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Five predictions for (Bit)coin
Contributor Tom Geller writes: "I recently wrote an article about Bitcoin and the law for Communications of the Association for Computing Machinery. In researching it I ran into plenty of wishful thinkers, ridiculous greedheads, and out-and-out nutbags promising a rosy future. I also found the expected blowback from vehement naysayers who think the best way to combat crazy is with more crazy. But despite that, I walked away believing that Bitcoin — or a decentralized cryptocurrency like it (let's call it "Coin") — is here to stay. As an interested outsider to the Coin economy, and a long-time technology commentator, here's what I think its future holds." Read on for Tom's predictions.
Coin's primary use will continue to be in international transactions.
While people wonder "When will I be able to pay for groceries and utilities with Bitcoin?", that use might never come. But Coin already shines in international transactions, where it provides a clear advantage over current systems, which are expensive and complicated hassles. That's why PayPal has become the go-to solution: it just works, albeit with typical fees around 3-5%.
Coin reduces that fee to a small fraction of 1% (when sent directly), and is available in places where PayPal fears to tread (Zimbabwe, Pakistan, etc.). Coin transactions occur instantly, with no intermediary, and — for better or worse — without recourse.
That leads to Coin's second primary use: to store liquid value in places where other stores (such as national currency) are unreliable. For all the cries that Bitcoin is "unstable", it seems to have settled quite nicely after its April spike. Certainly it looks appealing to anyone in an unstable country, and it's even tempting for those in places where the currency's been on a long, slow slide, like Argentina.
Coin's big vulnerability is its interface with national currencies ("real money").
None of this matters if you can't get your money out again. And that's where governments are taking a close look at Coin — with good reason. First, Coin exchanges have a terrible track record; second, such points of exchange are bottlenecks through which financial crimes often flow.
In the U.S., the government's Financial Crimes Enforcement Network (FinCEN) issued guidance asserting its right to regulate "Money Services Businesses", and defining exchanges dealing in virtual currencies (including Bitcoin) as such. That's a problem for many existing Coin exchanges, as the costs for complying with regulations are high. But if there's not a stable and reliable way to get national currency in and out of Coin, its value will plummet.
Conversely, Coin's value is likely to shoot up if this interface gets easier. Right now, it's surprisingly hard to buy Bitcoin (et al.) directly with U.S. dollars. Most methods require bank wires, tricky multi-step workarounds, and high fees. (I found Coinbase to be the most accessible, albeit with long delays and a bank verification procedure similar to PayPal's.) If Coin becomes as easy to buy as a gift card and redeemable at every bank, its practical utility will soar for everyday people.
No government will make Coin illegal.
Despite bloviation by a few politicians and baseless statements in the press, Coin is not per se illegal, and there have been no serious attempts to make it so. The FinCEN guidance mentioned earlier explicitly says that ordinary users — those who buy and sell using Coin — are "not subject to FinCEN's... regulations for MSBs". It's possible that other government agencies will continue to claim authority, but there doesn't seem to be much support for it.
A lot of noise has been made about Coin's use in illegal business, for example on Silk Road (where it's the only currency). But law enforcement is realizing that the currency isn't to blame, much as they've started to say that Craigslist isn't responsible for crimes organized through its ads. I predict that that distraction will continue to surface from time to time, but will essentially die soon.
Even if governments attempt to illegalize Coin, there's only so much they could do to criminalize ordinary users. Again, Coin's real vulnerabilities are higher up the chain. However....
If Coin succeeds, governments will get involved — for the better.
"Noooo!!!" scream the cryptoanarchists who are Coin's pioneers. "Keep the government out of this! Coin can't be controlled! Nobody can take away our freedoms!" What they don't realize is that this attitude doesn't reflect the values of Coin's future users. The benefits of "freedom" matter to the innovators; convenience and safety matter to those who follow.
"Government" in this case could also be a government-size corporation, syndicate, or other entity. The important thing is that it's big enough to administer, back, and enforce initiatives to protect the Coin economy. Whatever that "bully entity" is, Coin adopters will welcome it because of two major flaws currently in (Bit)Coin's design.
First, Coin is ridiculously easy to destroy by accident. If you lose the private cryptographic key that identifies your coin, it's gone. Not just stolen, but removed entirely from the economy, so nobody will ever own it again. Consider these stories on Bitcointalk.org, where within a few messages the cumulative total tops 10,000 BTC — currently valued around a million dollars. A central authority could address this in several ways such as tracking, restitution, etc.. People don't care that their cash is anonymous when the rent money disappears.
Second, the entire system is vulnerable to a brute-force attack. Without getting into the specifics, Coin (well, Bitcoin) works because it assumes that at least 50% of the computer power on the network is held by honest players. But a recent 51% attack on Feathercoin (a Coin with much lower capitalization) showed that it's possible for a single party (or syndicate) to trump that.
Let's do the math for Bitcoin, the Coin with by far the highest capitalization, at just north of USD$1 billion (1 x 10^9). To reliably overwhelm the network, you'd need computing power delivering about 100,000 gigahashes per second. Computers optimized for Bitcoin processing are currently available for about $1,000/gigahash, so sufficient computing power can be bought for $100 million. Electricity cost for the deed would be about $200,000/day.
O.K., it's not something a basement hacker could whip up. But there are over 400 people, and thousands of syndicates with a billion dollars in the U.S. alone. Perhaps at least one of them is crazy enough to drop 1% of the wealth to partially control (or completely destroy) a billion-dollar system. (Hell, one of them recently spent 1/10th of that price tag on his wedding.)
Those are only the two biggest technical concerns. Then there's the galaxy of financial services (such as insurance) that's available for fiat money, but which would be hard or impossible to provision for Coin without a central authority. Time could overcome these barriers; a bully entity would overcome them faster, and with greater public buy-in.
Bitcoin is not the end game.
Along those lines, I don't believe that Bitcoin will be the ultimate winner in this game. It's the 1.0, and a brilliant first effort at that. But it's not perfect, and several pretenders to the throne already claim to fix some of its bugs. In fact, shifting conditions may require periodic issuance of new Coin as a matter of course. (As I said before, I believe such issuances will involve a central authority.)
These predictions all assume that Coin will grow, and there are many reasons it might not. However, I'm bullish on it for the long-term. It's already proven its value in use; the public is used to handling Coin-like money (viz. Square Wallet); and its first major hurdles are in the past. Now it's ready to enter a fascinating future.
- - - - -
Tom Geller (tomgeller.com) writes about technology and business. He's best known for Drupal-related work that includes eight video courses for lynda.com, a book for Peachpit Press, and corporate work for Acquia, Commerce Guys, and others. He first became involved in computers as a grade-school student in 1976, playing "Hunt the Wumpus" on a 100-pound monster that spewed tractor-feed paper onto the floor. He lives in Oberlin, Ohio.
While people wonder "When will I be able to pay for groceries and utilities with Bitcoin?", that use might never come. But Coin already shines in international transactions, where it provides a clear advantage over current systems, which are expensive and complicated hassles. That's why PayPal has become the go-to solution: it just works, albeit with typical fees around 3-5%.
Coin reduces that fee to a small fraction of 1% (when sent directly), and is available in places where PayPal fears to tread (Zimbabwe, Pakistan, etc.). Coin transactions occur instantly, with no intermediary, and — for better or worse — without recourse.
That leads to Coin's second primary use: to store liquid value in places where other stores (such as national currency) are unreliable. For all the cries that Bitcoin is "unstable", it seems to have settled quite nicely after its April spike. Certainly it looks appealing to anyone in an unstable country, and it's even tempting for those in places where the currency's been on a long, slow slide, like Argentina.
Coin's big vulnerability is its interface with national currencies ("real money").
None of this matters if you can't get your money out again. And that's where governments are taking a close look at Coin — with good reason. First, Coin exchanges have a terrible track record; second, such points of exchange are bottlenecks through which financial crimes often flow.
In the U.S., the government's Financial Crimes Enforcement Network (FinCEN) issued guidance asserting its right to regulate "Money Services Businesses", and defining exchanges dealing in virtual currencies (including Bitcoin) as such. That's a problem for many existing Coin exchanges, as the costs for complying with regulations are high. But if there's not a stable and reliable way to get national currency in and out of Coin, its value will plummet.
Conversely, Coin's value is likely to shoot up if this interface gets easier. Right now, it's surprisingly hard to buy Bitcoin (et al.) directly with U.S. dollars. Most methods require bank wires, tricky multi-step workarounds, and high fees. (I found Coinbase to be the most accessible, albeit with long delays and a bank verification procedure similar to PayPal's.) If Coin becomes as easy to buy as a gift card and redeemable at every bank, its practical utility will soar for everyday people.
No government will make Coin illegal.
Despite bloviation by a few politicians and baseless statements in the press, Coin is not per se illegal, and there have been no serious attempts to make it so. The FinCEN guidance mentioned earlier explicitly says that ordinary users — those who buy and sell using Coin — are "not subject to FinCEN's... regulations for MSBs". It's possible that other government agencies will continue to claim authority, but there doesn't seem to be much support for it.
A lot of noise has been made about Coin's use in illegal business, for example on Silk Road (where it's the only currency). But law enforcement is realizing that the currency isn't to blame, much as they've started to say that Craigslist isn't responsible for crimes organized through its ads. I predict that that distraction will continue to surface from time to time, but will essentially die soon.
Even if governments attempt to illegalize Coin, there's only so much they could do to criminalize ordinary users. Again, Coin's real vulnerabilities are higher up the chain. However....
If Coin succeeds, governments will get involved — for the better.
"Noooo!!!" scream the cryptoanarchists who are Coin's pioneers. "Keep the government out of this! Coin can't be controlled! Nobody can take away our freedoms!" What they don't realize is that this attitude doesn't reflect the values of Coin's future users. The benefits of "freedom" matter to the innovators; convenience and safety matter to those who follow.
"Government" in this case could also be a government-size corporation, syndicate, or other entity. The important thing is that it's big enough to administer, back, and enforce initiatives to protect the Coin economy. Whatever that "bully entity" is, Coin adopters will welcome it because of two major flaws currently in (Bit)Coin's design.
First, Coin is ridiculously easy to destroy by accident. If you lose the private cryptographic key that identifies your coin, it's gone. Not just stolen, but removed entirely from the economy, so nobody will ever own it again. Consider these stories on Bitcointalk.org, where within a few messages the cumulative total tops 10,000 BTC — currently valued around a million dollars. A central authority could address this in several ways such as tracking, restitution, etc.. People don't care that their cash is anonymous when the rent money disappears.
Second, the entire system is vulnerable to a brute-force attack. Without getting into the specifics, Coin (well, Bitcoin) works because it assumes that at least 50% of the computer power on the network is held by honest players. But a recent 51% attack on Feathercoin (a Coin with much lower capitalization) showed that it's possible for a single party (or syndicate) to trump that.
Let's do the math for Bitcoin, the Coin with by far the highest capitalization, at just north of USD$1 billion (1 x 10^9). To reliably overwhelm the network, you'd need computing power delivering about 100,000 gigahashes per second. Computers optimized for Bitcoin processing are currently available for about $1,000/gigahash, so sufficient computing power can be bought for $100 million. Electricity cost for the deed would be about $200,000/day.
O.K., it's not something a basement hacker could whip up. But there are over 400 people, and thousands of syndicates with a billion dollars in the U.S. alone. Perhaps at least one of them is crazy enough to drop 1% of the wealth to partially control (or completely destroy) a billion-dollar system. (Hell, one of them recently spent 1/10th of that price tag on his wedding.)
Those are only the two biggest technical concerns. Then there's the galaxy of financial services (such as insurance) that's available for fiat money, but which would be hard or impossible to provision for Coin without a central authority. Time could overcome these barriers; a bully entity would overcome them faster, and with greater public buy-in.
Bitcoin is not the end game.
Along those lines, I don't believe that Bitcoin will be the ultimate winner in this game. It's the 1.0, and a brilliant first effort at that. But it's not perfect, and several pretenders to the throne already claim to fix some of its bugs. In fact, shifting conditions may require periodic issuance of new Coin as a matter of course. (As I said before, I believe such issuances will involve a central authority.)
These predictions all assume that Coin will grow, and there are many reasons it might not. However, I'm bullish on it for the long-term. It's already proven its value in use; the public is used to handling Coin-like money (viz. Square Wallet); and its first major hurdles are in the past. Now it's ready to enter a fascinating future.
- - - - -
Tom Geller (tomgeller.com) writes about technology and business. He's best known for Drupal-related work that includes eight video courses for lynda.com, a book for Peachpit Press, and corporate work for Acquia, Commerce Guys, and others. He first became involved in computers as a grade-school student in 1976, playing "Hunt the Wumpus" on a 100-pound monster that spewed tractor-feed paper onto the floor. He lives in Oberlin, Ohio.
Is "Coin" the hipster new way to say Bitcoin?
I think it would be a better investment to send my money to Barrister Mohammed Gandha from Nigeria.
sudo make me a sandwich
the entire reason for bitcoin to be the coin is that it is the coin, exactly because of the 51% attack. the popularity is the safety, in both that it's harder to take over and it's more probable you will not end up with so many of the coins that everyone else on the network just decides "fuck it" and leaves you with worthless bits. if one single entity had all the bitcoins in the world nobody would consider them worth anything.
what puts any credibility into bitcoin clones? wishful early adopters? why would anyone else after them adopt it - just to pay the early greedos?
was feathercoin tradeable to real currency? who in their right mind put any money into it.
world was created 5 seconds before this post as it is.
It's the weekly bitcoin article, are we done with it yet? No? Damn it...
Om, nomnomnom...
We'll have two more bc articles on Slashdot this week.
Sheesh, evil *and* a jerk. -- Jade
Because no one calls it that, and it's actual name is cryptocurrency
His numbers on Bitcoin Hardware are way off with ASIC's. Just visit Butterfly Labs, I have a rig doing 11GH/s, cost about $260 USD and uses ~ 50 watt of electricity. It costs less than $5 a month to run. BFL has some other hardware that has not shipped yet that can do 500 GH/s.
They sell their ASIC chips for $75 each (50 each if you have a coin credits) with min orders of 100. I assume each chip can do 2.5GH.
His numbers seem to stem back about a year or so ago.
People continue to be distracted by the 51% mining control issue when in fact that is not the issue, or it is not the issue they think it is. This sort of attack doesn't only happen at 51% it can happen at any level of computing power, but the probability of success increases and the attackers relative computing power increases.
https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_computing_power
Further once and attacker has such power the ability they have to do damage to the system is limited to specific things. Things that importantly don't include taking all your bitcoin savings.
Bitcoin has a huge smorgasboard of advantages over anything else out there that make it vastly superior: Decentralised and free from control, Always running 24/7, International, No/low fees, New privacy model, Transparent system, Divisible, Secure, Fast transfers, No chargebacks, Environmentally friendly / efficient, Digital It increased in value by 1,750% in 2011, 186% last year, and 1,000% this year, more than any other asset class. Time to load up imo. This is a radically superior money compared to pieces of paper and gold, even if you only count what it can do right now, and this is just the beginning. All kinds of cool stuff is getting built into the protocol. He is right about it being able to destroy them if you handle them yourself though. Many solutions are being worked on for that problem.
" Coin's primary use will continue to be in international transactions. While people wonder "When will I be able to pay for groceries and utilities with Bitcoin?", that use might never come. But Coin already shines in international transactions, where it provides a clear advantage over current systems, which are expensive and complicated hassles. That's why PayPal has become the go-to solution: it just works, albeit with typical fees around 3-5%."
The reason why existing systems cost so much and take non-trivial delays is because these systems can be attacked or exploited in ways that cost people real substantial amounts of money. If you see BitCoin carrying millions of dollars of transactions daily / hourly / in minutes, do you still think it'll be the hot sexy magical fairy of transactions that it is now? No, you'll have to raise fees to buff up the infrastructure against attack, and build in extra fees to compensate against fraud, or no legitimate business will deal with it.
There are a ton of bank to bank transfers that are generally a lot slower, but you're all but guaranteed against fraudulent transfers (and the ability to claw back accidental ones). BitCoin may be a fun geek interest area like HAM radios and DIY projects, but the realities of international commerce are fraught with realities that go far beyond any of the problems solved by this technical solution.
Bye!
It is basically a digital barter currency that people can trade. It has a cryptologic foundation so you can't just claim to own any without actually either being given some or 'mining' it. There's only a finite amount of bitcoins and mining it involves solving a mathematical problem that gets more difficult as each batch/block is solved and issued. Right now the hardware to effectively mine it is very specific and you basically will burn electricity at a cost roughly equivalent to the going rate of bitcoin. The early miners using just a standard PC to mine are theoretically sitting on bitcoins valued in the millions... if they haven't lost them after a crashed drive or such over the years.
I read the article, I think the conclusion is flawed. What the regulators want or can do is pretty much irrelevant.
Bitcoin is already out of the bag and is designed to make an end run around the "normal" ways of secured money transfers. I'm guessing they're not fighting this harder because they're trying to avoid the Streisand effect, as well as legitimize it as a threat to "normal" banking business by saying it is.
A rose by any other name... doesn't give a damn what it's called.
About the Streisand effect, the article mentions the recent jump in value from 20 to 250 to 120, but didn't mention the first jump over a year ago from 7 to 37 to 20 when senator Chuck Schumer pointed out how easy and untraceable it was to buy illegal drugs off silkroad using bitcoin through tor and how it should be stopped. Best bitcoin advertising ever!
The surge from having Cyprus banks skim value out of accounts will probably end up being a rather small bump once people realize that every time the US government creates more debt (and more money) by spending beyond what the collect in taxes, they are effectively pulling value out of the entire dollar-based-economy (everyone's pockets and savings). It will be interesting to see how they try to prevent people from moving their savings from one that perpetually looses value to one that is designed to perpetually grow in value.
Coin exchanges have a terrible track record...
Right. Many of them have gone bust, usually without returning the money. Bitcoin is the con man's dream - untraceable, irrevocable one-way money transfer from sucker to anonymous scammer. No worries about the mark coming back with the cops, or a few friends with baseball bats.
Getting money out of the various exchanges is hard. Even Mt. Gox has severe limits on withdrawal rates. That's suspicious. They should have 100% of the assets entrusted to them by their customers, and should be able to deliver them on demand. Because they resist that, I suspect they don't have all the assets they should. Withdrawal rate limits are commonly associated with Ponzi schemes and "high yield investment programs", where if the customers take out their money, the whole thing collapses.
Actually, the US is only concerned with two things: 1) large sums of income in bitcoin not declared on your income tax, and 2) large sums transferred to or from criminal activities, drugs, terrorism, etc.
Addressing concern numbe 1: (income tax)...
Bitcoin income is taxable just as barter "income" is taxable. To date this has been a small problem, because when you sell your bitcoin to buy a loaf of bread that transaction comes under scrutiny, and at this point in time, that transaction is the only bit the US government really cares to regulate (as mentioned in the story).
However, when you can buy many things with bitcoin, and it becomes very liquid, you can expect more forms of reporting required by the IRS, because bitcoin income, sans reporting, becomes totally off-the-books income. But for that to be a problem, bitcoin has to become just about as liquid as dollars or euros.
If large bitcoin receipts were reported as miscellaneous income, or barter income on your tax forms, valued at the then-current exchange rate, you will have removed any reason for the US government to be concerned about this as far as your personal tax return. It would be just like Tips reported by waitresses. No way to prove it, but mighty suspicious if you say you wait table for a living and don't report tips.
The US government has no interest in making transactions more expensive, or adding any friction to the system.
They do have a vested interest in knowing about income in the form of bitcoin just as they have an interest in knowing about Paypal income.
Sig Battery depleted. Reverting to safe mode.
How is bitcoin mining not a waste of electricity?
Because hauling cash around in armoured vans, and credit card networks, are not exactly free and clean.
Escher was the first MC and Giger invented the HR department.
You missed
For all the cries that Bitcoin is "unstable", it seems to have settled quite nicely after its April spike.
That's the one that got me. Two months where the price only fluctuated by less than 40% does not a pattern of stability make! There is no trend on this chart that leads me to believe it's ever been any more stable than the Iranian Rial.
John
Bitcoin, itself, will remain a niche currency. The author's point about places where banks fear to go is good. Otherwise, the built-in deflationary tendency will make it increasingly irrelevant in the larger economy.
Luke, help me take this mask off
It is not fatal by any definition of fatal I'm aware of. To the degree it has any effect at all it is only in terms of the current and ongoing transactions for the duration of the attack. To fit some definition of fatal the attacker must maintain the attack indefinitely, the attacker must also be able to respond to any effort by 'honest nodes' adding additional computing resources in response (i.e. there is a counter attack), and the existence of the attack is detectable and locatable.
Anecdotally the current hash rate is greater then the combined resources of all known supercomputers in existence today, so there is no plausible argument that we are discussing 'one user'. If anything we are talking about a state actor, with unimaginable resources, and to such a state actor other attacks are far more efficient. For example a public opinion war, such as what you are trying to wage.
In that this is fatal, it is because of usability, and functionality not cryptography. In other words it is exactly not "fatal, at least from a cryptographic standpoint." In this scenario there is no compromise of the cryptography in any way at all. This is precisely the type of misinformation I am trying to prevent in my post.
Also, "lack of security definition" has no meaning in this context so I'm at a loss for what you are trying to say there.