering up bulldust.

He studied computing science and linguistics before a wide-ranging media career and a stint at running an IT business. He can write iptables firewall rules, set a rabbit trap, clear a jam in an IBM model 026 card punch and mix a mean whiskey sour.

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  • WOW

    Eradicating the government's ability to operate sounds like a dandy idea... if you spend so much time playing World of Warcraft that you've come to believe that that's the real world and the world of physical objects you can touch and smell is the illusion.
    • The real world where objects like government are things that you can touch.


      This is kind of a Personal question... Do you "touch" government?

      Maybe more interesting, does government "touch" you? Where? Did you like it?

      I am not going to argue that we cannot smell government. It smells to high heaven!
  • I am bookmarking this... I can come back to this article in two years and ask you how much money you **lost** by attacking Bitcoin with arguments from ignorance instead of learning how it works and getting on board.

    In the meantime, I hope you enjoy being robbed of 40% of what you make every year, by the organized criminals who do business under the name "government", and seeing half of that money be used to bomb brown children you've never met. Because, "what about the roads" and "godvernment protects me". Haha.
    Manuel Amador
  • Argument so weak I'm filing you under "Lost Causes"

    You are staggeringly wide of the mark in your interpretation/analysis of the bitcoin economy.

    The weaknesses you attribute to bitcoin are all applicable, in equal measure, to the system you laud for its trustworthiness - CASH.
    Bitcoin is analogous to CASH.

    CASH is easily stolen.
    CASH requires secure storage facilities to guard against theft.
    CASH is almost impossible to recover once stolen.
    CASH transactions are virtually untraceable.
    CASH is often used to finance nefarious activities, such as the drug trade.

    So by your rationale we should get everyone in the world to burn their bills, melt down their coins and we can all go back to a barter economy.

    Oh and by the way, just ask a Zimbabwean, a Cypriot or a Greek about those "promises implicit in the coloured rectangles".
    • So far my thoughts are being reinforced

      Two out of three comments here, and nearly all that I've received elsewhere, are actually reinforcing my views: that Bitcoin is mostly about screechy extremist ideology (governments are organised criminals et? because, yeah, "What have the Romans every done for us?"), and that the main way of dealing with criticism is to call the critic ignorant.

      If Bitcoin really is, or can become, a useful workaday currency (not just cash, but a monetary system with all the infrastructure around it), then I'd have thought that more joined-up arguments would emerge straight away.

      Is it possible to do better than this?

      And is it possible to do so without confusing a working monetary system with currency speculation?
      • Do more research into fractional reserve banking

        If you prefer/trust a fiat currency whose purchasing power is consistently eroded (stolen) away by means of inflation, and a fractional reserve banking system which is designed to ensure everyone remains in perpetual debt then you really need to wake up and smell the coffee. Your views are exactly the type of views governments and central banks want people to hold. I'd prefer to think for myself rather than walk over the cliff with the other lemmings.

        If you were a Cypriot with your money being held in a Cypriot bank, would you be trusting the security of your cash/banks/govt. right now? What about if you were an Argentinian? How would you be securing your money to ensure the govt doesn't steal it by means of capital controls? This is not fairy tale stuff. It is happening right now, in the real world. If capital controls can happen in Cyprus and Argentina it can happen in America, England and Australia too.

        The fact is, and it has happened countless times throughout history, governments can and will steal citizens assets by means of capital controls. This usually happens when they get into too much debt. How much debt are world governments in right now? How are governments going to repay this debt? Answer: they won't. They will just inflate and inflate and inflate until your cash savings are worth nothing. Zimbabwe is a perfect example of this. America are in the process of doing exactly the same thing with the US dollar only they are calling it quantative easing. A fancy name for eroding the value of the dollar.

        Once people start to lose faith in fiat currency and banking system (like they are doing now), the people will move to another form of currency, even if that means reverting back to gold and silver. Bitcoin, as a currency, is probably the most secure choice there is right now, whether you choose to agree or not.

        The fact is, the central bankers, whom you regard so highly, are nothing more than white collar terrorists stealing your money. The whole banking system is designed to erode the value of cash and transfer it to the central bankers/government.

        The benefits of Bitcoin far outweigh fiat. The fact is the genie is out of the bottle and Bitcoin will make governments very scared. I expect to see a lot more articles such as yours denigrating Bitcoin. It is all part of the propaganda machine.
        • Fractional Reserve Banking is not exactly where the fraud comes...

          Being in agreement with your main line of argument I would like to correct you in something you should be aware of.

          Fractional Reserve banking PER-SE is NOT the problem, the problem is what in Spanish is called "descalce de plazos", (I don't know the English equivalent for this sorry) which basically means that banks ask for sort term money to lend it long term. THAT is when the fraud appears, the credit expands artificially and the bank no longer can seriously think of keeping its payment promises... if it were not for the constant bail out of the central banks, printing money for them even during the "happy times" of no "credit crunch".

          You could run a legitimate bank with fractional reserve banking without any privilege form the government nor help from the (government controlled) central banks.


          You DON'T need to keep 100% cash (or gold) to keep your promises of payment, you just have to back up all your debts and promises with something that guarantees you can honor them.

          Lets see and example:
          Bank A cares about keeping its promises, it has 10M€ in current accounts that has to honor (that is pay in full before 2-3 days) how can it keep it promises?

          It could, for instance keep 3M€ in cash, for everyday payments. It could also keep 9M€ in very sort term and very trust worthy debt, such as commercial letters of exchange backed by actual goods that are being sold in 3 months maximum.

          Bank B is a normal bank, such as the ones we know and use. A bank that relies on Central Banks to help the commit fraud. As such its 10M€ current account deposits are backed by just 1M€ cash (on a lucky day) and 10M€ in mortgages, with a mean time to end of 20years.

          In a bank run, Bank A would give the 3M€ right away the same day, sell immediately the 9M€ in letters of exchange with a discoing converting them hopefully in 7M€ cash and be still in business without being accused of breaking any contract, committing any fraud or resorting to external political help from a central bank.

          Bank B on a partial bank run would ask help from the central bank and it may survive. But if the bank run is too deep, it will discover that the money wasn't really there, cause selling 20years mortgages is not like selling commercials exchange letters payable in a few months, the discounts will be huge, even if the real state prices are not falling, which will probably be at the same time (that is what triggers the bank run most of the time)
      • Why must Banks be involved in every transaction?

        I don't care about ideologies. What I care about is 3 to 6 percent charges on transactions that are little more than database transactions (i.e. pretty much total Bank/Credit Card profit).

        Why wouldn't we want a technology that allows transactions between parties that doesn't incur a banking fee, charge, delay, etc.

        I told my Dentist about Bitcoin, and then he proceeded to fill a cavity. He talked the entire time about the various fees and charges he pays just to do business, and a guy that dropped 10K in cash for some dental work. He was so excited about a tech that might give him some control of his business that I thought he was going to take off the rest of the day to do research.

        I get that reaction frequently when I tell business owners about the tech. They don't want drugs. They just want to make a fair an profitable business work outside dramatic and sometimes crushing bank fees.
      • OK I'll try again..

        "If Bitcoin really is, or can become, a useful workaday currency (not just cash, but a monetary system with all the infrastructure around it)" - I'm not saying it undoubtedly IS a useful workable currency yet... Bitcoin is young. Less than five years old. The world is only just beginning to wake up to it. Give it a chance. It most definitely CAN BECOME a useful workaday currency but it faces many hurdles to do so, chiefly (in my opinion) the general population's ignorance of computers/internet security. With so many PCs and accounts compromised around the world it's like the equivalent of the majority of people taking their cash out of the bank and putting it on their driveways in a box labelled "Contains Cash, please don't steal me".

        And hey, not all us bitcoiners are anarchists. I'm not anarchist. I respect the rule of law and the need for order. But I do not think that governments and laws should be exempt from criticism.

        I'm no conspiracy theorist. I understand that we need a monetary system and that, so far, the third-party-regulated physical token system has been a robust and reasonably well-implemented solution. However, it is not perfect. In fact, many areas of the monetary system are grossly inefficient. Bitcoin addresses these issues. Bitcoin is progress. Bitcoin removes the difficulties associated with cross-border transactions, time taken for transactions, costs of making transactions, security of transactions.

        It is an elegant solution. An EFFICIENT solution.

        No, it's not perfect, but whoever said it was?
  • To be honest, I'm surprised BitCoin lasted this long.

    I've always seen bitcoin as little more than a meme really. I'm surprised it lasted this long. 12 months ago it was at a record low, now it's at a record high. It won't really take off until some mainstream money trading company actually starts recognising it. Until then, it'll just be some underground behind the scenes thing. It will most likely fade further into cultish obscurity no matter how much real world money it's "worth". It doesn't matter how much real world money it's "worth" if that value isn't actively able to be used in the real world.
  • Your old and probably a Keynesian

    Old people often can't see the benefits of new technologies until there using it without even realising it. The current fiat money is a waste of time to save your money in long term thanks to inflation. If the US hadn't brought the world off the gold standard (as previously it was agreed all major currencies would float against the dollar which was pegged to the dollar after the British Empire collapsed due to the debt owed for WWI and WWII) in 1972 to fund the Vietnam War. Then we wouldn't be in this world wide financial crises for the last five years. The world isn't coming out of this financial crises unchanged and no amount of QE is going to fix things. That's the thing with bitcoin it's like gold and QE can't happen.
    • Typo

      * (as previously it was agreed all major currencies would float against the dollar which was pegged to *GOLD after the British Empire collapsed due to the debt owed for WWI and WWII)
    • Credibility problem

      First you use "Keynesian" as if it were an insult (when it's just a label for an economic school of thought you happen to disagree with), and then you go on to insist that the current financial crisis is caused by inflation when in reality it is marked by a distinct LACK of inflation (despite constant warnings for these past five years, by people with views rather like yours, that QE or any other central bank intervention or fiscal stimulus would cause imminent Zimbabwe-style hyperinflation). Oh, and (unrelated to the dollar/gold typo you've already corrected) you wrongly characterise the Bretton Woods era as having floating exchange rates.

      So how are we supposed to take your support for Bitcoin seriously?
      • You say deflation, I say inflation

        Inflation of the money supply doesn't necessarily result in inflation of prices. Deflation occurs when the assets bubbles blown up by cheap printed money collapse as they were bad allocations of capital that didn't really exist anyway...

        Yes, the hyperinflation that many fear hasn't hit the West.... yet. But 100 years of the Fed hasn't brought about fair and distributed prosperity for all either, despite its promises to do so.
  • I don't think you know what a Ponzi scheme is

    Nobody is selling anything to give to original investors and so on and so forth. Bitcoin is by definition a finite resource used as a means of exchange.
    Sean MN Lawrence
  • The Bitcoin system sounds familiar.

    I suggest that the unit of currency used in Bitcoin should be called the "Tulip". It will allow historians to make comparisons between similar schemes which arose at different times.
    Peter Bowditch
    • Familiarity breeds complacency

      The error of the Dutch was in using a perishable, indivisible, infinitely-replicable asset as a store of wealth. We have corrected their errors, and we have gone further - much, much further.
      Boggle Smith
  • The author obviously doesn't even understand old money

    We have well seen the problem with fiat money losing its value over time. The dollar lost over 95% of it's value in the past 50 years. Once you put your money in a bank what you have is an IOU and not money anymore. And Cyprus just showed us how unsafe that is.

    And what's unfair about bitcoin? That old people like the author who are unable to think and appreciate innovation will buy into it only when it's too late? Early adopters of a crypto currency take a risk and should be rewarded for it. Like the current system is fair, where all the new money goes to a bunch of politically well connected bankers.
    martin sydney
  • Maybe

    Maybe you are right, you could also be wrong. I heard similar kinds of arguments back in the day when the internet was young and free and was just used by nerds to chat on IRC. No one could see how the internet would be of any use to them. I remember saying it will be one of the greatest game changes in the world. Look where we are today.
    In much the same way I think crypto currencies will be a game changer. At the moment it's pure speculation, it's not like I can go down to the local pub and use bitcoins to buy beer. What I could do though, if I didn't like my tax rate or the fact that countries (Cyprus) can arbitrarily steal money off me, is put it into bitcoins and retrieve it later for hard cash or goods.
    It's probably a silly argument to be having at the moment; anyone who has tried to buy bitcoins can tell you, it's a pain in the rear. mtgox has a huge waiting list now and other places require cash deposits.
    At any rate, if it fails it will pave the way for better digital currencies.
  • Who do you trust?

    "With Bitcoin, I have to trust some damnably obscure mathematics, and hope that the crypto never gets cracked. Yeah, right."

    Well, every Defense Department in the world relies on those "damnably obscure mathematics" to keep you safe. Math is the stuff that builds the technology that underlies your job. Your car. The energy you use.

    And yes, Bitcoin.

    On the other hand, the Banks and Wall Street brought you the 2008 market crash. And that crash isn't even over yet! They brought you the bank bail outs, and an income gap that has grown steadily over the last 40 years.

    Seriously, how can you even make an argument based on Trust against Math!?!