Friday, April 13, 2012

Bitcoin - The Libertarian Introduction

***Originally published in Freedom's Phoenix Magazine - April 13, 2012***
Republish, copy, and distribute at will.

Bitcoin  - The Libertarian Introduction

What it is, how it's used, and why you should care.

Erik Voorhees - April 11, 2012

"When a state currency is challenged, the state itself is challenged,
and market forces move swiftly around sickly, depreciating inhibitors."

·         Introduction
·         What is Bitcoin?
·         How does it work?
·         Why is Bitcoin valuable?
·         No really, WHY is Bitcoin valuable?
·         How does one obtain it?
·         Being careful with money
·         What can one do with it?
·         Bitcoin vs. The State
·         Bitcoin and Disruption
·         Useful Resources

Introduction

There has been much talk about Bitcoin within libertarian and economic circles. It's becoming a buzzword, but like all new systems that break onto the public stage quickly, Bitcoin brings with it excitement, speculation, rumor, and downright confusion. To be sure, Bitcoin is complicated. After all, it's an entirely new global monetary system - both a currency and a payment network for that currency.

Like all powerful tools, it's important for those interested in using Bitcoin to spend some time engaging in the due diligence of education. Similar to a bicycle, once you know how to use Bitcoin, it will feel very easy and comfortable. But also like a  bicycle, one could spend years learning the physics that enable it to operate.  Such deep knowledge is not necessary to the actual rider, and in the same way one can enjoy the world of Bitcoin with little more than a healthy curiosity and a bit of practice.

This article is a primer on Bitcoin: an overview of the fascinating new phenomenon from the perspective of a humble libertarian who cares more about the ramifications for human liberty than about the technical protocol and brilliant science underlying the network.

The basics of Bitcoin are all covered here, ranging from a light technical overview to due diligence to monetary economics and theory. You'll also find an extensive list of resources to bring you up to speed on this most fascinating thing to happen in the realm of anarcho-capitalist technology since the internet itself.

What is Bitcoin?

Bitcoin is two things: it is a digital currency unit and it is the global payment network with which one sends and receives those currency units. Both the currency unit and the payment network share the same name: Bitcoin.

As a currency unit, consider Bitcoin like other currencies. The world has euros, dollars, yen, gold and silver ounces, and now it has Bitcoin as well. The properties of the Bitcoin currency unit are as follows:

·         There will never be more than 21 million in existence, and they are released over time at a declining rate (at the time of writing, about 8.5 million Bitcoins exist).

·         As new coins are released on the set schedule, they are given at random to those who contribute computing power to securing the network. This is called "Bitcoin Mining" but it should more accurately be called "Bitcoin Auditing." Those who contribute more computing power to this work have better odds of receiving the new coins, but the rate of new coin creation never increases (in fact it diminishes over time until all 21 million coins exist). Inflation is thus pre-determined and ever-decreasing toward zero. The below graph shows the release schedule and inflation rate:

·         Each Bitcoin is divisible by one hundred million. You can thus possess 0.00000001 Bitcoins.

·         Bitcoins are perfectly fungible, they are divided and combined seamlessly in your account.

·         It is theoretically impossible to make a fake Bitcoin (to fully understand why this is true, one needs to study cryptography and fairly advanced mathematics).

·         As a currency existing in a perfectly free market, Bitcoins always have a market price. At the time of this writing, this price is about $4.80 each. Because Bitcoin is global, there are also market prices for Bitcoin in every major national currency from yen to Brazilian reals.

·         Bitcoins are traded like other currencies on exchange websites, and this is how the market price is established. The most prominent exchange is BitStamp.net

So those are the details of Bitcoin as a currency unit, but Bitcoin is also a payment network. As a payment network, Bitcoin replaces the function of banks (especially the Federal Reserve as money creation is not at the whim of any person nor group), inter-bank funding networks (like SWIFT and SEPA), payment processors (like PayPal) and remitters (such as Western Union). The entirety of these massive industries as they relate to the creation, storage, accounting, and transfer of money has been usurped by Bitcoin. If Bitcoin succeeds, it is likely that PayPal and Western Union would be removed from the marketplace. The Federal Reserve (and every central bank) would be made redundant. "Disruptive technology" is thus an understatement.

How does it work?

But how does Bitcoin work, you ask? How does it replace the functions for which we've so long relied on (and been beholden to) governments, banks, and payment companies?

To use Bitcoin, you traditionally download the software (though you can also use an "ewallet" system, discussed later). The software acts as your "bank account." It stores a secret code on your computer, and this code enables funds to be spent from your bank account. In Bitcoin terminology, this bank account is called your "wallet." So your wallet sits on your computer, and as soon as one has this wallet software one can receive and send Bitcoins to other wallet-holders anywhere in the world. It is as fast and easy as sending an email (easier because you don't have to bother writing a message!).

You don't need a name, an address, a Social Security/Slavery number, or any personal information of any kind. Nobody "approves" you for Bitcoin. It's free and open-source software. You get it from Bitcoin.org.

Transactions are sent and accounts are secured using what's known as "public key cryptography." Every account has a public key and a private key - both of which are long strings of numbers and letters. Your wallet software knows your private key, and this allows it to send money. To send money to someone, you merely need to know their public key (basically their bank account number). If you have your private key plus their public key, a transaction can be created and the funds are deducted from your account and credited to the receiver's account, without anyone else having a say in the matter.

As mentioned, your account is merely defined as a long string of numbers and letters:

1PGFCtrJHUsc7fs4LGWLmXUEwuKyDaHuRa

Thus, your account has no personal information attached to it. You do not need to divulge any information whatsoever in order to obtain a Bitcoin account. This means you can receive, store, and spend Bitcoins with relative anonymity. The anonymity is relative because if you post your address anywhere that can be attributed to you (like on your Facebook page), then of course one can see that the account belongs to you, and money going to it would not be anonymous.

Bitcoin therefore works as a peer-to-peer network upon which account holders can transfer Bitcoin currency between accounts instantly and with relative anonymity. So long as an account holder protects her private key, her funds remain perfectly secure and only she can send them to someone else (and nobody can stop her).



Why is Bitcoin valuable?

This is perhaps the most important topic to address, as nothing else matters if Bitcoin has no value. What makes Bitcoin worth anything? Isn't it just "fake"? Isn't it just a made-up pretend virtual currency? Many say, "I can't hold it, I can't see it, and thus it's artificial and not worth my time." Let's challenge this understandable initial reaction. Let's demonstrate why Bitcoin is valuable, and very much worth one's time.

Financial privacy has long been symbolized by the notorious "Swiss bank account." Yet, anyone with a Swiss bank account has to trust that bank, and as we've seen in the last couple years, "bank privacy" even in Switzerland is a myth - banks there have been bending over for the US government and divulging customer information. So imagine having a private, numbered Swiss bank account, but without having to bother with the Swiss bank itself. That is Bitcoin. Instead of placing your trust in a regulated bank governed by fallible humans, Bitcoin enables you to place your trust in an unregulated cryptographic environment governed by infallible mathematics. 2+2 will always equal 4, no matter how many guns the government points at the equation.

Bitcoin is thus the only currency and money system in the world which has no counter-party risk to hold and to transfer. This is absolutely revolutionary and you should read the preceding sentence again. Gold advocates will point out that physical gold bullion has no counter-party risk, but that is only true for storage in your own home. Store it in a vault or bank and you have counter-party risk. And sending gold? You have to trust all sorts of people if you wish to transfer your gold somewhere else or spend it across distance.

Bitcoin means complete ownership of money both in storage and transfer. Nobody can prevent you from having it. Nobody can prevent you from spending it. Even if one's home is broken into, or even if the government issues a "confiscation order" (as they did with gold in 1933), one's Bitcoins are perfectly safe. Try fleeing a country with $1,000,000 in bullion without the government knowing about it. Easier said than done. With Bitcoin, it's almost easier done than said - you could put $1,000,000 of Bitcoin on a USB drive, or even write the private key on a piece of paper, or just email the wallet file to yourself to be retrieved outside the country.

Starting to see the value? Never in the history of the world has an individual had this ability. It is unprecedented.

No really, WHY is Bitcoin valuable???

At this point, skeptics should say, "okay fine, you can store and spend Bitcoins without interference, but what gives them initial value? Why do they have a price?" It's a very good question, and even expert economists have struggled with the answer.

But really, the answer is simple. Bitcoins have value because A) they are useful and B) they are scarce. Combine those two attributes in any asset and you will discover it has a price. The moment the first Bitcoin was traded to someone in exchange for something else, an exchange rate (market price) was established. Subsequent exchangers agreed or disagreed with that rate, and made further trades accordingly. Bitcoin thus spontaneously developed a price, as do all things in an open market if they are sufficiently useful and sufficiently scarce.

Let's look at value a little further, because it's a contentious issue with Bitcoin. There are many (including Paul Krugman) who believe Bitcoin isn't worth anything and is no more than a speculative bubble fad.

I wouldn't expect Krugman to "get it," but wiser/real economists need only observe metals to start understanding why Bitcoins have value. After all, any strong advocate of gold or silver as money should hopefully understand why these metals should be money. The answer is that these metals tend to be chosen in an open marketplace as money, because their specific properties make them useful as a means of exchange. It is the properties of gold and silverunique to these metalswhich make them excellent money. They are scarce, fungible, uniform, transportable, have a high value-to-weight ratio, are easily identifiable, are highly durable, and their supplies are relatively steady and predictable. Contrast other goods like chickens, or seashells, or sand, and you discover that none of them are as good on the above attributes as precious metals. Chickens can't well be cut in half or recombined, seashells are not uniform, and sand is too plentiful to be used as money. Why not other metals... why don't we use iron as money? It's not scarce enough - you'd need carts of it at the store to go shopping.

As any Austrian economist can tell you, money is merely that commodity in an open market which best satisfies the properties necessary for useful exchange. Gold and silver take the cake every time a violent government doesn't get in the way... or at least, this is true historically. But, this doesn't mean that gold and silver are "perfect, infallible money." Indeed, there are practical problems. One can't easily divide and combine silver coins to make change. One can't easily send large values of gold across distance without hiring security and waiting for transport. One must pay storage fees, or risk theft at home. And, while difficult, it is possible to make fake gold and silver ingots and pass them off in trade as real.

So then it follows that if gold and silver are not perfect money (though admittedly the best we've had), perhaps mankind could discover or invent something that was even better. This is the Bitcoin experiment - the question of whether Bitcoin, with its specific attributes, is an even better form of money than what the marketplace currently enjoys (or in the case of state fiat, is forced to use). If the Austrians are right, and a marketplace tends to chose the medium of exchange which best works as money, and Bitcoin's specific attributes make it excellent money, then perhaps the marketplace will, over time, increasingly use it for such.

The answer so far, is yes. Bitcoin is finding more and more niches for early adoption, which further supports its market price, providing confidence to holders that it will retain value, and this further lends Bitcoin to be used for still more purposes. It's an organic and messy process, full of trial and error, potholes, brilliant innovations and terrible failures. But that's what an open marketplace is, no? Every day a more resilient economy is being built, and not at the point of a gun, but voluntarily - not by decree of Bernanke, but by spontaneous, self-interested private order.

Many have made the argument that "nothing backs Bitcoin." And this is true. Bitcoin cannot be redeemed for any fixed value, nor is it tied to any existing currency or commodity. But, neither is gold. Gold is not backed by anything - it is valuable because it's useful and scarce. Cars are not backed by anything, they are merely useful as cars and thus have value. Food is not backed, nor are computers. All these goods have value in proportion to their usefulness and scarcity, and one merely needs to see the usefulness of Bitcoin to understand why, without backing from any government nor corporation, without being tied to any fiat currency or existing commodity, it commands a price on the market and rightly so.


How does one obtain it?

When one understands why Bitcoins are useful and therefore valuable, one might wish to obtain some. But how? Well, how does one obtain any currency? There are two basic ways, either by selling goods and services for it, or by buying it at an exchange.

We'll examine buying at an exchange first. "Exchanges" are simply websites where buyers and sellers come together to trade one currency for another. If you have an account at an exchange, and fund the exchange with Bernanke Bucks, you can buy Bitcoins.

The practical steps for doing this are as follows:

Step 1) Create a free account at a trustworthy exchange like BitStamp.net.

Step 2) Put money in the exchange, typically by linking your bank account or sending a wire.  

Step 3) Once your funds are at the exchange, you can buy Bitcoins at the current market price. The coins then stay at the exchange in your account until you send them somewhere else (to your personal wallet or someone you'd like to pay, etc). If you want to sell Bitcoins for dollars, you simply do the process in reverse - send the Bitcoins to an exchange, sell them at market price, and transfer the USD to your bank.

The Bitcoin market is fully-liquid and operates 24/7 with no holidays. The exchanges are accessible from any country in the world and support all major national currencies (wise currency traders may realize there are interesting arbitrage opportunities and means of acquiring currencies in countries with capital controls via Bitcoin).

The other way to get Bitcoins is to sell goods and services for them, just like you sell goods or your labor for dollars. Being able to receive Bitcoins is as simple as putting your Bitcoin address on your webpage, and you get this address automatically once you have a Bitcoin wallet. There is no "sign up" or "approval" to be able to accept Bitcoin. You can be any age, and in any country. Just get the wallet software (from bitcoin.org) or use an "ewallet" such as Paytunia.com, and paste your Bitcoin address for the world to see. Anyone who knows your Bitcoin address can send you Bitcoins instantly.

For small businesses who would like a more advanced way to accept and track Bitcoin payments for website orders, there are a few good merchant solutions. Paysius.com is the best - it will plug into your site (using common shopping cart plugins) and enable your customers to select "Bitcoin" as payment during checkout instead of credit card or PayPal, etc. (this doesn't replace those methods, it merely gives your customers a new option). Further, because very few businesses can pay their salaries and suppliers in Bitcoin (yet), systems like Paysius give the business the ability to auto-convert incoming Bitcoins into normal USD and have that deposited in the company bank account. Fees are much lower than credit card processing, and Bitcoin payments have zero chargebacks or reversals (it's impossible to reverse a Bitcoin payment) so merchants can securely accept payment from any country with no more risk of reversal, which should be a welcome relief to those who have been burned by PayPal or credit card fraud. Other than Paysius.com, Bit-pay.com is another good option for merchants to accept Bitcoin.

So that's it - that's how you get Bitcoins. Just buy them, or sell stuff in exchange.

Being careful with money

This is where many people have justified concerns. Bitcoin requires a high degree of personal responsibility, and so users need to know the basic rules for using Bitcoin safely. The bad news is, if you screw up, you can lose money and never get it back. The good news is, with a few basic pointers and some practice, you can use Bitcoin extremely securely, without fear of loss. Do not get into Bitcoin without understanding these basic concepts:

Concept 1) Bitcoins are like cash and are thus stored in a specific physical place. This means, you must always be mindful of where your Bitcoins are, and what risks that location presents. For example, if your coins are on your computer, and you don't back them up somewhere else (yes, they can be backed up easily), and the computer crashes, your money is gone. There is no company you can call to complain about it... the money is lost forever. Similarly, if you store your coins with an online service (like an ewallet or exchange), then you are trusting that service to hold your coins safely. If you give your coins to someone who is not trustworthy, they can run away and you'll never get them back. You wouldn't give $100 cash to someone you don't trust. The same is true with Bitcoin. So if the coins are in your possession (on your computer or smartphone), you must be mindful of them, back them up, and keep your systems secure. If the coins are held for you by someone else, then you must be able to trust that party.  This is the most important safety concept of Bitcoin.

Concept 2) Wherever you keep your Bitcoins, they will be protected with passwords. If coins are on your computer in your wallet file, and someone learns your wallet password and they obtain your wallet file, then they can spend your coins! Similarly, if you keep coins with a service provider, and someone learns your login information, they can steal your coins. Use strong passwords whenever you deal with Bitcoin (more than 12 characters) and keep them always in a safe place. Funds are not protected by government-mandated and taxpayer-subsidized FDIC insurance - a Bitcoin bank cannot just type in digits into your account to replenish funds stolen by your own carelessness with your password.

Concept 3) When coins are on your own computer (meaning you're using the wallet software from bitcoin.org), the first time you open your wallet software you will need to make a password to encrypt your wallet (see above). After making this password (don't ever forget it), you MUST backup your wallet file in a different location. This file is where your money is stored. The file name is "wallet.dat" and backing it up is as simple as copying the file and putting it somewhere else. To find your wallet.dat file:

---------
On Windows, you must first tell your computer to "Show hidden files and folders" - look up how to do this online. Then, you can find your wallet here:

C:\Documents and Settings\YourUserName\Application data\Bitcoin (XP)

C:\Users\YourUserName\Appdata\Roaming\Bitcoin (Vista and Windows 7)

If you're on a Mac, you can find it here:
~/Library/Application Support/Bitcoin/
--------

Put this wallet.dat file on a USB drive in your safe or mail it to your parents. Burn it to a CD and put it in a bank safety deposit box. Put it on a different computer. You can even email the file to yourself. Better yet, do two or three of the above. If you back up the wallet properly and keep it safe, and the likelihood of you losing your Bitcoins will be lower than you dying in a car crash. If you don't back it up, the likelihood of you losing your coins is high. Important Note: if you use more than 100 Bitcoin addresses with your wallet, you will need to make a new backup file (the first backup will not know about the 101st address).

Concept 4) Liberty advocates love free markets. But, with freedom comes responsibility. Bitcoin exists in a free market. It is not regulated, tracked, or overseen by anything other than cold hard mathematics. Thus, the companies and organizations you find in Bitcoinland are often unregulated and private. A Bitcoin-based company doesn't even need to be registered as a company anywhere, because it doesn't need a business checking account or an IRS extortion number (known as an EIN). While this means Bitcoin enables truly free trade on a global scale, it also means Bitcoin users need to be careful and prudent. Don't buy things from companies or websites you don't trust. You may never see your money again, and there is no way to "reverse" a payment. With Bitcoin, reputation and history are everything. If you wouldn't give cash to a stranger in an alleyway, don't give Bitcoins to a stranger online. Enjoy the free market, and be a responsible adult.

Concept 5) Remember that Bitcoin should still be considered an experiment. As resilient as the system has proven to be, it is still new. The value of a Bitcoin could drop to zero tomorrow. This means under no circumstances should people invest money in Bitcoin which they cannot afford to lose. Bitcoin is a highly volatile commodity with an extremely uncertain future. Grandmothers should not be putting retirement money into Bitcoin (nor in US dollars, for that matter).



What can one do with it?

The short answer is that you can do anything, but you might have to build it first! Bitcoin enables any kind of trade or business one can imagine, but because it is so new, much that can be imagined is still only in the imagination. Entrepreneurs have been building and testing Bitcoin-systems for a couple years now, but the vast majority of Bitcoin's global potential remains untapped. Every liberty-minded entrepreneur should be considering this point.

As for what's currently available, the most basic thing one can do with Bitcoin is buy products and services from anyone who accepts Bitcoin. A partial list can be found here: https://en.bitcoin.it/wiki/Trade There is also the booming illicit drug market known as Silk Road, where almost any substance imaginable can be purchased for Bitcoin. Accessing Silk Road requires further security precautions such as the use of Tor, which is beyond the scope of this article.

Next, donations are made very efficient via Bitcoin. Groups from Wikileaks to indie film companies and animal shelters accept Bitcoin donations. Bitcoin works great for donations because micro-transactions are possible (you can't send $0.10 to a charity via PayPal, because the fees are larger than $0.10... but with Bitcoin you can). If you want to accept donations for anything, put a Bitcoin address on your website. It costs you nothing. Want to donate to Wikileaks? Here's their address: 


1HB5XMLmzFVj8ALj6mfBsbifRoD4miY36v  

Like to gamble? Bitcoin lets US players actually play poker online. The government can't stop the payments, after all. Sites such as SealsWithClubs.eu are gaining popularity, with larger casinos being built.

Want to send money to friends or family overseas? Use Bitcoin. Instead of paying Western Union $40, just send Bitcoins for free. Remittance markets are one area where Bitcoin really shines, because it passes across borders instantly and with no possibility of regulation nor interference. Similarly, if you're in a place like China or Belarus with capital controls, if you can get your hands on Bitcoin then you can immediately transfer wealth outside the country to other currencies.

Want gold or silver to store value acquired via Bitcoin? Try a site like Coinabul.com

Work with freelancers or have a business that pays people in other countries? Use Bitcoin. After all, Bitcoin enables "under the table" payments to anyone, anywhere. Paying a contractor in Italy or India is now as easy as sending an email.

Want to protect wealth or move it privately? Bitcoin transcends all borders and regulations. No longer do you need to have your wealth sitting in an account that can be frozen or seized.

Basically, anything you can do with "money" generically, you can do with Bitcoin - yet you now have no governmental restriction upon that activity.  If you're a merchant, why not start accepting Bitcoin as payment? It's easy to integrate if you use a system like Paysius.com.

If you think Bitcoin could be used in a creative new way, then go build the system! Just as few people understood the power of the internet in the early '90s, the same is true with Bitcoin. And just as with the internet, it is attracting builders and entrepreneurs all over the world.


Bitcoin vs. The State

Now we get to the more fun part, which is especially relevant to any libertarian discussion of Bitcoin. This is the manner by which Bitcoin supersedes government control. "Okay," people say, "so Bitcoin is new and the government doesn't regulate it yet, but they will!" Unfortunately for the government, they cannot. No person nor group of people can defy the laws of mathematics upon which Bitcoin is built.

But first, let's look at the ways the government could interfere with the Bitcoin system.

Private websites on a hosted server can be taken down by the government. We saw this in amazing clarity recently when MegaUpload was taken down by the US government, even before any trial or finding of criminal activity had been accomplished. It should be assumed that the government can take down any site it wishes, with or without the legal cover of legislation like SOPA and PIPA (which merely give legal blessing to powers already assumed and demonstrated). So this means that any website that dealt in Bitcoins could be removed and shut down. The exchanges would be the first target.

Yet, even here the government runs into trouble, because websites can be mirrored, copied, and hidden very easily. Taking down Bitcoin websites would be like cutting the heads of a Hydra - for each successful severance, publicity and the profit motive would compel more sites to spring up (case in point: how many file sharing sites exist, other than MegaUpload?).

In fact, certain sites have proven impossible for the government to take down altogether. Take the example of The Silk Road, which is a brazen website selling illicit drugs. US Senator Chuck Schumer expressed angst in this regard, though he's pitifully impotent to remove the site because it exists on what's known as the "dark web," on servers hidden via cryptography. If the above-ground Bitcoin websites are shut down, the below-ground sites will flourish. And every time a high profile site is taken down, Bitcoin would get free publicity around the world.

So taking down websites is an inadequate strategy if the government wishes to impede Bitcoin. What else could they do?

Within one country, at least, a government could prohibit individuals and businesses from openly accepting Bitcoins (and if this happened in the US, it'd be the ultimate sign that the Supreme Court had fully abandoned its proper responsibilities). Suppose the US Government did ban the acceptance of Bitcoin: it would mean Bitcoin could only be accepted in secret. This would harm the economy significantly, but wouldn't come close to stopping Bitcoin (and indeed, unless every government did this, Bitcoins could be openly accepted in other countries leading to capital flight which would pressure governments not to outlaw it in the first place).

But what about the more obvious attack method - can't the government just "shut down" Bitcoin transfers? Amazingly, no. Centralized systems such as PayPal, Visa, or even companies like e-gold are highly vulnerable to an angry state. The thugs must merely break down the door, confiscate the servers, and throw the owners in jail. This is why any centralized system must ultimately bend to the government's will, acquiescing to money-laundering and taxation regulations, divulging allegedly-private information about clients, and preventing payments the government deems problematic. If they don't, they're shut down.

Bitcoin is not vulnerable to this risk, because there is no central point of failure. There is no Bitcoin office. There are no central Bitcoin servers. There is no president nor employees of Bitcoin. Bitcoin has no home country, it is licensed nowhere. It is a distributed network, a protocol, that can operate as long as the internet exists (and, in fact, even without the internet per se). Transactions occur peer-to-peer, meaning no governing body approves them. Accounts cannot be frozen, because nobody has the freeze button.

Bitcoin cannot be turned off - it is like a benevolent virus which, so long as a few hosts survive somewhere in the world, can perpetuate itself and regrow at the speed of information.


Bitcoin and Disruption

Once one makes this realization - that the government is actually quite powerless to stop Bitcoin, then a few ramifications might spring into mind. If Bitcoin doesn't fail on its own, then to some extent it will succeed, and as it succeeds, it starts to replace many of the institutions which have caused so much trouble for humanity.

First on the chopping block are market actors which compete for the business of money transfer. Mega-companies like PayPal and Western Union (and even more deeply rooted companies like SWIFT) discover that they have to compete with a system that transfers money at practically zero cost. The "service" these companies provide is made redundant, and just as the buggy-whip manufacturers were out of a job at the onset of the automobile, so too will payment services be useless at the onset of the frictionless global transfers afforded by Bitcoin.

From a market efficiency standpoint, if these companies are earning billions of dollars a year for providing a service which can be done for free, then if that service catches on, humanity will be billions of dollars per year richer. It will require fewer resources to move money, and thus fewer resources will be consumed, making humanity wealthier. Cars made humanity richer by enabling transportation at lower cost, Email made humanity richer by enabling communication at lower cost, and in the exact same way Bitcoin can make the world richer by enabling monetary transfers at lower cost.

If Bitcoin grows large enough to start replacing financial transaction networks, its value will stabilize further and more confidence can be imbued in the long-term price. Subsequently, Bitcoin will become an increasingly better (more stable) means of value storage, which threatens banks first and then national currencies second.

All the work done by banks to hold and account for money (and transfer it between individuals and companies) can be done natively by Bitcoin. And so just as the payment services become redundant, so too do many services provided by banks, shrinking the banking sector down to those areas where it still serves useful value.

A Bitcoin world would still have banks, of course, but the banks would be properly placed into those market roles where they do useful work. People don't necessarily want to store value on home-based PC's, and a bank with security staff and safe systems may make a smart place to hold funds (but instead of everyone having to hold funds at the bank, it would be their option based on their risk-profile). Similarly, there will always be a need in a capitalist system for loans and interest paid on deposits. Banks would enjoy this ability with Bitcoin so long as they were efficient and could compete in the open market.

And as we move further along the adoption and growth curve of a Bitcoin monetary system, we see that national currencies themselves become challenged quite quickly. Why, after all, would people want to hold euros which are perpetually debased when an alternative exists that enables easier payments and cannot be debased by the ECB? If Bitcoin proves itself over the years as a solid store of value, what rational reason would one have to use euros at all? Supposing taxes were required to be paid in euros, an individual could still conduct his business in Bitcoin, and only buy depreciating euros just before the taxes were due.

Why don't we see this with gold today? Because gold has no good payment system built into it - physical bullion is not efficient for daily trade, and digital vaults backed by gold have all come under fire from government AML concerns, as we've seen the transfer systems of companies like GoldMoney be pressured into shutting down (last year, GoldMoney discontinued it's account-to-account transfers).    

Remember, Bitcoin automatically makes both the storage and transfer of funds easy, secure, private, and instantaneous. With a history of price stability earned over time, or in conjunction with gold and silver as an even more reliable store of value, why use state fiat at all?

The final domino to fall, of course, is the power which governments wield over their flock via their ability to print, regulate, and control the nation's money. When a state currency is challenged, the state itself is challenged, and market forces move swiftly around sickly, depreciating inhibitors. The press conferences of someone like Bernanke would become less and less important, because the currency he printed would be used in narrower and narrower circles. Instead of fighting the government, Bitcoin enables individuals to sidestep it - to ignore it to a large degree. Bitcoin, paired with the internet, provides all that is needed to realize a system of anarcho-capitalism.

After all, what power would the Zimbabwe government have if its people had had Bitcoin in their communities - money they could hide and spend via cell phones and email accounts. What cause would there be in Greece to riot at the ECB mandates when the country can abandon the euro in favor of a money that each of them controls unto themselves. And from where would the US get the resources to deficit-finance its wars and welfare programs when it no longer has the ability to print money and pay back debt with debased currency? Like a gold standard, Bitcoin shackles a government and forces it to subsist only on what it can tax openly and legitimately borrow, but unlike a gold standard, Bitcoin doesn't require any official status to become a standard. The market can arrive at the standard sans government approval, again because it works elegantly both for storage and transfer and it cannot be stopped because it exists in decentralized form.

We see that along Bitcoin's growth and adoption curve, some exciting and quite revolutionary possibilities occur. Instead of trying to change governments with a useless vote, or pathetic pleading, we merely abandon the government's powerbase - the power derived from control of exchange and currency. The awkward inconveniences and growing pains of this new monetary system should be easily outweighed by the gift given to the noble cause of liberty if it should succeed.

Time for a reality check. A prudent person should assume Bitcoin will fail, if for no other reason than that most new things fail. But, there is a very real chance it will succeed, and this chance is increased with every new user, every new business, and every new system developed within the Bitcoin economy. The ramifications of success are extraordinary, and it is thus worth at least a cursory review by any advocate of liberty, not just in the US but around the world.

Spend some time with Bitcoin. Learn it, challenge it, and use it. You can assume no government wants you adopting this system in any capacity, and for that reason alone it's worth consideration by honest, moral, and industrious people.

Useful Resources

As Bitcoin is decentralized, it can be hard to find all the resources one might want. Below is a list of some of the most useful websites and tools for learning about and engaging the Bitcoin economy.

WeUseCoins.org - Best place for beginners to start.

CoinDesk.com - Excellent source of Bitcoin news and information.

Bitcoin.org - Official site of the Bitcoin project, download the wallet software here.

BitStamp.net - The leading Bitcoin exchange. Buy and sell Bitcoins here.

BitcoinTalk.org - The official discussion forum, and large enthusiast community

Wiki.Bitcoin.it - Encyclopedia of most aggregated Bitcoin knowledge, very extensive.

Bitcoin.it/wiki/trade - Partial list of companies that accept Bitcoin as payment

BitcoinMagazine.net - Professional publication and news portal

Blockchain.info - Tool for viewing accounts, payments, and numerous economic statistics.

BitcoinCharts.com - Shows current market prices and economic statistics.

Preev.com - Super easy Bitcoin<->fiat calculator, multiple currencies supported

BitcoinMonitor.com - Live view of transactions as they happen on the Bitcoin network.

BitPay.com - An excellent merchant solution for businesses that wish to accept Bitcoin payments.

Coinabul.com - Leading gold and silver bullion seller for Bitcoin

Coinapult.com - Send Bitcoin via Email or SMS

WorkForBitcoin.com - Bitcoin job board - freelance projects which pay in Bitcoin.




***Like the article? Donate Bitcoin at: 1FHXmBgbxyVowtWtcxQSGAccT1APCrXPKo

About the Author

A writer, entrepreneur, and armchair economist, Erik Voorhees (originally from Colorado) moved from Dubai to join the Free State Project in New Hampshire in 2011 in order to advance the cause of liberty. While there, he discovered Bitcoin and accidentally fell down the rabbit hole. Bitcoin has now become his hobby, his activism, and his career, believing the new currency to be the greatest tool for global liberty since the internet itself. 

Erik is a well-known member of the Bitcoin community forum (screen name- evoorhees), and currently works for Coinapult, based in Panama. Furthermore, Erik is also a partner in a couple top-secret super-subversive Bitcoin-based projects and coordinates the Free State Bitcoin Consortium group among liberty activists in New Hampshire.

Follow Erik's Twitter account @ErikVoorhees or email him at erikvoorhees [at] gmail




83 comments:

  1. nice article Erik. only one point.

    you say that wallets never have to be backed up except once. i don't think that's true for active users. after 100 uses of the key pool, i believe that the wallet needs another backup.

    ReplyDelete
  2. Great article! Its awesome that you guys in the Free State Project decided to move up here... its a great influx of new ideas; just look at some of the online maps of bitcoin users; NH is a real hotspot! Bet you didn't know about the black flies before you showed though! heh heh...

    ReplyDelete
  3. If you use a deterministic wallet such as what Armory offers, then it is true that you never have to backup more than once. But in the case of the default client, after 100 spend transactions, your keypool runs out and you risk losing bitcoins if you don't backup after every single spend. This is why having separate savings and checking wallets can really help to mitigate this issue if you're using the default client ( as of 0.6.0 at least ).

    ReplyDelete
  4. Great Post! I love reading bitcoin articles from people who genuinely 'get it' :)

    ReplyDelete
  5. Bit-Pay.com should be added to the list…they make it easy for merchants to start accepting Bitcoin without having to setup and run bitcoin themselves.

    ReplyDelete
  6. Excellent piece, Erik. Even though it's a libertarian primer, it is unfortunately still a minority viewpoint among Libertarians. This has puzzled me greatly especially when you read the visceral reaction to bitcoin at the Mises forum and elsewhere.

    Casey, Schiff, Kramer, Hoppe, and others would do well to read your analysis. Wenzel and Murphy appear to be encouraged but bitcoin needs to be embraced in the affirmative and promoted for what it is -- the mechanism by which sovereign individuals can wrest control of the oppressive State monetary monopoly away from the current overlords.

    ReplyDelete
  7. Great piece, you must have put a lot of work and time into it.

    I think you should split it in like 4 or 5 parts, newcomers want their primers bite-sized...


    "Inflation is thus pre-determined and ever-decreasing toward zero."

    I think you need to change 'Inflation' to 'Money growth' for that statement to be correct. Inflation is the the general level of prices of goods and services, and does not only refer to the number of money units.
    In fact, the Bitcoin economy is highly deflationary, not inlationary.

    ReplyDelete
  8. You s hould add bitmit.net to useful resources. It is currently the biggest Bitcoin auction house and also a place where merchants can distribute their goods

    ReplyDelete
  9. Excellent job, Erik.

    Thank you.

    ReplyDelete
  10. Excellent article.

    When talking about what bitcoin is, there is the technology and the currency, but the existing currency is a specific block chain. It is very easy for someone to use the existing open source software to start a new block chain, which would be a new currency based on the bitcoin technology, but operationally completely separate from the current bitcoin currency.

    If we refer to the currency today as BTC, anyone could make BTC2 tomorrow.

    ReplyDelete
  11. This must be one of the definitive articles written about Bitcoin Erik. Bravo - well done! I have linked to this piece on my blog Bitcoin Bytes - www.bitcoinbyte.com - and follow you on Twitter. I look forward to Bitcoin gaining more mainstream acceptance.

    ReplyDelete
  12. Great article.

    Couple of comments:

    1. there's a typo: "and this allows your it to send money"

    2. the current release of the bitcoin.org client has a "file>backup wallet" menu entry. much easier and safer than that 'show hidden files, find wallet, hope it's not being written to while you copy it' malarkey.

    3. "You only need to back up the wallet file once at the beginning (you don't need to do it every day or week, etc)" isn't strictly true. after a backup, your backup is good for 100 outgoing transactions or new receiving addresses. See https://en.bitcoin.it/wiki/Key_pool - it's dangerous to tell people they don't need to back up more than once.

    4. consider linking to http://en.wikipedia.org/wiki/Silk_Road_(marketplace) when mentioning silk road.

    ReplyDelete
  13. @BrightAnarchist

    > you risk losing bitcoins if you don't backup after every single spend

    You only need to backup after each 100 new addresses is used, either as new receiving addresses, or as 'change' addresses on spend transactions.

    ReplyDelete
  14. Excellent, thorough & well-written article that will take a reader from beginner to functional/intermediate level in understanding Bitcoin.

    Really, A+ job!

    ReplyDelete
  15. You mentioned that there are no centrally controlling powers in the Bitconomy. But keep in mind that there is a core group of developers who work on the mainline bitcoin.org client. They have a lot of clout and, if co-opted, could cause havoc ranging from releasing poorly implemented code to hiding backdoors in clients.

    Another attack is to purchase more computing power than the entire network and fuck with block contents. Such an attacker could DDOS the network by refusing to record other people's transactions in the blocks they mine, or by double spending their own coins.

    ReplyDelete
  16. It would appear that the bitcoin developer group would be a weak point, and it's been written that the FBI has already paid them visits in the past. However, bitcoin is an open source project. This makes it very hard to hide backdoors, and any poorly implemented versions would most likely be shunned by the bitcoin community. There is nothing giving the current developers sole rights to the software. I suspect if they became untrustworthy in the eyes of the bitcoin users then a new group of developers would step in and fork the software down a new, trusted path, once again. These are some of the very questions which this experiment call bitcoin should prove out. It will be interesting to see what happens.

    ReplyDelete
  17. Great article. Well researched. I'd like to point out that there are still additional hurdles to true anonymity with bitcoin, and governments/regulators will continue to fight anonymity as long as they can. It's true that pure bitcoin exchanges can be done with no intermediary and relative anonymity, but in practice there is usually fiat money involved at some point in the process, usually to buy the bitcoin in the first place. This will remain its anonymity Achilles heel until there is no longer a need or desire to convert back and forth into fiat currencies.

    ReplyDelete
  18. (continued…) The only truly anonymous bitcoins are those mined by their possessor (with a TOR proxy) rather than those exchanged for fiat money. Because of anti-money laundering laws, and the account holder information exchanges are required to maintain, all transactions can be directly traced back to the names of people on both sides of an exchange. You cannot create an account with MtGox, CryptoXChange, Dwolla, etc. without providing your name and other identifying information. If you transfer any significant amount of fiat money you need to provide additional ID, i.e., passport number, social security number, etc. (I haven't tried BitInstant to deposit cash into a bank, but if it is really anonymous and becomes popular banks will most likely start asking for ID to make these kinds of deposits.)

    ReplyDelete
  19. (continued…) Then there is your own bank account from which your fiat money originates. It definitely has your personal information, and if you used an electronic means to transfer it to an exchange then your name is once again tagged to the funds and everything you buy with it. In fact, if at any point along the line you used an account associated with your name then your name becomes traceable throughout the entire chain of events, from your bank, to the exchange, to the public key you have in your bitcoin wallet (exchanges record the public key of every bitcoin deposit and withdrawal). Yes, the bitcoins in the wallet sitting on your home computer are traceable to your name, even months or years after you acquired them. Just follow the fiat money trail. Thus, most bitcoins in circulation today are traceable back to an individual, and that is why anonymity is still a challenge.

    ReplyDelete
  20. (continued…) There is a relatively easy way to break this chain once you have some bitcoins. Simply transfer your coins to a new wallet (i.e., a different public/private key pair). By doing this you are essentially breaking the direct chain of information pointing to you because it appears as though you made an exchange to someone else. What's great about this is you don't need any intermediary to accomplish it. You are both the sender and receiver. This may seem trivial, but it's not. For the same reason a dollar bill can find its way into hundreds of different hands over its lifetime, so can a bitcoin. The guy who held it yesterday is no more responsible for it today than someone who never held it before. So making a phantom transfer to a new wallet makes the fact that you once openly possessed it rather inconsequential. It is, however, still permanently recorded in the bitcoin block chain that you once possessed these coins, via the public key tied to your name. But who knows who controls the new public key just created. That key was generated out of thin air by your bitcoin client and was never associated with your name.

    ReplyDelete
  21. (continued…) After the transfer it is no longer possible to prove with certainty that you still have the bitcoins, short of someone getting hold of your new wallet. Actually, there is one more way the exchange can be traced and that's by your computer's IP address. If the sender and receiver IP's are the same then it's pretty obvious the exchange occurred between one person. The best way to eliminate this is by using a TOR proxy which every bitcoin client allows you to setup easily once you're running the TOR client (www.torproject.org). A TOR proxy makes it extremely difficult to determine either the sender or receiver's IP address. Better still, make several wallet to wallet transfers, with the sending and receiving wallets on different computers, both running TOR.

    ReplyDelete
  22. (continued…) Nothing is 100% foolproof, but it would take a considerable effort, basically a surveillance type operation at the time of transfer to determine you still possess the coins. It definitely makes the job of tracing transactions more difficult, and the more bitcoiners who employ these techniques, the more the bitcoin network will become truly anonymous, despite how much information the exchanges gather. Bitcoiners really should learn to use TOR proxies as a matter of course. These anonymity tools do add a bit more overhead and tedium to using bitcoin, but it's worth it in the long run. I suspect future bitcoin clients will have such devices built-in and turned on from the get go. Happy bitcoining!!!

    ReplyDelete
    Replies
    1. Thanks for the much-needed, level-headed criticism and information

      Delete
  23. This comment has been removed by a blog administrator.

    ReplyDelete
  24. Execellent article, well written and showing a deep understanding of btcoin's potential: bravo Erik

    ReplyDelete
  25. This comment has been removed by a blog administrator.

    ReplyDelete
  26. Canadian exchange: https://www.cavirtex.com

    ReplyDelete
  27. I didn't see mention of the most obvious "flaw"...requiring internet access. Sandy victims in NY had no internet for days, even weeks. A fully digital currency isn't much use during natural disasters, mass power outages, or other communication disruptions (including ones created my the government)

    ReplyDelete
  28. Nice well written article, and BTC just keeps rising after block reward halving recently.

    http://cryptocur.com/bitcoin-block-reward-halved/

    ReplyDelete
  29. Why can there only by 21 million bitcoins, ever?

    ReplyDelete
  30. This is the first time I have heard of bitcoin and I have no further information apart from this article.
    Two questions: if there is only 21million bitcoins (that can be separated to 0.000001 denominations then surely someone could buy and hold a lot of them and not use thus making them useless. Someone like warren buffet could just purchase lots of them like he owns 1/5th of the worlds silver and moves the market as he likes.
    2. On first read of this article it does come across as a scam. However it is believeable as in I want it to be a true 'currency' and not a scam.

    ReplyDelete
  31. > Why can there only by 21 million bitcoins, ever?

    It's how the system is designed. 50 bitcoins were created every 10 minutes for the first 4 years. Now we're in the 2nd 4 years, and the rate has halved to 25 bitcoins every 10 minutes. In 4 years it will halves again to 12.5 bitcoins per 10 minutes, and will keep halving every 4 years. If you add up all those bitcoins you get a little less than 21 million.

    ReplyDelete
  32. > if there is only 21million bitcoins (that can be separated to 0.000001 denominations then surely someone could buy and hold a lot of them and not use thus making them useless

    You missed a couple of zeroes. Each bitcoin can be divided down to 8 decimal places, not 6. It wouldn't be very easy to buy a lot of bitcoins. I'm not selling mine any time soon unless I get a very good price for them. The current price of $47 each is the cheapest anyone is selling for. Once those are bought, you'll have to offer more for the next lot. I wouldn't sell mine at $100 each.

    > However it is believeable as in I want it to be a true 'currency' and not a scam.

    It's not a scam, but there's no guarantee that people will continue to value bitcoins. If you buy some and look after them properly, you'll be able to keep them. But it's possible that in the future we'll all wake up and say "why did we think that was worth anything?" - like we did with Beanie Babies, and tulips. That seems unlikely to me, given Bitcoin's unique properties that make it so much like money.

    ReplyDelete
  33. Valuable article.

    One question. As I understand from the article, there is a process to limit the total number of bitcoins created.

    Since this did not occur as some natural event, what prevents those who are central to this process from creating wallets with fraudulent bitcoins for their own benefit? Or if governments wish to subvert the system, what prevents governments through suborning individuals who are actively involved in developing the system, or simply their own hacking, creating an enormous volume of bitcoins and putting them into play, thus destroying it with inflation?

    ReplyDelete
  34. There is another flaw, I saw this used on countless situations, and that is to create a zillion similar coins bitcoin, zetacoin and any other name. Being a free market nobody stops fbi to create about 100 new currencies so people will be confused.

    ReplyDelete
  35. i'm abit disillusioned with this at the moment. I'm in the uk and it seems i can only get bitcoins by making an international bank transfer to bitstamp and then I can buy bitcoins from them and transfer them to my wallet. It's NOT very anonymous though!. It seems we in the UK can't make anonymous cash deposits to exchanges. Please correct me if Im wrong..

    ReplyDelete
  36. > I'm in the uk and it seems i can only get bitcoins by making an international bank transfer

    I'm from the UK too. I can sell you some bitcoins if you like, if you're willing to transfer money to my UK bank account. That should be fee-free for you.

    ReplyDelete
  37. re. my previous comment - I should have left a way to contact me... email dooglus at gmail dot com.

    ReplyDelete
  38. Any earnings in bitcoin (or seashells, coconuts, marbles...) still need to be declared in your taxes in their equivalent dollar amount, otherwise you would be a tax evader. Granted, there's no way for the government to know - but what if they find out later by other means? Facing charges of evading a few years worth of taxes won't be fun.

    Furthermore: suppose you need to transfer back to dollars to pay for an emergency. How will you explain 30 or 40K suddenly appearing in your bank account?

    ReplyDelete
  39. the length of time it takes for the wallet to synchronize with the network is ridiculous. When I first downloaded the wallet it took 24 hours and today after using it a few times it looks like it's going to be a couple of hours!

    ReplyDelete
  40. Version 0.8 of the client is significantly faster at syncing with the network than all previous versions. If you're not using it, try upgrading.

    ReplyDelete
  41. There will be 21 million bitcoins and in total 2,100,000,0 00,000,000 bitcoins unit made available for trade, that is 2,100 Trillion bitcoin units.
    As a comparison the M3 euro mass is Slighlty less then 10 trillion. One can make the same anlysis against the usd monetary mass and will not get close to those 2100 trillion units. Consequence:
    * there are/will be too many bitcoin units , and one can then question its value.

    ReplyDelete
  42. "there are/will be too many bitcoin units , and one can then question its value."

    Your math is off. You count a Euro or a dollar as a single unit against the smallest unit of bitcoin. Put on your thinking cap and come back with a comparison based on 1/100th denominations of Euro or dollar, which you damn well know exist.

    ReplyDelete
  43. Definitely agree with what you stated. Your explanation was certainly the easiest to understand. I tell you, I usually get irked when folks discuss issues that they plainly do not know about. You managed to hit the nail right on the head and explained out everything without complication. Maybe, people can take a signal. Will likely be back to get more. commodity trail

    ReplyDelete
  44. The concept is called “Crypto Currency”. It’s a digital currency implemented on the basis of open source, peer to peer internet protocol. for more info click the link below
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    ReplyDelete
  45. The concept is called “Crypto Currency”. It’s a digital currency implemented on the basis of open source, peer to peer internet protocol. for more info click the link below
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  46. It is great to have this useful information about the crypto currency. I think that I can also have some research on this issue of digital currency implementation.

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  49. Many people including myself are just starting to hear about Bitcoins even though they have been around since 2008-2009. They are a very new "currency" and will allow you to profit without ANY fees of transfer, any freezing of funds, doesn't require banks and is currently feared by established financial institutions to the way of trying to ban it. The funny thing is that is it`s impossible to ban or prohibit because no one owns it!

    There are a group of clever developers are working on a tool that will allow people to make bitcoins every single day! There is a nice short to the point video that explains the "Human Greed" factor and why this is an entirely new and unexplored market!

    This is unlike anything you have ever seen or heard off and it makes perfect sense that early birds knowing this info will make alot of money off the backs of people that come into a new moneymaking market too late. The beauty of this is that you stay anonymous and in nowadays world flying under the radar is important. The recent scandals of governments spying on its citizens are making "transparency" a scary thing so don`t let anyone meddle in your private affairs!

    There is a free presentation seat to be grabbed so you can be the first to learn more about this bitcoin robot that is due to be released very soon to a small circle of people that follow its development.

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  53. I think bitcoin will be widely accepted in the future doesnt matter what they all speak that will collapse.

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  59. Main problem seems to me that, as a previous poster commented, bitcoin currency is really the blockchain and there is nothing to stop anyone from creating competing currencies (i.e. blockchains) based on the same technology, and a few alternatives have already popped up. So the value of bitcoin depends on the fact that it already has a sizeable base of users. Doesn't seem like a very solid foundation for the value of the currency,

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  76. Maybe I am missing a few things here....

    1) How is it anonymous if a person has to use a Bank Account to get money out or put it in?

    2) Based on the writers definition of value (this is the part I am not clear on), virtually ANYTHING that fits the definition of currency can be used thus it is a perceived value similar to a speculative stock.

    It seems to me that without fiat currencies, the bitcoin cannot survive...

    With that said, I own bitcoin but I am on the fence regarding longevity of the idea.

    Decent article but, in my mind, not strong on the points of how it derives value.

    Thanks!

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