As globalization expands and technology evolves many conclude that the foreseeable threat to privacy is closer than one would imagine. Even more prevalent- those same people would argue- is for the need for innovation in personal security to be just as fast as the speed in access to information to be both set with the same global speedometer.
I couldn’t agree more.
I recall of a time long, long ago back before the internet ruined… I mean enhanced our lives; when the newly developing concept of e-commerce was in its infancy stage. You remember- if you’re old enough to- how life as we knew it would change EVERYTHING. We thought life as ‘The Jetsons’ have finally become a reality. With just one click of a button whatever you wanted would instantly appear. No more trekking all the way to the corner store for milk. Need a lozenge for your sore throat? Just press “enter.” Believe me I’m not exaggerating I remember having conversations like these on the endless possibilities of the internet.
Just as the ideas behind e-commerce went from the simplicity of ordering daily household staples to the formulation of the online business-to-business (B2B) model, so are the same thoughts with the creation of e-currency.
According to Morgan E. Peck of IEEE Spectrum, the conception of digital cash dates back to 1998 when Wei Dai, a computer science graduate from the University of Washington created the b-money project as a means “to enable online economies [free of taxation or regulation] that are purely voluntary.”
This concept is in connection with Nick Szabo’s development of conceptualizing binary solutions into something of value- which Szabo coined “bit-gold” to mimic the method of mining gold. However, his network design didn’t involve any “real” monetary value rather once a difficult computer problem was solved the person responsible received credit. The new solution would in turn generate a new binary string or “property.” “Each solution would become part of the next challenge, creating a growing chain of new property.”
B-money and bit-gold never gained traction. In 2008 a new concept entered the cyberspace scene called Bitcoin. Following the same gold mining notion, bitcoin was established, but rather than creating a chain of digital property, as furthered explained by Peck, a chain of transactions would be recorded instead and logged in a ledger book to account for all transactions. One bitcoin (BTC) equals 1000 MBTCs and 1 MBTC is the equivalent to 0.001 BTC. Each bitcoin can be divided into 100 million pieces allowing for a steady stream to circulate. This new technology took off in 2010 and according to Coindesk, a bitcoin pricing index, yesterday’s trading for one bitcoin closed at $575.36.
The creator – being just as mysterious as the origins of gold itself remains nameless – set 21 million bitcoins in the virtual ground with 11 million in circulation. When computers solve the complex problems a bitcoin is unearthed and each solution is tied to solving the round of complex problems, making each one more difficult than the next.
Outside of the exclusive “miner” being compensated for their excavating efforts, others that want to partake in the action rely on a bitcoin exchange. For example, if someone wants to buy bitcoins he/she can use their US currency to purchase and store them in a digital wallet or convert those bitcoins into other currencies if one chooses. While exchanges are not the only source for trade, they are the most widely used.
The intrigue of the potential to realize something to materialize from the bitcoin phenomenon is nothing new. As were the gold rush that created masses of prospectors filled with the hopes of digging up value so are the likes of bitcoin buyers seeking the same. And as were the threats of newly claimed greenbacks being snatched up by coach or train robbers as one traversed across the plains, also lurking about are the faceless online predators looking to steal hoarded loot.
“There are botnet operators, hackers, and ponzi-scheme runners floating around our space,” Peter Vessenes, Chairman of the Bitcoin Foundation, stated in an open letter. The foundation began in September 2012 as a way to advocate bitcoin protocol.
However, glitches, in my opinion, are the real enemy not hackers. If there were no flaws in a system, there wouldn’t be any room for someone or some bot to enter.
News from Bitcoincharts.com recently announced, “As of February 2014, Bitcoin transactions are malleable [easy to influence] in multiple ways. This means a (valid) transaction can be modified in-flight, without invalidating it, but without access to the relevant private keys.” In layman’s term, this means trouble.
On February 7, Mt. Gox, the largest bitcoin exchange with over one million in trading volume, froze bitcoin payouts due to a malfunction in its wallet system. Prices of the bitcoin slumped 8 percent to $712.32 from $826.44 with an intraday low of $668.15.
Adding insult to injury to those with bitcoins locked away, the exchange’s website has been shutdown since Tuesday amid allegations of insolvency. Online chatter about possible Mt. Gox mismanaging accounts began to sputter wildly when accusations reported of Mt. Gox “planning to file for bankruptcy after months of technological problems and what appeared to have been a major theft,” according to The New York Times. An unverified document is circulating that as much as 744,408 bitcoins (valued at $365 million) were stolen over an unknown number of years “causing about six percent of the 12.4 bitcoins in existence to disappear.”
In August of 2013, the U.S. Dept. of Homeland Security seized nearly $3 million from a US-based Mt.Gox account operated by Dwolla, a third-party payment platform, accusing the Mt. Gox CEO, Mark Karpeles, of money laundering. Needless to say amidst the cloud of rumors Karpeles has since resigned – not as CEO of Mt. Gox- but from the seat he held at the Bitcoin Foundation; the same foundation that promotes a “fair, stable, safe, and secure” network. By the way, it was reported that the vice president of the foundation, Charlie Shrem, was arrested this January under accusations of “selling over $1 million in bitcoins to Silk Road [a black market website] users who would then use them to buy drugs and other illicit drugs;” Shrem has also resigned from the foundation.
Wednesday, Manhattan Attorney Preet Bharara subpoenaed “Mt. Gox, other bitcoin exchanges, and businesses that deal in bitcoin to seek information on how they handled recent cyber attacks.” Today Mt. Gox ended the rumors of being unable to pay and formally announced that the company is filing for bankruptcy, “admitting that it had lost 850,000 bitcoins,” a value of $450 million.
Unfortunately, Mt. Gox is not the only exchange to experience its share of woes. BitFloor, a New York-based exchange, was hacked into in January 2012 wiping out 24,000 bitcoins, about $250,000, held in reserves.
Systems malfunctioning, nonetheless, are forced to last place on the growing list of problems for bitcoin and at the top are liquidity and volatility.
To ease the strain of liquidity companies such as Casascius and PrintCoins are creating physical versions of the digital currency functioning like pre-paid cash. ATMs as well are popping up in cities such as Boston and Albuquerque. Although more companies are coming around to the idea of accepting bitcoins as payment for service, due to the large price swings – from the time someone orders at a restaurant, for example, to the time the check is presented- the price would have fluctuated by at least 30 percent, as one finance professor proclaimed in December; predicting that the “Bitcoin will trade for under $10 a share by the first half of 2014.”
Not all companies are as enthused about the possibilities. Apple officially removed the last bitcoin app, Blockchain, from its mobile marketplace on February 5. Reports cite legal uncertainty as the reason.
Countries are also taking a stance on virtual cash. China has blocked financial institutions from using bitcoins but exchanges of the crypto-currency are allowed to operate. Other nations such as Germany, Russia, France and Norway – just to name a few – have either completely blocked the currency or placed strict limitations. As for the United States, the decision seems to still be divided as to whether the plug should be pulled or if a “softer” approach should be implemented.
Besides liquidity there is also the factor of too much volatility. Prior to the Mt. Gox shutdown Tuesday closing at $135.00, bitcoin prices on the exchange were already plummeting. Indications of a weakening market began early December – in a span of three months the price has dropped 89 percent. At its peak one bitcoin would have cost you $1,242.09. Meanwhile- also within a three-month period- prices for the second largest exchange (or current largest at this point), BitStamp, reached a high of $1,131.77 down to a low of $569.44 (mid-day today).
November 2013 saw bitcoin balloon 94 percent in one month. Currently the market is down 25 percent YTD with a volume fewer than 200,000 being traded.
As we are witnessing, without any real means of cashing out, your money could end up in a world-wide web of a limbo. Just ask Kolin Burges, a London investor, who has been outside the Tokyo-based headquarters of Mt. Gox protesting in efforts to retrieve the $320,000 USD he has lost.
However when asked on Tuesday by Melissa Lee host of CNBC’s Fast Money, “Have you lost faith in bitcoin at this point?” Burges replied, “I haven’t lost faith in bitcoin itself but I do feel that exchanges needs to be more regulated. I am definitely worried about using other exchanges without being more sure that they are actually operating in a safe manner and that they still have people’s deposits.”
Following the conversation, Lee spoke with Brian Kelly of Brian Kelly Capital –a user of bitcoin himself- where he states it is a “great opportunity to buy.” He also goes on the say, “Keeping your money in an exchange or any type of online wallet where there is no government protection, you can lose your entire investment.” Furthermore, he feels what happened to Mt. Gox shows in fact the strength of the crypto-currency. In comparing this to the fall of Lehman Brothers and the collapse of the US financial system, Mr. Kelly declares “the financial system behind bitcoin still works, the real strength is its decentralized nature, [with] no single point of failure.”
Here’s why I disagree with this comparison. The financial crisis occurred as a result of an industry-wide practice of swapping bad credit deals that collectively faltered the mega corporations when the contracts defaulted. In the case of bitcoin, Mt. Gox stands alone. It simply became too big too fast and couldn’t handle the load. If other bitcoin exchanges don’t learn from this mistake Mt. Gox can be just as easily replaced by another on top of the mounting heap of bitcoin disarray.
Yet, another form entering the arena as “opportunity” comes announced as commodity.
The Winklevoss brothers of Facebook notoriety filed paperwork with the SEC to formulate a bitcoin ETF, exchange-traded fund, calling it “a digital commodity.” This is an unusual move because commodities are typically traded on futures exchanges; which in my view further exacerbates the fact that liquidity is little to nil. Interestingly though, the CEO of the Winklevoss-funded start-up company, BitInstant, is Charlie Shrem. Yup, the same one mentioned previously.
The SEC has yet to make its decision on the matter public.
Added to the chaos cloaked as opportunity are tons of websites promoting, “How you too can make money from bitcoin arbitrage!” Many will come across and think it seems like a good investment but don’t go running towards this so soon. With the gap in the bitcoin spread this would appear as though any would-be bitcoin insider with tech savvy could simply reap huge benefits that are just waiting for someone to grab, but, this practice is ignoring one important economic principal- the law of one price– which states, “The price of a freely traded good should be equal across all open markets.” Under this rule of thumb, trading bitcoin as a commodity would be counterproductive.
In other attempts at placing an investment value on the bitcoin mechanism many have compared it to PayPal, a payment processing technology, which does not coincide with bitcoin being touted as a legal tender nor a commodity.
Is bitcoin a vehicle for exchange or the portal that supports the vehicle going through it?
Which begs another question: If traders of bitcoin can’t figure out how much it’s worth, let alone its use, then how is it worth my investment?
Since inception the bitcoin market has seen tremendous interest in demand but in order for a market to function and run efficiently supply is just as important; ask any economist or financial professional as opposed to a computer geek (no offense if you’re a computer geek).
Lastly my point is, from purely an investment standpoint, bitcoin is too confusing.
With the increasingly added risk of security from either hackers or with uninsured funds being completely wiped out, regulation is desperately needed- the very thing that cypherpunks hate.
Maintaining internet seclusion is a concern for everyone. The freedom to exchange or share information freely and securely is at the forefront of anyone voluntarily giving away what is already valuable: their identity.
Despite the inconsistencies purchases of bitcoin continue to soar, but as for me, until bitcoin can figure out what it wants to be I’ll just keep my real money in my real wallet.