Deon Opperman

Deon Opperman
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Saturday, 25 May 2013

BITCOIN OR BITCON?


Let me make it very clear:  I am an avid supporter of cryptocurrencies, of which Bitcoin is arguably the most dominant at present.  I own bitcoins, and consider every retreat or crash in the bitcoin price as a buying opportunity.  I do not speculate. I buy and hold for the long term.  I encourage my friends and colleagues to buy bitcoin and take the time to explain to them how it works (not easy when dealing with a non-tech friend).   I am, as they say, “in it for the ride”.

That said, I also warn my friends that we are in uncharted territory here.  And as any pioneer will tell you, uncharted territory is fraught with danger.

Bitcoin supporters frequently point out that the great flaw in fiat currencies is precisely the word “fiat”.  A fiat currency is a currency that has no intrinsic value.  It has value because a government says it does, i.e. the government has issued a fiat declaring it to be so, and then, when the citizens accept the government’s fiat (which they usually do having little or no alternative), the currency becomes legal tender.  Given the questionable integrity of governments one must rightfully have grave concerns about the reliability of such a currency.

Furthermore, because governments and/or their central banks control the fiat currency, they can inflate or deflate that currency’s value at will, by either reducing or increasing how much of that fiat currency is in circulation, either by withdrawing some from circulation (literally burning notes or pressing delete buttons) or putting more into circulation (printing more or typing a one followed by a couple of zeros on a spreadsheet).  The quantitative easing (QE) programs of many governments since 2008 is an example of the printing side of this equation.  Markets are literally being flooded with money – trillions! - created out of thin air, with the result that the inherent value is decreasing.  The current currency devaluations have led to the current global “currency war”.

Like a nuclear war, a currency war carries the danger of mutually-assured destruction (MAD).  As one country devalues to give its currency competitive advantage in the global markets, so another country devalues its currency even more to counter and negate that advantage.  A global  tit-for-tat reaction is triggered and countries find themselves locked in a race to the bottom.  At some point a tipping point is reached and then…chaos.  Hyperinflation or severe deflation or stagflation, massive economic turmoil and even war.  Citizens wake up in a post-apocalyptic  economic wasteland.  Once financially sound families find themselves , through no fault of their own, in queues at soup kitchens.

The global economy is currently experiencing  a currency war led, most notably, by the USA and Japan, with the European Union and the UK hot on their heels.  Make no mistake, these are big guns, and they are firing wildly.  There will be blood.  You can run, but you cannot hide.  Or maybe you can.

Bitcoin supporters, having pointed out the above, claim that Bitcoin offers a way out. Follow the literature, the tweets and the soapboxes and you will hear the following:

·         Bitcoin is not issued by government fiat.  As such it is not controlled by any government or central bank anywhere in the world. Bitcoins are issued by a computer protocol in the cloud, which has (so far) proved itself impervious to hacking or manipulation.
·         Consequently the Bitcoin money supply cannot be inflated or deflated at the whim of a government, or anybody else for that matter.
·         The Bitcoin protocol is programmed to issue only around 21 million bitcoins by the year 2140, at which point no more will be created.  In other words, the money supply remains fixed thereafter and the value of a bitcoin determined solely by unfettered supply-demand market forces, i.e. the value of a unit determined by perceived value.
·         Bitcoins are stored with the people who own them, and can be transferred peer-to-peer.  This means that banks and central banks are removed from the equation with an attendant drop in transaction fees and general “bankster corruption” and, very important – central bank manipulation of value is negated.

This all sounds good.  And it is.  But show me the gain without risk and I will show you La-La Land.

Much has been written regarding the inherent (and very real) risks attendant upon the storage of your bitcoins, the reliability of your bitcoin client wallet, and the vulnerability of bitcoin exchanges to state regulation and even shut-down (using the criminal use of bitcoin as an excuse).   This author is of the conviction that these are issues that the profit motive will incentivise some clever people  to solve in due course.

But the issue that is seldom addressed or discussed is ironically one that lies at the very heart of Bitcoin’s apparent strength – that it is not a fiat currency.

No-one really knows for sure who created the Bitcoin protocol in the first place.  There is a name – Satoshi Nakamoto – but whether this is one individual or a group, a pseudonym or the actual name, nobody knows…for sure.  And I mean for sure.

So here you have a currency that has been created, not by a government, but by a mystery. Citizens can call a government to account, even storm its Bastille (or White House) if they choose, but how do you call a mystery to account?  More important:  How do you know for certain, as in one hundred percent certain…and let me repeat that:  ONE HUNDRED PERCENT! – that the apparently impervious Bitcoin protocol really is just that…impervious…especially to manipulation by its creator/s.

Yes, avid Bitcoin supporters will tell you that no-one, not even the mystical Satoshi Nakamoto can alter the protocol, and they will inundate you with techspeak, but say what they might, the Bitcoin protocol was written by a person, or persons, and as such cannot, by definition, be declared to be “untouched by human hands”.  And we all know that where human hands can go, well…things don’t always turn out for the greater good.

One thing that characterises a zealot is confirmation bias – the inclination to exclude any evidence that negates his or her belief structure and focus only on the evidence that confirms it.  There are many Bitcoin zealots.  I am not one of them.

Yes, I believe that cryptocurrencies are the future of money.  Yes, I believe that cryptocurrencies offer a place to hide from the vagaries of central banks and governments and the corrupt practices of banks. And yes, at the moment Bitcoin is the crypto to beat.

But there are also deep uncertainties involved, and only time will tell whether I used my devalued fiat currency to buy bitcoin…or a bitcon.


5 comments:

  1. If you held say R1m in Bitcoin, where would you host your wallet ? Local or on-line ? If you held it on-line then you would have to trust the wallet hosting site and its government. If you held that amount local then you would have to trust yourself to properly secure the wallet against intrusion techniques ?

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    1. This is an important question. What I have done up until now is to spread my holdings across a number of wallets so that all my eggs are not in one basket. I see that there is a memory stick-type wallet becoming available now on which you can apparently store your bitcoins, completely offline. In such a case your responsibility with regards to safety would be the same as with gold coins. Offline storage is already a reality, and is my first choice going forward. I view bitcoins as digital gold from which you can scratch very small pieces and send anywhere in the world. That's how I explain it to people new to bitcoin. But I'm learning as I go along. Fortunately there are many places where you can get advice.

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    2. Thats a decent strategy, except do you hold the different wallets on the same machine ? Because if you do then that machine is basically one basket with different eggs in them. My main concern is spyware detecting keystrokes when I make a transaction and enter the wallet decryption password. Like with most things encryption its usually not the encryption that gets broken its something else like spyware virtually looking over your shoulder. Best way I reckon is to run on a non-standard platform like Ubuntu Linux and that I run inside a virtual machine. This protects me against the common 'script-kiddie ' hacker but not against a pro. It is the pro I am worried about. I have seen the memory stick wallet types but they are not fully developed yet and presents the same problem , trust. Do I trust the firmware written on that device not to 'skim' of some of my money ? I can read the code and understand it but the problem is the average person cant so they have to rely on trust once again. I have not found any way that is not dependent on trusting some other party. The level of trust one needs to have on another party thus remains and I would suggest it is reverse proportional to the level of technical skill and understanding that one has.

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    3. My concern, Wouter, is that while the safeguarding of your bitcoins is as technical as it currently is, how can we expect mass adoption of bitcoin? It's one thing to hide your gold coins somewhere in your house or store them in a vault - everyone understands how to do that; but while such complicated tech steps have to be taken as you describe, it's going to be a problem for most people. However, I'm quite sure the boffins in the bitcoin world are looking at this and that it will be sorted out in due course.

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