Catching up with Bitcoin

So I read on Samizdata this morning that Bitcoin has encountered it’s first truly serious issue. Control over a substantial fraction of the currency has been lost as popular bureau de change Mt Gox has gone bust. The BBC business editor seems to call this right, or at least nearly:

There is no central authority to step in and give any kind of guidance to Mt Gox customers whether their money is safe or gone. And there’s no compensation safety net.

Bitcoin has been set up on the basis of pure caveat emptor. If its participants take any losses in their stride, and learn the lessons, it can go from strength to strength.

If they are unable to develop any kind of governance system that provides confidence that Bitcoins are where they are supposed to be, then it will disintegrate into fringe territory for loons and wild-eyed monetary anarchists.

I think he is right that this is a big test for Bitcoin and of the committment that the participating companies have to keeping it going, but it is not a choice between centralisation or anarchy.

First it is worth noting some confusion about timing. The BBC date the problems back to 7th February and describe them as technical. The leak that precipitated the crisis (according to this sequence of events) is date stamped 24th February. I will trust that Tumblr datestamp over the BBC fact checkers in this case. Also, I like to beleive I have not been asleep for 19 days, although this is possible.

© ZCopley

© ZCopley

I have not yet read much of the detail, but the timeline is important because it reflects how survivable the crisis is for the core Bitcoin system. Just as the Dollar would not be systemically affected by a bankrupcy of Travellex, Bitcoin is not directly affected by the closure of one exchange. The problem is of credibility.

If users begin to perceive Bitcoin as a risky and difficult option then they are less likely to buy into the concept, just as you are less likely to by a Ford if you think they suffer from rust (I am neither a bitcoin nor a car expert, do Fords rust?). If we were to find ourselves 19 days into a crisis with no-one stepping forward to sort it out, then we would have a serious credibility problem, but if we are just 48 hours in then there is still time.

If the people involved in Bitcoin are just chasing a quick buck, and regard this as a nice job to have while the fun lasts, a job the can leave to go and work in computer games in 5 years time then they will let Mt Gox and $409 million of Bitcoin just melt away. If, however, they have decided that their life mission is to make Bitcoin work then they should be willing to step up and put forward the funds and manpower necessary to mount an orderly bankrupcy process (or investigate the theft, retrieve the coins, repair vulnerabilities etc), by way of mutual contractual agreements – just like a proper political anarchy.

We are about to discover what kind of people are running this system.

 

UPDATE: The FT have credible details. It seems there was a “bug” at Mt Gox ~19 days ago, and the site vanished very recently after a theft. When is a bug not a bug?

Simon Gibbs

Simon is a London based IT contractor and the proprietor of Libertarian Home. Working with logic and cause-and-effect each day he was naturally attracted to nerdy libertarianism and later to harshly logical Objectivism. Find him on Google+ 

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  19 comments for “Catching up with Bitcoin

  1. Feb 26, 2014 at 10:35 am

    Good summary. NeoBee are interesting: http://www.neo-bee.com/en/ — I need to investigate them more but they seem to be trying to add safety and convenience to Bitcoin. Such services added on top are probably part of the answer.

  2. Feb 26, 2014 at 11:00 am

    The BBC man does not seem to understand that the Bank of England did NOT always use to step in to bailout banks and other such. For example the then Governor of the Bank of England was utterly disgusted with Walter Bagehot suggested the possibility of bailouts being a good thing (and Bagehot was incredibly moderate compared to the “mainstream” today). If an industry needs a “central authority” and a “safety net” for investors (which is what “depositors” actually are – as the money is not “deposited” it is lent out) then it is not a private industry at all – it is a welfare scheme. And the people who work in such as welfare scheme should be on Civil Service wages.

  3. Paul Marks
    Feb 26, 2014 at 11:11 am

    As for Bitcoin…. I do not see how this “exchange” managed to go bankrupt (still any bankruptcy is possible). Bit”coin” is not coin at all – it is just certain “special numbers” (actually no more special than any other numbers) that are encrypted. If someone wants these “special numbers” and is prepared to pay Dollars or Pounds (or silver or gold) for them – fair enough. Dollars and Pounds are “fiat currencies” (they are based on government orders – “fiat” as in “by fiat”, specifically legal tender laws and tax demands). Gold and silver have many nonmonetary uses (although all ECONOMIC value is subjective – so someone may simply hold that all the uses of gold and silver “have no value” for them). Bit”coin”? It is neither a fiat currency (no legal tender laws or tax demands) or a commodity with non monetary uses (as both gold and silver have). People may still get involved it in if they wish (of course yes) – but they need to be aware that it is NOT a currency, it is a CRYPTO currency (the word “crypto” is very important – and it is not just a matter of cryptography) – it is not a commodity and it is not a fiat currency either (essentially it is nothing much).

  4. Feb 26, 2014 at 11:30 am

    Lastly.

    I hope the BBC man understands (although he most likely does not) that a commodity money (such as gold or silver – or other commodities) does NOT need a “central authority” or a “safety net”. A gold (or whatever) STANDARD may need such things – but that is the problem with a gold (or other) “standard” not with commodity money.

    As for banking – an honest money lender leads out money (real savings – their own, or the savings that other people voluntarily entrust to them to be lent out, not “deposited”). When money is lent out it is not still “in the account” of the “depositor” (there are no “depositors” – the language is wildly misleading – a real “depositor” would PAY THE BANK for looking after the money, they would not get interest on real deposits – i.e. money that was actually “deposited” as grain is “deposited” in a grain silo).

    What a straight forward money lender does not do is (via a complex process of interactions with other money lenders) “expand credit” – i.e. lend out “money” that no one has really saved (real savings being a SACRIFICE OF CONSUMPTION from real income). Thus creating a credit bubble – a boom-bust.

    Should anyone wish to deny that the banking system “expands credit” (“broad money”) over and above real savings of cash-money, I have a simple question for them.

    From 1929 to 1933 everyone complained of great “deflation” in the United States. Milton Friedman made this the orthodox complaint for Monetarists as well as Keynesians – the problem was “the collapse of the money supply”.

    But no one was going round bank vaults burning Dollars and melting down coins.

    So, if the banking system does not expand credit (“broad money”) over and above real savings of cash money…….

    What form of money contracted from 1929 to 1933?

    What form of money contracted from 1929 to 1933?

    This is the question I can not never get the “the banking system does not engage in credit expansion – it just puts peoples savings to work” people to answer.

    What form of money contracted from 1929 to 1933?

  5. Mar 1, 2014 at 8:48 pm

    Some words of wisdom around this from the other contributors.

    The way I see it so long as the people who bought their bitcoins from Mt Gox can still trade them then the owners have not lost any money, maybe a bit of value knocked off for the moment. I find it difficult to understand from the press exactly what was ‘stolen’. For me the number of exchanges available just decreased by one, perhaps because they did not charge enough for each transaction to pay for their overheads, and the ‘attack’ just came at the same time and took them over the edge. The truth will be interesting if it comes out.

    • Mar 1, 2014 at 9:10 pm

      I believe the theft occurred over a long period and emptied the banks reserve wallet, leading to a solvency issue.

      Unfortunately Mt Gox was not just a convenient tool for users to make bitcoin transactions into their own wallet, it held the bitcoin on behalf of users and the reserve ratio fell away from 100%.

  6. Mar 2, 2014 at 11:38 am

    The people have not lost any money – because they did not have any money. Bit”coin” (it is, of course, not a coin) is not a commodity money (it is not a commodity – it has no nonmonetary uses) and it is not a fiat money (fiat = “command”, “order” as in “by fiat” – legal tender laws and tax demands, the vile Paul Krugman;s “men with guns”). It is NEITHER. It is not money.

    So the people who have lost Bit”coin” have not lost money – because BC is not money. What they have lost is the opportunity to sell BC to other people (for money) at a later date. However, not all is lost – at least one person I know has admitted to buying BC (at the panic prices) in the hopes of selling it later (when people get over the Magic the Gathering “Mt Gox” thing). I must confess that I rather hope he loses his shirt (after all he is planning to sell something that has no nonmonetary uses what-so-ever and is not a fiat money ether). However, I suspect he will do well – there are always more mugs to con. As long one does not stay in the scam a little bit too long…….. The point (as with all these schemes) is to NOT be the person left holding the BC when the music stops (to make sure that one has converted one’s notional profits it real assets).

    Of course BC did have a use – converting money (fiat money or commodity money) with less transaction costs. One would (for example) use Dollars to buy BC then sell the BC for Pounds. However, transaction costs for converting money have come down now (partly because of this competition).

    • Mar 4, 2014 at 10:12 am

      It is a new form of money, so it’s not surprising it doesn’t fit with definitions of commodity money and fiat money. However if it looks, walks and quacks like a duck, it is a duck, and if people are using it as money, then Bitcoin is indeed money. Whether it will prove to be long-lasting, and / or stable is another matter.

      • Mar 4, 2014 at 10:37 am

        Money is either a claim on a commodity with non monetary uses (thus giving the money its subjective economic value – “subjective” does not mean “nothing” as with Bit”coin”) or it means the vile Paul Krugman’s “men with guns” (legal tender laws and tax demands).

        BC is not a commodity with nonmonetary uses (contrary to Max Keiser who was busy lying on Russian Television a few minutes ago – as usual “Bitcoin is just like gold and silver” lie, “Bitcoin means jobs and economic growth” another lie).

        Nor is BC backed by any legal tender laws or tax demands – so it is not even a “fiat money”.

        It is not a “new type of money” it is not money.

        This does not mean that people can not make money from it – as long as they are not left holding BC when the music stops.

        “Buy low, sell high” as someone I know (who is busy talking up BC on his libertarian blog) says.

        Notice “sell high” – he has no intention of saving BC for his retirement (it is not money).

        He intends to “sell” – the talking up is a matter of trying to ensure that he “sells high”.

        And the people he sells the BC to?

        Why should he care about them?

        After all a mug is born every minute.

        By the way – there is a university basing itself on BC and claiming that BC will be the future of the world.

        The university is in Cyprus – that wonderfully straightforward and honest place.

        • Mar 4, 2014 at 11:34 am

          Money is a medium of exchange. BC is a medium of exchange. BC is money. The fact that some people have bought it speculatively changes nothing, nor does the risk that BC may crash into oblivion, as various fiat currencies have done in the past. As long as it is used as a medium of exchange it will remain money. Given the number of people using BC at the moment, it has more claim to being money than, say, silver.

          • Mar 4, 2014 at 12:18 pm

            Money must be a store-of-value (NOT just a “medium-of-exchange), and saying that economic value is subjective does not alter this. A commodity is a store- of-value (for example silver has served this function for thousands of years). Even a fiat money is a store of value (thanks to the vile Paul Krugman’s “men with guns” – i.e. legal tender laws and tax demands). But BC is neither a commodity or a fiat currency, it is not a store-of-value

            For example no one would “save BC for my old age” (someone would do that with silver).

            What one does with BC is to “buy it low and sell it high” (as fast as one can) – one does not want to get caught holding BC when the music stops.

          • Mar 4, 2014 at 12:43 pm

            BC is a store of value, as long as it is used as money. Will it be valuable in ten years or even ten hours? No one knows, but the same applies to fiat currency. The Zimbabwe dollar was money and then, due to hyper-inflation became essentially worthless (dropping to its commodity value as paper, which can be used inter alia as a bathroom sanitary product), but until that event, it was money.

            The speculation occurring doesn’t change this. There is speculation in all world currencies, and speculators buy any currency which they think is under-valued, and sell if they think it’s over-valued. This is separate to BC being used for buying and selling goods and services, which is going on all the time. Even if the government shills were right and BC was only being used to buy and sell drugs and fake passports, this alone qualifies BC as money.

  7. Mar 4, 2014 at 10:49 am

    By the way the photograph – the photograph of actual Bit “Coin” that is with the post.

    If the claim is being made that the BC is worth the metal in those coins then BC is rather over valued (more than one hundred times over valued). Again “subjective economic value” does not mean “this thing that has no nonmonetary uses what-so-ever has a vast value – because I say it does”.

    “The metal in the coin has nothing to do with the value” oh does it not?

    Then why is gold no longer used to make Pound coins? It was once.

    Sliver was dropped from high denomination American coins in the early 1960s – as the coin was becoming less valuable than the silver (due to monetary inflation).

    Now nickel is being dropped from coinage – for the same reason (the coinage was becoming less valuable than the nickel in it – thus tempting people, at some point, to melt it down).

    After all those BC in the photograph are not made of gold – and they are not going to be.

    • Mar 4, 2014 at 1:00 pm

      The photo is just illustrative. It is art depicting bitcoin.

      • Mar 4, 2014 at 1:09 pm

        Agreed – but in India physical Bitcoins are used to counter the claims of nasty people that BC does not actually exist. “My dear Sir (or Madam) do not listen to the nasty people saying that Bticoins do not exist – see I am holding one in my hand (errr no you can not examine it),it is very valuable indeed, and I have proved that nasty Mr Marks is a liar.” In the long term it would be better if these tokens (these bits of “art depicting bitcoin” ) were the actual things being sold. At least after “tulip mania” people actually had tulip bulbs – they could plant them in their gardens and see my late father’s favourite flowers.

  8. Mar 4, 2014 at 1:36 pm

    Good point about fiat money Richard – that is why I do not think highly of Paul Krugman’s “men with guns” argument (and not “just” on moral grounds”).

    As for BC my opinions have changed on it in recent weeks (and not because of the Magic the Gathering problem), I have tipped from neutral (and I was neutral) to hostile – due to an insight into a leading British libertarian (unintentionally) gave me into the motivations of the people involved in BC.

    But I can still think of legitimate uses for BC – for example one could buy BC (in a country where buying gold and silver leaves a paper trial) and then go overseas and buy gold or sliver with the BC and store the gold or silver there.

    When the government comes stiffing around asking “what have you done with your money?” one can say (quite truthfully) “I bought BC with it”, then when they say “where is the BC?” one can say “I lost it” (and this will be believed – as the BC market has a bad reputation).

    This may be what certain people are doing with their overseas accounts (now that Switzerland and even Liechtenstein give information to the tax authorities).

    Use the money in the account to buy BC – use the BC to buy gold or silver in another country (and store it there).

    Then say one lost the BC.

    Of course it would be less complicated to just go and live in the country you store your gold or silver in – but some people do not want to do that. And electronic transfers of ownership of gold and silver may be trackable by the tax authorities.

    Just how safe is BC? These “block chains” bother me – to my old brain they seem like something that tax authorities could track.

    • Mar 4, 2014 at 1:42 pm

      To my young, computer programmer brain, I cannot understand why people think it would be difficult. Indeed the only self labelled expert I ever met on Bitcoin told me it was doable.

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