- About Bitcoin
- What is Bitcoin? (Video)
- Bitcoin: A Peer-to-Peer Electronic Cash System
- Differences from other digital currencies
- Transaction fees
- A Guide to Bitcoin Mining: Why Someone Bought a $1,500 Bitcoin Miner on eBay for $20,600
- Satoshi Nakamoto/Authors
- This Week In Startups: Gavin Andresen and Amir Taaki (Video)
- The New Yorker: The Crypto Currency
- Bitcoin Value Crashes Below Cost of Production as Broader Use Stutters - Charles Arthur
- From Megabytes to Megabucks - Christine Evans-Pughe (PDF)
- I Bought a Bitcoin: How I joined a Virtual Currency Megabubble
- What is Bitcoin and why is it important? (Video)
- Bitcoin Ponzi Scheme (Video)
- Bitcoin Report Volume 27 (Bitcoin Crash 2 - Ponzi Scheme Debunked) (Video)
- Peter Schiff on Bitcoin and where the dollars gets its value (Audio)
- Peter Schiff Radio Show with Bitcoin (1st half) (Audio)
- Bitcoin vs Banksters (Video)
- Silk Road: eBay for Drugs - Monica J. Barratt (PDF)
- The Bitcoin Bubble and the Future of Currency - Felix Salmon.
- Digital 'Bitcoin' Currency Surpasses 20 National Currencies in Value - Maxim Lott.
- HOLD SPARTANS!
- Keiser Report on Bitcoin
- Alex Jones Show on Bitcoin
- The Bitcoin Channel - YouTube Channel
- Let's Talk Bitcoin! - Podcast
- Money Transmitter Legislation and Bitcoin's Legal Status
- On Bitcoin and Red Balloons (PDF)
- Bitcoin: A Bit Too Far - Edwin Jacobs (PDF)
- FBI - Bitcoin Virtual Currency: Unique Features Present Disting Challenges fo Deterring Illicit Activity (PDF)
- Mt Gox
- Places that Accept Bitcoins Directly
- Trade Wiki
- Free Bitcoins
- Bitcoin ATM - Dollar Vigilante
- Casascious Coins
- What is Money For? - Maria Pia Paganelli
- Fiat Money and Collective Corruption - Thorstein Polleit (PDF), (Video)
- Legal Tender Status
- How Currency Gets into Circulation
- Electronic Banking
- Federal Reserve
- How Much U.S. Currency Is in Circulation
- Currency FAQs
- Is U.S. Currency Still Backed by Gold?
- Who owns the Federal Reserve?
- Article One (coin money)
- Remarks by President Lyndon B. Johnson (Coinage Act of 1965)
- History of the United States Dollar
Researched Argument (score: 16/20 - highest in class [prof's highest ever given grade was 17.5])
9 April 2013
Bitcoin: Digital Currency or Virtual Nonsense?
In 2009, Satoshi Nakamoto, a possible pseudonym, released a new digital currency called Bitcoin. This new currency offers decentralization through P2P networks, finite limitation, does not depend on central authority, and the program’s code is completely open to scrutiny. In June 2011, media hype caused the digital currency’s value to rapidly reach a high of $30 per single unit (coin), but the demand for the currency was short lived and within months the value crashed to a low of $1 (Arthur). It seemed like Bitcoin was born, grew, and went to its grave in less than three years. Bitcoin enthusiasts were deeply disappointed, and the currency’s media presence disappeared. Interestingly, it seems like Bitcoin refused death, and the currency has made an astounding comeback—as of today, April 9th 2013, a single coin trades for $237. But, the idea of a “digital currency” is not new; in fact many companies have tried establishing their own currency and almost all have promptly failed. In the 1998 article, titled “Digital Money: Electronic Cash Makes Sense,” Vary Coates and Steven Bonorris, associates of The Institute for Technology Assessment, explore the then forthcoming thought of digital money. The authors posed advantages, issues, and requirements that digital currency must fulfill in order to gain mass adoption by the public. While the article is dated, it forecasts many aspects which Bitcoin is now addressing. If a digital currency, Coates and Bonorris argue, is to be widespread it must be portable, interchangeable, divisible, indefinite, extensively accepted, and must retain user anonymity (24). Bitcoin easily addresses divisibility, up to 8 decimal places (“About Bitcoin”), and due to its decentralized P2P architecture may remain indefinite. But, the other requirements set by Coates and Bonorris need to be discussed at length in order for economists and the public to consider Bitcoin as a viable currency.
Currently, government-backed fiat currencies take on many forms, and thus are highly mobile. Cash, checks, money wire, and debit cards are among available public methods of transferring funds from one person to another. For the majority of Bitcoin’s life, the digital currency has been restricted to computer transfers. These transfers pose a serious mobility flaw because they restrict the exchange in the offline “real world.” The vision of Coates and Bonorris focused, at minimum, on the idea of transferring funds from a computer/laptop to a smart card (Coates & Bonorris 24). Prominent Bitcoin developers, like Amir Taakir, a game and open-source software developer, acknowledge Bitcoin’s mobility problems due to the interface, “Right now Bitcoin is not as user-friendly as it could be. It is like the Internet without the Web Browser” (qtd. in Evans-Pughe 61). To address Bitcoin’s mobility issues, start-up companies have introduced three solutions: Casascious Coins, PrintCoins, and Bitcoin ATMs. These solutions allow Bitcoins to behave like physical cash and checks, thus giving the digital currency a way for rapid offline exchange. Of course, Bitcoin’s circulation pales in comparison against the US dollar’s $1.18 trillion (Federal Reserve), but these initial solutions should facilitate the currency’s offline mobility.
While the physical circulation of Bitcoin may facilitate interchangeability, online transfers can be troublesome. Bitcoin.org, the official website for the open source Bitcoin client, states that transfers may take seconds, but the verification process may require anywhere from 10 to 60 minutes (“About Bitcoin”). The online reference, Bitcoin FAQ, makes clear that in a non-recourse system, verification needs to take place for a user to sell and buy Bitcoins (“FAQ”). This verification delay can reduce the attractiveness of Bitcoin as a method of payment for instant goods. Thus merchants selling ebooks, music, software, videos, and other digital goods, may be required to implement intermediary acceptance methods. Currently, one method of speeding verification is through the payment of additional fees. Bitcoin’s FAQ page states, “Transfers can take longer if the transaction fee paid was not high enough. If there is no fee at all the transfer can get a very low priority and take hours or even days to be included in a block” (“FAQ”). The reasoning behind the fee and verification system is explained in “Bitcoin: A Peer-to-Peer Electronic Cash System,” written by Bitcoin creator, Satoshi Nakamoto. In short, Nakamoto’s states that such fees fund incentives that encourage honest nodes, thus preventing “greedy attackers” (Nakamoto 4). Evidently, Nakamoto’s verification methods focus was on security rather than speed. While verifications can be time consuming, and may require additional fees, the process has not stopped over 270 merchants from choosing Bitcoin as a viable method for payments (“Places”).
Of course, the range of products offered by 270 merchants is not enough to satisfy all consumer needs; thousands of merchants are needed for Bitcoin to be viable to consumers. Based on February 2013 statistics, over 40 thousand Bitcoin transactions are taking place every day, amounting to an approximate of $1 million dollars in volume (“About Bitcoin”). In the global economy, the Bitcoin statistics are minute in comparison against $186.2 billion 2012 e-commerce retail sales using the US dollar (Lipsman). Historically, digital currencies similar to Bitcoin have failed to gain merchant adoption, which led them to their demise. In “Digicash files Chapter 11,” Tim Clark, a Staff Writer for CNET News, describes the digital cash situation in late 1998.
Electronic-cash schemes have found difficult sledding recently. First Virtual Holdings, which had a form of e-cash, exited the business in July. CyberCash’s CyberCoin offering hasn’t really caught on. Digital Equipment, now part of Compaq Computer, is testing its Millicent electronic cash, and IBM is in early trials for a product called minipay (Clark).
Although the now defunct currencies had corporate backing they failed to become fully established. Ursula Huws, a professor at the University of Hertfordshire, gives us a brief insight in currency adoption, “A currency is a kind of collective belief, like a religion. Modern currencies are not fundamentally very different. In essence, as soon as people stop believing in the Euro or the Yen or whatever, it collapses (qtd. in Evans-Pughe 60). As Huws points, the public’s acceptance is crucial, and Bitcoin does not have a pristine record. Around June 2011, the currency reached $30 and promptly crashed to a low of $1 (Arthur). A second bubble may be on the horizon, as the price has now reached $237, and the charts show near exponential growth similar to 2011’s. Whether the current price is an indicator of mass adoption or a bubble waiting to burst is unclear. Such rapid growth and possible collapse may deter merchants from trusting Bitcoin, and thus they may wait until the value stabilizes.
Another challenging aspect of Bitcoin is shared transaction activity, which can compromise consumer trust. When purchasing goods at supermarkets, a buyer can use electronic methods of payment, such as credit or debit cards, which can leave a trail of transaction records. The same buyer can choose not to use electronic payment, and instead opt for the more anonymous cash method. Because Bitcoin is an electronic currency, all transactions are broadcasted to the network within seconds (“About Bitcoin”), which poses privacy issues. In the article “From Megabytes to Megabucks,” Christine Evans-Pughe, a regular contributor to Institution of Engineering & Technology, cites the concerns of ITC lawyer Edwin Jacobs, “Because Bitcoin is decentralized and operates over a P2P network, there are in essence many mini databases which collect data. Do they collect personal data by which you can identify someone? If so, what do they collect and who has access to it?” (61). On a similar thought, Coates and Bonorris, state that privacy is “valuable to people who are concerned about the financial trail…” (24). While Bitcoin transactions are public, and can be observed through the website blockchain.info, it does not prevent users from conducting activities that require high levels of anonymity. Users of Silk Road, an online drug marketplace, accept Bitcoins for payment, but employ a combination of intricate internet and encryption technologies to remain anonymous (Barratt 683). The use of Bitcoin for illicit activities has spiked the interest of the Federal Bureau of Investigation, particularly regarding “tracking of users.” On a 2012 unclassified report, titled “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity”, the agency states that Bitcoin transactions are “somewhat anonymous,” and most anonymity “depends on actions of the user” (Federal Bureau of Investigation). The same report includes several steps to enhance privacy, but achieving absolute anonymity still remains solely in the domain of advanced computer users.
Although Coates and Bonorris posed many requirements for the success of digital currency, they overlooked the aspect of quantity limitation and the possibility of decentralization. Unlike the national fiat currencies, Bitcoin has a finite limit of 21 million coins and does not rely on central authorities (“About Bitcoin”). Some critics of Bitcoin believe that such limitations will contribute to its downfall. Felix Salmon, finance blogger at Reuters, is among the critics, and he states, “Currencies such as the dollar, with a central bank which can print money at will, have succeeded for a reason. As economies grow, the money supply has to be able to grow with them. And that’s why [B]itcoin can never really succeed over the long term” (Salmon). Prominent economists, like Andrew Polleit, would disagree with Salmon’s favorable views of fiat currency and central authority. In Polleit’s article, “Fiat Money and Collective Corruption,” the Chief Economist of Degussa Goldhandel GmbH explains the problem of government’s issuance of money,
[S]uch a policy does not correct the economic disequilibria caused by a preceding wave of circulation credit expansion. It postpones the correction of prices and production structures and causes more malinvestment, thereby increasing disequilibria even further. As a result, the inevitable final recession will be the more severe, the longer the correction had been prevented by further increases in circulation bank credit expansion. An ongoing increase in circulation credit will therefore necessarily result, as Mises explained, in a complete collapse in the monetary and economic system (Polleit 400).
In addition to Polleit’s strong anti-fiat currency views, Evans-Pughe notes that the printing of money by government can lead to market credit boom/bust cycles (59). These bubble cycles may be a contributor to the decline of public trust in government; 2010 numbers indicate only 22 percent of Americans trust in their leaders (qtd. in Giddens et al. 374). Surely, while fiat currencies tend to lose value through inflation, the finite limits of Bitcoin can lead to deflation. The coins found in the Bitcoin system are unique; if a Bitcoin user loses his “digital wallet,” the money in that account will also cease to exist (“FAQ”). Although the loss of a large “wallet” could briefly affect the value of Bitcoin, the currency’s divisibility into smaller denominations allows for continued presence. Furthermore, Blockchain.info reports that only about 11 million coins are in circulation, another 10 million are yet to be mined. Attaining Bitcoins can be achieved through purchases of existing coins, or “mining” of new ones; the process does not require any central authority, and is entirely up to people with computing power. Indeed, the finite and decentralized nature of Bitcoin may align with the interest of free-market advocates.
Although Bitcoin is only four years old, its value is now at over $1 billion dollars, putting its worth above 20 other government-backed currencies (Lott)—a feat that is amazing considering its lack of central authority. Bitcoin elegantly addresses divisibility through decimal breakdown, and its networked nature may assure its future presence. However, the other requirements set by Coates and Bonorris have not yet been fully solved; anonymity and interchangeability still remain subjects for further development; portability improvements are taking place in various forms; and wide acceptance is still a matter of users, merchants, and the influence of media and leading economists. Regardless of the current state of Bitcoin, we can safely assume that this digital currency has surpassed many of the previous virtual currencies. Based on its growing presence, it would be unwise to think of Bitcoin as only simple digital zeros and ones.
· "About Bitcoin." Bitcoin.org. Bitcoin Project, n.d. Web. 04 Apr. 2013. <http://bitcoin.org/en/about>.
· Arthur, Charles. "Bitcoin Value Crashes Below Cost of Production as Broader Use Stutters." The Guardian. Guardian News and Media, 18 Oct. 2011. Web. 04 Apr. 2013. <http://www.guardian.co.uk/technology/2011/oct/18/bitcoin-value-crash-cryptocurrency>.
· Barrat, Monica J. “Silk Road: Ebay for Drugs.” Addiction 107.3 (2012): 683-684. PsyINFO. Web. 4 Apr. 2013.
· Coates, Vary, and Steven Bonorris. “Digital Money: Electronic Cash May Make Sense.” Futurist 32.6 (1998): 22-25. Sociological Collection. Web. 17 Mar. 2013.
· Clark, Tim. "Digicash Files Chapter 11." CNET News. CBS Interactive, 04 Nov. 1998. Web. 04 Apr. 2013. <http://news.cnet.com/Digicash-files-Chapter-11/2100-1001_3-217527.html>.
· Evans-Pughe, Christine. “From Megabytes to Megabucks.” Engineering & Technology 7.4 (2012): 59-61. Business Source Premier. Web. 17 Mar. 2013.
· Giddens, Anthony, et al. Introduction to Sociology. Ed. Karl Bakeman. 8th ed. New York: Norton, 2012. Print.
· "FAQ." Bitcoin Wiki. N.p., n.d. Web. 04 Apr. 2013. <https://en.bitcoin.it/wiki/FAQ>.
· Federal Reserve. "How Much U.S. Currency Is in Circulation?" FRB: How Much U.S. Currency Is in Circulation? Federal Reserve, 22 Mar. 2013. Web. 04 Apr. 2013.
· < http://www.federalreserve.gov/faqs/currency_12773.htm>.
· Lipsman, Andrew. “ComScore Reports $186.2 Billion in Full Year 2012 U.S. Retail E-Commerce Spending, Up 15 Percent vs. Year Ago.” ComScore. ComScore. 7 Feb. 2013. Web. 4 Apr. 2013. <http://www.comscore.com/Insights/Press_Releases/2013/2/comScore_Reports_186.2_Billion_in_Full_Year_2012_U.S._Retail_E-Commerce_Spending>.
· Lott, Maxim. "Digital 'Bitcoin' Currency Surpasses 20 National Currencies in Value.” Fox News. FOX News Network, 29 Mar. 2013. Web. 04 Apr. 2013. <http://www.foxnews.com/tech/2013/03/29/digital-currency-bitcoin-surpasses-20-national-currencies-in-value/>.
· Nakamoto, Satoshi. "Bitcoin: A Peer-to-Peer Electronic Cash System." Bitcoin.org. N.p., n.d. Web. 4 Apr. 2013. <http://bitcoin.org/bitcoin.pdf>.
· "Places That Accept Bitcoins Directly." Spendbitcoins.com. CryptoSpend, n.d. Web. 04 Apr. 2013. <https://www.spendbitcoins.com/places/>.
· Polleit, Thorsten. “Fiat Money and Collective Corruption.” Quarterly Journal of Austrian Economics 14.4 (2011) 397-415. EconLit with Full Text. Web. 17 Mar. 2013.
· Salmon, Felix. "The Bitcoin Bubble and the Future of Currency." Medium. N.p., 3 Apr. 2013. Web. 04 Apr. 2013. <https://medium.com/money-banking/2b5ef79482cb>.
· United States. Federal Bureau of Investigation. Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity. FBI, 24 Apr. 2012. Web. 4 Apr. 2013. <http://www.wired.com/images_blogs/threatlevel/2012/05/Bitcoin-FBI.pdf>.