RENEGADE CURRENCY: Will Bitcoin and its ilk end the Fed?
JACKSON, WYO – Like a misunderstood rebel turned superhero, Bitcoin has morphed from infamy and its role in Silk Road drug deals to digital currency’s darling poster child. When Lloyds of London creates cold storage for the digital currency, Bitcoin has arrived, and is evolving at warp speed.
Embraced as a “renegade currency,” U.S. investors contend Bitcoin protects Americans from a decaying dollar. They acknowledge it also threatens the U.S. Federal Reserve, and other central banks, which control fiat currencies around the world. Bitcoin’s whole point, it seems, is to eliminate central banks and investment middlemen across the globe to create a free market virtual ownership society.
Detractors argue any currency dependent on the energy grid and computer security and reliability is inherently flawed. But for many, it’s only the currency’s volatility that makes it too risky.
“When it comes to figuring out the main reason why every brick and mortar store in your local town is not accepting Bitcoin as payment, you don’t need to look much further than price volatility,” writes Kyle Torpey of Men’s Daily News.
“There are plenty of people who like the idea of a decentralized currency not controlled by any government, but the reality is that these same people only want to accept currencies that are relatively stable,” Torpey says.
“After all, a store cannot plan for the future or pay for supplies, employees, and other costs when they don’t know what the value of each sale will be after only a few hours have gone by.”
Enter Bitcoin 2, recently rolled out to begin ironing out volatility wrinkles. Philosophical detractors, however, believe Bitcoin is a Ponzi scheme that will replace national fiat systems with a mega-global fiat system, trading paper for digital money that concentrates wealth in relatively few, technologically sophisticated, invisible hands that hold zero accountability for system failure.
Designed as a virtual peer-to-peer payment scheme, Bitcoin is not issued by any government, bank, or organization; it relies on cryptographic protocols and a global, distributed network to mint, store, and transfer the currency.
No central government banking authority tracks the publically accessible, yet anonymous Bitcoin transactions.
Bitcoin’s elite, tech-savvy user network manages all tasks collectively.
Credited as being created by pseudonymous Satoshi Nakamoto in 2008, Bitcoin itself remains equally mysterious to many consumers and mainstream investors – a virtual currency consisting of secure, encrypted digital codes, from which pieces are “mined“ using software, and then either traded via a number of online platforms, or used to purchase goods from vendors that accept Bitcoin as payment.
Now the gold standard for an ever expanding, global payment system, one Bitcoin once cost less than ten cents.
Prevailing against a backdrop of pervasive black market activity, government warnings, and mainstream public ignorance, 2013’s final quarter saw Bitcoin use and value explode within less than three months, rising from $100 to a record high of $1,238 per Bitcoin on Dec. 4, 2013.
Chinese demand spurred Bitcoin’s value. However, by mid-December China restricted exchange of Bitcoin for local currency. The European Union warned Bitcoin lacks consumer protection, because unlike credit cards and other forms of virtual currency, it can be stolen and chargebacks, so far, are impossible.
Though highly volatile, and subject to market whims, Bitcoin currently holds steady around $850, proving to be a formidable, rebel currency with a cause. By effectively dodging government regulation, Bitcoin attracts a burgeoning, upwardly mobile crowd of enthusiastic, principally young male investors. And while Bitcoin is clearly the top dog, it leads a pack of at least 80 other “cryptocurrencies.”
Two studies examining who uses Bitcoin indicate the typical user is male (88 percent), relatively young (average age 32) and fairly affluent –not exactly Joe Sixpack. This is “… a very attractive advertising demographic,” Nicholas Colas, chief market strategist at ConvergEx Group, told CNBC.
Money Morning Associate Editor David Zeiler reported on Bitcoin user demographics, citing research firm Quantcast. About half of Bitcoin’s ultra-techy users enjoy annual incomes of $50,000 or more; over a third top $100,000; and, more than a quarter take in more than $150,000.
The lure of capturing this attractive clientele, Zeiler noted, did much to win Bitcoin acceptance among vendors hesitant to embrace the untested, volatile currency that lacked a regulatory foothold in any world government. As concern waned, more businesses adopted Bitcoin as legitimate payment, helping secure its alternative currency status.
Given the comfort of Bitcoin’s investors to make online purchases, web-based businesses such as San Francisco game company Zynga Inc, dating website OKCupid, and blogging platform WordPress were inclined to favor Bitcoin.
When Zynga adopted Bitcoin earlier this month, its value skyrocketed, surpassing $1,000 a share by January 6, a soft landing after China had yanked the welcome mat.
Another milestone for the fledgling currency came on January 10, when Salt Lake City company Overstock.com became the first major online retailer to accept Bitcoin as a form of payment for a wide array of products, including cars, furniture, electronics and jewelry. Bitcoin now joins Visa, MasterCard and PayPal as legitimate virtual currency.
According to Zeiler, Overstock partnered with Coinbase to process the payments and to handle the conversion of Bitcoin into U.S. dollars. Coinbase is an international digital wallet that allows clients to securely buy, use and accept Bitcoin currency.
Coinbase co-founder Fred Ehrsam told Zieler, “We believe that Bitcoin is nearing a tipping point for broad consumer adoption, and we couldn’t be more thrilled to be working with the team at Overstock.com to help make that a reality.”
Zeiler also quoted Overstock.com chairman and CEO Patrick Byrne. “Bitcoin is well suited for online transactions.
It has no transaction fees and works well for international customers. Providing this convenience for the cult-following Bitcoin customer is the smart thing to do. Other online companies will have to follow suit soon.”
Zeiler wrote, “In fact, Byrne said the king of online retailing, Amazon, will have no choice but to start using Bitcoin or ‘cede the market’ to Bitcoin-accepting sites like Overstock.”
Consumers can already use Bitcoin for more conventional purchases, according to Zeiler, by using a “Gyft” mobile gift card app that permits Bitcoin use to buy gift cards for more than 200 vendors, including Best Buy, Crate & Barrel, Target Corp, Whole Foods Market and Victoria’s Secret.
“Nerds, techies – whatever you want to call the early Bitcoin adopters – it’s a very high-level demographic that’s using this,” CJ MacDonald, co-founder and chief operating officer of Gyft, told CNBC. “We have had some high-profile, high-end retailers saying they want to adopt it to go after this very group.”
Analysts suggest some retailers may be observing who uses Bitcoin before adopting it themselves. According to Zeiler, the number of Bitcoin wallets on Blockchain.info soared from less than 200,000 in April of last year to more than 1 million this month.
Rebels with a cause
“What we’re witnessing,” said Money Morning Defense and Tech Specialist Michael A. Robinson, “is a global rebellion against the Fed, against all central banks. A harsh dose of medicine to many overblown power structures.”
Robinson, a former Board Member of a major Silicon Valley Venture Capital Fund who spent the last two years analyzing the benefits of buying and investing in Bitcoin, said the Fed pumps $85 billion a month into the U.S economy, further ravaging the dollar’s value, which prompted Warren Buffett’s blunt advice to CNBC that investors should fear the dollar because it will be “worth less and less over time.” Buffet advised investors to “Run from paper money. … Paper money has a lousy future.”
As a result, Robinson writes, investors flock to Bitcoin amidst fears the Federal Reserve policy of quantitative easing will lead to “both shares and bonds falling in value as global stock markets have been propped up by the Fed’s aggressive policy.”
“Ordinary Americans love this currency, yet politicians are terrified of it. Something like this has never happened before in history,” Robinson said. “Since 2009 we’ve had ungodly amounts of money printing, quantitative easing, and zero percent interest rates as far as the eyes can see. Remarkably, this new currency makes all those problems unnecessary and even obsolete,” he said.
“It’s a stateless currency,” Robinson adds. “There’s no central bank, no central computer, no center to attack. Governments fear this money could hasten the end to paper money and start a powerful revolution.”
Money Morning reports some market analysts believe the revolution has already begun. Thirty-six cities across 20 states already allow citizens to pay for everything from water bills to parking tickets with Bitcoin. And according to the latest figures, nearly 700,000 American businesses are now turning to Bitcoin, including Wal-Mart, CVS, Lowes and Nike.
International acceptance is surging too, and economists predict Bitcoin could usher in a new international monetary system. Not everyone agrees this is a good thing, however.
“Given the above scenario, it is my belief that the next global war would be fought in Cyberspace,” writes Matthias Chang for Global Research, “a cyber war that would destroy economies by paralyzing the financial system, specifically the payment system.
“Bitcoin is … admission that the financial powers are … considering the replacement of the Fed [and] the central banks of [all] developed economies … substitut[ing] control … with super-super computers networking the global economy, controlled by a handful of techno-corporations, and behind this front, the power of the 0.01 percent financial elites. Let me assure you that this is no conspiracy theory,” writes Chang.
“The original amount of Bitcoin … mined (i.e. created by the computer) is only 21 million. … If you had [bought] Bitcoin early (2009) you would be very rich now, as the price of Bitcoin … skyrocketed to over US $1,000. … This is a Ponzi scheme,” he charged.
“The inner circle or founders who created the initial amount of Bitcoin. … made a killing in the Bitcoin market,” Chang said. “However, I am placing my bets on a Gold-Backed Monetary System, for when the Bitcoin Ponzi scheme is exposed, people will scramble for gold and gold-backed currencies.”
“Michael Robinson attributed Dr. Milton Friedman as saying, ‘We don’t need the Fed, replace the Fed with a computer’. … It begs the question, who controls the computer?” Chang asked.
“Just imagine watching your computer digits vaporized before your eyes and there is nothing you can do about it,” he warned. “All your transactions are anonymous. The only evidence that you [own] Bitcoins is in your Bitcoin computer ledger, or your Bitcoin wallet. It is not in a vault. The money trail is wiped out,” he said.
“Who do you complain to since the reason you went into Bitcoin is to maintain your anonymity, your privacy and as the promoters of Bitcoin keep touting – to escape from the taxman?” Chang asked.
Given Bitcoins sordid history, Chang’s instincts are understandable.
Until 2013, cryptocurrencies like Bitcoin were associated with the black market due to their anonymous nature.
Even this month, the black market site Sheep Marketplace was taken down, citing a theft of $5.3 million in Bitcoin. Later users allegedly tracked nearly 100,000 stolen bitcoins, worth more than $100 million, through the block chain.
In May 2013, the feds investigated and shut down the Liberty Reserve marketplace as criminals from around the world used the site almost exclusively to launder money.
The most notorious marketplace, however, was Silk Road.
Prior to arrest in San Francisco on Oct. 1, 2013, alleged founder and mastermind Ross Ulbricht used Bitcoin to run Silk Road, the most “sophisticated and extensive criminal marketplace on the Internet,” according to federal prosecutors, to facilitate the covert transaction of nefarious deals involving drugs, computer hacking, forgeries and even hit men.
Calling himself Dread Pirate Roberts, a nod to a character in “The Princess Bride,” the FBI alleges Ulbricht unmasked himself by using his real name and a Gmail account to establish Silk Road, known as the eBay or Amazon of drugs by its users.
On January 15, 29,655 Bitcoins were ordered forfeited by Silk Road, the largest such action ever involving a digital currency, according to NBC news. The feds allege another 144,336 bitcoins were seized from computers belonging to Ulbricht. Total worth of Bitcoin seized from the now defunct Silk Road is estimated to be approximately $142 million.
The long arm of the law
Due to murky regulations and a lack of awareness among major law enforcement entities for victims of Bitcoin theft, CoinDesk’s Carrie Kirby found there aren’t many places to seek justice.
Enter super-sleuth University of California-San Diego PhD researcher Sarah Meiklejohn, who wrote, among other highly significant revelations, If Privacy Matters, Cash Is Still King.
Kirby wrote, “Law enforcement agencies and media outlets turn to the PhD candidate to trace Bitcoin movements, because Meiklejohn –along with a team including other UC-SD and George Mason University researchers – has dug deep into the block chain, following the money, and challenging the notion that Bitcoin transactions are anonymous.”
In Meiklejohn’s paper, “A Fistful of Bitcoins: Characterizing Payments Among Men With No Names,” Kirby writes, “how Meiklejohn’s team sleuthed out Bitcoin addresses by making transactions and deposits, then used heuristics to link clusters of addresses, following money from a supposedly anonymous marketplace, such as Silk Road, all the way to a [Bitcoin] exchange, such as Mt. Gox, which if subpoenaed would have to turn over users’ real names to authorities.”
Meiklejohn explained to Kirby how she and her team accomplished what the FBI couldn’t without them:
“If you know how Bitcoin works and are very motivated to protect your anonymity, that is possible. The problem is there are more people who don’t know. We saw a lot of people buy their Bitcoin from Mt. Gox, or another exchange, then transfer the Bitcoins that they just bought directly from their Mt. Gox address to the Silk Road account, and that’s how they buy the drugs. That’s the biggest mistake – not understanding that hopping directly from an exchange that knows who you are, to the site where you want to buy drugs, is probably not a good idea.”
At least, not if the FBI requests Meiklejohn and her team to pay attention.
And with respect to Chang’s worries, Meiklejohn related another matter to Kirby that would validate his vanishing Bitcoin concerns.
“We’ve actually been looking into a form of ransomware recently,” said Meiklejohn. “The idea is, someone holds something hostage and demands payment in Bitcoins. This ransomware can come in a bunch of different forms. The most direct thing is, they just lock down your computer and say, ‘Give us 2 BTC at this address and we’ll unlock your computer.’ It’s a form of malware.”
Meiklejohn explained that rather than monetize the infected computer, i.e. rob it of its valuable content, “they monetize very directly – by getting you to give them money in exchange for getting your computer back.”
With respect to ongoing criminal activity along the Bitcoin marketplace’s superhighway, Kirby and CoinDesk have followed a proliferation of black market sites since Silk Road’s demise. She wrote, “The argument goes that where one falls, another 10 will spring up. But if they’re all run by amateurs, tripping over their own shoelaces, what does it matter?”
Guess it depends whether you’re the one watching your Bitcoin vanish before they get caught. The good news for ethical cryptocurreny junkies is the technology’s always changing, and may eventually solve pesky pirate problems.
Smart, innovative programmers continue improving upon cryptocurrency’s concept, changing protocols, building layers on top of existing designs, tweaking imagined flaws for improvement. At least 80 new digital currencies emerged in the past two years, most based on Bitcoin, but with significant tweaks.
“Each new cryptocurrency that comes forward benefits from the groundwork that Bitcoin advocates have already done,” said Mastercoin Foundation executive director Ron Gross, speaking at the Future of Money and Technology Summit in San Francisco.
“You can take Bitcoin’s open source code and make a couple tweaks, and you have an altcoin,” said Greg Schvey, head of research for The Genesis Block, a New York-based global resource for digital currency analysis. “I could make a new alternative currency by the end of this conversation,” Schvey told Kirby.
Alternative digital coins can be refreshingly creative, even edgy, belying an in-your-face nefarious nature that may help motivate rebellious investors’ buy-in to secure their legitimacy. Two examples are Dogecoin, which began as a dog joke, and the litigious Coinye West coin, featuring rap artist Kanye West’s likeness, but used without his permission, and now subject to lawsuit.
“We’re building on Bitcoin’s success – on a lot of infrastructure that has already been laid in the last five years. The infrastructure is technological, its social – all these gatherings of people – and it’s regulatory,” Gross said.
Kirby reports that when David Sterry, a Bitcoin believer for years, learned that Bitcoin miner demand was causing month long backlogs, Sterry realized it was his “big, big moment” to create Litecoin.
With a few tweaks to Bitcoin’s encrypted protocol, Litecoin emerged in October 2011. It’s value fluctuations tend to mirror Bitcoin, Kirby notes, adding that as Bitcoin prominence and price escalate, it becomes more difficult to mine, so new miners rush into Litecoin as the next best thing. Litecoin’s total market cap value of $410.8 million makes it the second biggest cryptocurrency after Bitcoin at $7.7 billion.
Sterry suggests there may be advantages to having multiple active cryptocurrencies. For example, it may reduce price volatility.
“With a reasonable second cryptocurrency (Litecoin), we have a pair that we can trade between very easily. And maybe it’ll help to stabilize the value of each one and take some of the edge off the speculation,” Sterry said at the Future of Money and Technology Summit.
Survival of the fittest
Cryptocurrency’s time has come. Whether Bitcoin or any of its progeny survive ensuing evolution remains to be seen. Regardless of the underlying motivation for Bitcoin’s creation, whether intended to do good or evil, whether one supports or opposes its method, irrelevant of its future, Bitcoin’s significant foothold today in humanity’s collective consciousness testifies to the creative resiliency and power of determined innovative thinking.
Breaking Bitcoin news
On Monday, the Bank of Finland declared Bitcoin a commodity, and determined the digital instrument does not meet the definition of a currency, nor does it satisfy the legal conditions required to be considered a legitimate form of electronic payment. One wonders how this will affect Finland’s first-in-the-world, permanently installed Bitcoin ATM machine – convert it to trade for baseball cards maybe?
Local Bitcoin usage
A random sampling of vendors and acquaintances around the valley had either never heard of Bitcoin, or were aware of it but knew nothing much about it. None of the merchants were considering it, though only local shops were questioned. If Bitcoin gets accepted in Jackson, it’s likely to be at national chain stores or franchises.
Over at Wilson Backcountry Sports, I asked owner Andy Olpin if he took Bitcoin or knew of anyone in the valley who accepted it. He grimaced and said, “Sounds pretty sketchy to me. I think I’ll wait till I’m 100 percent sure… and then, maybe not.”
Bitcoin ‘bit of funny’
Norwegian Kristoffer Koch forgot about the 150 kroner ($26.60) he paid for 5,000 Bitcoins back in 2009, until recent widespread media coverage about the digital currency jogged his memory, rewarding Koch with an $886,000 windfall due to today’s hot Bitcoin market.
Dogecoin accounts for more cryptocurrency trading than Bitcoin, Litecoin, and all others combined. Dogecoin’s popularity is off the charts. Although the canine cryptocurreny’s value is no where near that of Bitcoin, Dogecoin’s trade volume skyrocketed past Bitcoin’s in early December, peaking at 200,000 transactions in one day.
Zero-0k transactions took place between January 2009 and midway through 2010, when the currency gained rapid popularity among affluent, young adult males, with Bitcoin use peaking on November 28, 2013 at 102.01 thousand transactions. A little more than half that many transactions took place last week on January 14, 2014, at 55,000.
Bitcoin value was flat from January 2011 until it began rising rapidly in February 2013, and peaked on November 30, 2013, just prior to China prohibiting Bitcoin use. Since then, the currency’s value had dipped and fluctuated, but seems to be stable and leveling off.