Bitcoin is the first peer-to-peer (P2P) digital currency and payment system to gain significant interest. This month its marketcap surpassed $1 billion. [Below is a description of what Bitcoin is, and isn’t, and why it has caught on to the extent it has.] Words: 1664
So writes Shelby H. Moore (www.coolpage.com) in edited excerpts from his original article* entitled Bitcoin: The Digital Kill Switch.
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Moore goes on to say in further edited excerpts:
The Differences Between P2P Currencies & Credit Cards
P2P currencies promise some differences from credit cards, such as:
- increased privacy,
- no control by authorities,
- instant signup,
- lower fees for the merchant, and
- no chargebacks (buyer at the mercy of the merchant to issue refund if dispute).
Unlike a credit card which allows the merchant to see your details, making charges to your P2P account is impossible, unless you allow someone to get your private key. Note credit cards are adding for example Verified By Visa to provide a similar degree of security.
The government control increased on March 13, when FinCEN ruled that transactions for goods and services paying with P2P currency are not regulated, yet exchange to other currencies is regulated and can’t be anonymous. Since most users need to exchange from legal tender to and from P2P currencies, some of the purported privacy has already been lost. Also instant signup has been effectively eliminated for many, as now many new users must “practically give a DNA sample” to become verified by exchange providers [although] this tsuris may not exist in all jurisdictions.
The anonymity of payments for goods and services is given by the fact that each sender and receiver of a payment is just a number without any other identifying information attached. New numbers can be generated by users at will. However, the authorities regularly collect information from the internet about usage activity using various means of tracking such as man-in-the-middle routers, spyware, and requests for information from sites that collect information via cookies such as Google’s ads and Facebook’s Like that appear on many pages of the internet.
The Advantages of P2P Currencies vs. Credit Cards
Since most of the differences from credit cards are being diluted what are the advantages?
For merchants it is:
- the elimination of the 2 – 5% fees charged by credit card companies,
- the elimination of the ability of the buyer to issue a chargeback (n some cases, however, the buyer will not like this “no chargeback” provision and prefer to use a credit card), and
- accessing a new market of highly motivated buyers. .
For the buyer or payer it is:
- the expectation of appreciation as most merchants don’t accept P2P currencies yet.
Valuation of Bitcoins
The supporters of Bitcoin are projecting very high valuations ranging from $1000 to $1 billion per coin in the future, based on a limit of 21 million coins to ever be created, and a projection of percentage share of global transaction processing.
- 50% of Bitcoin’s future money supply was issued to the founders and early adopters in the first 4 years ended 2012,
- by 2016, 75% of the 21 million coins will have been created,
- by 2020, 87.5%’
- by 2024, 93.75% and
- by 2028, 97%.
This accelerated phaseout in the creation of new coins is creating a mad “gold rush” to get in before it is too late. Even though at least 59% (but most likely 75 – 95% since that is only a lower bound that can be measured reliably) are holding long-term and not spending, the sky-high valuations are based on the hope for adoption by merchants and then increased spending on goods and services in the future.
The 21 million Bitcoins are replacement goods with low barriers to entry and thus can be debased by market share. If competing P2P currencies issue many more coins, then the total finite demand for P2P coins has to be spread between the coins in all P2P currency competitors but this spread of market share is not uniform.
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Today, Bitcoins trade at $75 – $95 with 10.8 million coins issued and Litecoins trade at $0.58 – $0.68 with 2.5 million coins issued. Given real-time exchange between P2P currencies, there is nearly no barrier-to-entry, since merchants will want to accept as many no chargeback currencies as they can if value is rising or stable. Also Gresham’s Law dictates that coins will higher issuance will drive coins with less issuance out-of-circulation towards a higher store-of-value.
Valuations are also crucially based on market share of transaction processing to be captured in the future, which requires circulation of the currency. [As such,] it is quite naive to think that the 21 million coins of Bitcoins are immune to debasement by competitors, unless all competitors suck and have no desirable differences.
Much of the fervor is further amplified with a false sense of altruism under the delusion of being part of a momentus and historic creation of what supporters expect to be the first meritocratic money system – one which can’t be debased by the power elite who control the strings on banks in the fiat fractional reserve systems society uses now.
For Bitcoin to meet the expectation of investors in its digital coins, the transactions for goods and services has to scale up and here is where the hidden diabolical quality of Bitcoin (and Litecoin too) becomes too obvious when the technical details of the design are closely scruntinized by an expert programmer such as myself.
The processing of transactions in P2P currencies is provided by “mining” peers, who provide some Proof-of-Work to insure that double-spends can not exist in the single correct copy of the distributed database. These peers are computers connected to the internet and interacting in a protocol with the other “mining” peers.
To incentivize the “mining” peers to offer their hardware and electricity to this task, they are given the new digital coins created with each new block of transactions. Also they may be offered an optional transaction fee by some payers.
However, the rate of creation of new coins is halving every 4 years, and will eventually stop. Given the fervor the supporters have over non-debasement for meritocratic money system, the end of the creation of new coins is “non-negotiable”.
If an attacker can muster 51% of the Proof-of-Work capacity of a P2P system, the attacker can take over the system.
There are differences of opinion as to the degree of malicious behavior an attacker could do. However, one unarguable mathematical conclusion is that an attacker that had, for example, 60-90% of the Proof-of-Work capacity could process 60-90% of the transactions. If this attacker did not do any thing noticably malicious and did not charge a transaction fee, then virtually all customers would not find it necessary to offer a transaction fee because over just 3 blocks of waiting time the 60-90% becomes 90-99.9% of all transactions. (First block, 60 to 90% + second block 60 x (100 – 60) to 90 x (100 – 90)% + third block 60 x (100 – 84) to 90 x (100 – 99).) If this was sustained for sufficient months or years when the production of new coins had ended (or declined significantly), then all the other miners would go bankrupt because their costs are not subsidized. Such an attacker would then control virtually 100% of all transactions processed. Note this 60 – 90% could be built up over time, because offering free transactions to a percent of the market (when no new coins are being minted), drives some percent of the other miners bankrupt thus increasing the percent the attacker has. It is a snowball effect.
The above was explained to some of the developers of Bitcoin who hang out at bitcoin.stackexchange.com, but they claimed it is only an opinion and not a fact. How can math be an opinion?
Digital Kill Switch
There is an expectation that large retailers such as WalMart, Amazon, etc., will want to provide the “mining” peers at no transaction fee cost to the buyers so as to gain a competitive advantage over other retailers but we see from the prior section that the incentive is very great to create a cartel that has control over all transactions.
Once you have that cartel, you can eliminate those outside the cartel by delaying their transactions or charging transaction fees only to your competitors (billing the competitor, not deducting from the payer in the system) so this is just the credit card fees we have now all over again, except then they will also have a public global record of all transactions in the world (total end of privacy). Then the government could easily collude with these cartels to turn off the transactions of political dissidents…and any other classification of terrorist. This is not a stretch at all. The design of Bitcoin and Litecoin encourages it. I go so far as to say they were designed for it given there are alternative designs (I proposed one) that don’t have this diabolical possibility.
Having numerous competing P2P currencies does not escape from this diabolical threat, if all of them have the same diabolical design. A non-diabolical design would either have debasement that never ends and/or a minimum transaction fee. I doubt one can create a non-diabolical P2P currency at any time in future, [though,] because the first-mover advantage will apply inspite of low barriers to entry because, if the users already have Bitcoin and Litecoin, they may not see any compelling reason to add another, in spite of the diabolical quality which does not affect them directly (as a member of the majorty and not a dissidant or other threatened class).
The Differences Between P2P Currencies and Gold
The P2P currency fervor was further stoked by the illusion that they are somewhat like gold [but the differences are significant].
- Gold can be traded privately with no public record. P2P currency ownership and transactions are stored in one public database that is never erased forever!
- Gold’s money supply is always increasing forever (we can mine it in outer space if we run out on earth) and the rate of nominal increase every year is also increasing. Bitcoin and Litecoin are geometrically decreasing the rate of increase of the money supply and will terminate production of new coins at 21 and 81 million respectively. Some people think this makes them even better than gold and silver….
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.marketoracle.co.uk/Article39704.html (© 2013 Copyright Shelby Henry Moore III – All Rights Reserved; © 2005-2013 http://www.MarketOracle.co.uk)