November 26, 2013
LTP has written extensively about how the Bitcoin economy is shaking up the world. This link will connect readers to 29 such articles. . With this piece, we wanted to make some lesser known aspects of Bitcoins clearer:
1) As its value rises, Bitcoin looks more like an investment instrument rather than a currency. Consumers seem to consider Bitcoins more like buying Gold for long-term gains rather than a currency for buying bread and butter.
Brian Roemelle and some experts developed a model that shows a rather shocking result: single Bitcoin values could reach more than $10,000 if just 2% of Chinese and Indians buy and hold, for savings purposes, just a fraction of the Bitcoins that will be in final circulation.Bitcoin has to pass these kind of acid tests before it becomes a real currency.
2) You could theoretically do everything with Bitcoins today that you do with your online currency, such as buy a private island at bitpremier.com, stock up on designer perfumes, or purchase stock gold and silver. I guess that’s what the Chinese and Indians will do with high saving rates.
3) Origin –Satoshi Nakamoto, the believed creator of Bitcoins, is an unknown entity. In Japanese, his name translates to thinking clearly inside the foundation. This unidentified person wrote the white paper in 2008, which marks the beginning of the Bitcoins.
His net worth is valued at $800 million due to his 1 million Bitcoin holdings.
But why does he not reveal his identity? Governments? The answer is not clear.
Then comes Gavin Andresen, Bitcoin’s current lead developer who is not able to reach Satoshi as well! He is well praised for his open, selfless and democratic ways. There were doubts initially that he himself is Satoshi, but these were quickly fended off by Gavin several times stating their coding styles are very different. Latest amongst the popular linkage stories is between Ulbricht (Silk Road guy who got arrested) and Satoshi as described by the NYT blog. So who are the other usual suspects?
Jed McCaleb is a UC Berkeley dropout (not a Japanese) and was one of the founders of Tokyo based Mt. Gox. He has been doubted for his decision to choose Japan even while it has high corporate tax rate and regulatory red tape. McCaleb previously founded eDonkey in 2000, one of the most sophisticated and largest peer-to-peer file sharing networks at the time. Like Satoshi he too, moved on to something else from Bitcoin (Ripple).
Shinichi Mochizuki: Recent news on Japanese mathematician has prompted speculation that the eccentric genius had, while solving the famed ABC Conjecture, one of math world’s most complex problems, created Bitcoin in his spare time. It’s tough to question Mochizuki’s abilities but patterns seem to fit.
Like Satoshi, Mochizuki also put his ABC Conjecture proof on internet (and not regular academic channels) and simply walked away. He refused to explain his potentially historic work to the great frustration of mathematicians everywhere in the world. Mochizuki is also a native English speaker, though it’s unclear if he can code or is knowledgeable in cryptography. But given Mochizuki’s mathematics acumen and unquestionable intelligence, it’s not hard to believe that he might have learned coding.
4) Publicly available ledger – You do not have to provide identifying information to participate in the Bitcoin network. It doesn’t need to know the sender and the receiver. But records of every Bitcoin transaction are stored permanently on the network’s shared public transaction register.
5) Bitcoin Out of the Purview of law – Legislators never thought about the possibility of a very decentralized payment system. The legal categories that govern conventional markets can’t be directly applied to Bitcoin, making it difficult for Bitcoin users to figure out how the law really applies to them. So there is confusion.
For example, the anti-money-laundering agency FinCEN has issued guidelines for Bitcoin users, which it defines as those who acquire Bitcoins to purchase goods and services. But what if you acquire Bitcoins for some other purpose, like investment or to transfer cash overseas? None of FinCEN’s categories seems to fit these individuals. Similarly, Bitcoin miners, the people who process Bitcoin transactions and are rewarded with new Bitcoins, do not fit into any of FinCEN’s regulatory categories. Without clear legal guidance, the Bitcoin community has been forced to wing it.
6) Big Transaction that changed everything – On blockchain.info a $150 Mn Bitcoin transaction occurred at current rates on Nov 22. And Sarah Meiklejohn, a computer scientist at the University of California, San Diego, did a sophisticated analysis about who is responsible for those Bitcoin transactions. She has compiled a large database of Bitcoin addresses tagged with their likely owners in her research paper. While she says she can’t be sure, it comes out that 194,993 Bitcoin transaction was probably done by Bitstamp, the world’s second-largest exchange for trading dollars for Bitcoins based out of Slovenia (can all US banks wire transfer there?)
7) Country most excited – The big excitement is coming from Argentina which is currently suffering from inflation in the range of 10% to 11% and has strict capital controls. When people are thinking about solutions they are looking at possible ways to protect the purchasing power of their cash. Many of them are considering Bitcoins as a way to move their wealth without restrictions from the Argentine government. The wallets and exchanges are going to be targeting that country now.
8) Remittance could be huge business. It is the single biggest application of a decentralized currency. Around $400 Bn is sent to families at home each year. When Western Union or other services put charges between 5% to 9+%, Bitcoin transaction charges could be much lower.
9) Should I still buy Bitcoins or has it already become too expensive? The Bitcoin price will not always go northwards. It fluctuates a lot. And there is no reason it will not fall to lower levels. For e.g., one theft from a Bitcoin exchange or wallet could bring the value down. But in the longer run, this self regulated currency which has only 12 Mn Bitcoins, has kept the prices go up
10) Is it safe or your government or police can object to you buying/selling Bitcoins? This is a question on everybody’s mind. Experts believe at consumer level there is no offense unless you use it for illegal purposes which will anyways put you in trouble. Infact in the case of bitcoins, the buyer or seller is not known unless you are using some wallets which do verification (and so it could be back-tracked).
11) Should I buy directly from exchange or wallets? Coinbase and similar wallets charge 1% on iOS app as well as bank charges of 0.15 dollars per transaction. So that and point 10 should answer the question.
12) Amongst many objectionable facets of this decentralised currency is that it seems to be going towards centralization by having popular exchanges such as Mt Gox. When you can only recall the same 5 names to do a transaction, its quite an example of centralization. And in that sense Bitcoin is quite vulnerable to government intervention.