By now almost everybody on the Earth has heard about Bitcoin since it’s constantly in the news, with it’s price rising rapidly.
The aim here is to give an overview of Bitcoin and then take a critical look at it.
Some common questions about Bitcoin:
“What the hell is it?
In the most general sense, bitcoin is software that forms a decentralized, peer-to-peer payment system with no central authority like the Federal Reserve or U.S. Treasury. It’s fair to call it a digital currency or cryptocurrency, but at the moment, most investors aren’t really using it as currency to pay for things. Instead, they’re using it as a speculative investment to buy in the hope of turning a profit. Maybe a big profit. (And maybe a big loss).
What backs or supports it?
Bitcoin runs on something called blockchain, which is a software system often described as an immutable digital “ledger.” It resides on thousands of computers, all over the world, maintained by a mix of ordinary people and more sophisticated computer experts, known collectively as miners. Yahoo Finance’s Jared Blikre dabbles as a bitcoin miner, running mining software in the background on his laptop. Here’s how much bitcoin he has generated so far: 0.000000071589. At the current rate, it would take him about 1,200 years to mine one complete bitcoin. That gives you a sense of how complex it is to mine bitcoin, and how much processing power it takes: These computerized mining rigs throw off so much energy that they can heat your home.
Who’s running the show?
Bitcoin is decentralized, which means there isn’t one arbiter, central party or institution in charge. Blocks of transactions are validated on the blockchain network through computing “consensus,” which is a feature of the software. Bitcoin was created by someone in 2009 using the pseudonym Satoshi Nakamoto, but it isn’t known who that was, and that person or group doesn’t have control over bitcoin today. [Can you say suspicious?]
What is there to value?
The price of bitcoin fluctuates based on buying and selling, just like a stock, but there’s a ton of debate over what the price represents. In theory, the value of bitcoin should reflect investors’ faith in bitcoin as a technology. But in reality, investors mostly see bitcoin as a commodity because of its finite supply. Under Satoshi’s blueprint, the total supply of bitcoin will eventually be capped at 21 million coins. At the moment [12/19/17] , 16.7 million bitcoins have been created. A fractional amount of new coins gets created every time a miner uploads a block to the blockchain, which is a reward for mining.
Is this a scam?
It’s not a scam, in the sense of somebody marketing a bogus product. Bitcoin is a legitimate technology. The question is how useful and valuable it will become.
Is value completely determined by the free market?
For the most part, yes. There’s a known and limited supply of bitcoin, so when demand goes up, so does the price. Technical innovation also contributes to bitcoin’s value. It was a novelty when first created in 2009, and the market has determined (for now) that it’s an invention that’s worth something.
If it’s virtual, can’t people make duplicates?
Yes, but that’s not a problem. All bitcoin transactions are stored on that public ledger, the blockchain. You can copy the blockchain, but it’s just a record. So you wouldn’t be changing the distribution of bitcoin. To process new transactions in bitcoin, miners with powerful computers solve complex problems that add the transactions in a block to the blockchain. This is called “proof of work” and is one of the core features of most cryptocurrencies. Multiple miners verify the work, which prevents fraud.
Is this a legal tender?
Not officially yet in the United States. “Legal tender” means the laws of a state or nation require any creditor to accept the currency toward payment of a debt. In the United States, for instance, merchants must accept the U.S. dollar, which makes it legal tender. The U.S. government allows transactions in bitcoin, but doesn’t require every nail salon, car dealership or restaurant to accept it. They do have to accept dollars. Meanwhile, Japan and Australia, among other countries, have officially recognized bitcoin as legal currency.
What is the collateral behind bitcoin?
Nothing! The bitcoin blockchain records the entire transaction history of all bitcoin, which is validated through proof of work. That’s not collateral, however. There’s no other tangible asset backing bitcoin, the way a car serves as collateral for a car loan or a building serves as collateral for a commercial property loan.
Who keeps track of each bitcoin?
All of the miners who maintain the system.
How do you buy and sell it?
There are a number of easy-to-use exchanges now where you can buy bitcoin using money transferred from a bank account, and in some cases by charging a credit card. The most popular mainstream option is Coinbase, which now has more than 13 million customers. Kraken is another one.
What are you actually buying?
You’re buying a digital “key,” which is a string of numbers and letters that gives you a unique claim on the blockchain supporting bitcoin. You can transfer this asset to others for whatever the market price of bitcoin is, minus transaction fees.
Can it be traced back to you?
Yes. Anyone who buys or sells bitcoin on an exchange such as Coinbase must provide their personal information to that exchange. If law-enforcement agencies or the IRS need to know something about you, the exchange will have to provide the info under the same laws that govern banks or brokerages. But your personal info does not become part of the blockchain and is not visible to miners maintaining the blockchain.
Are bitcoins real money? And can I cash them in whenever I want?
Bitcoin has value that can be converted into ordinary currency, or used to make purchases from sellers that accept bitcoin. So in that sense, it’s real money, and it will remain real money as long as there’s a market with people willing to buy it. To “cash in” bitcoin, you need to sell it to somebody, in exchange for dollars or some other currency. Exchanges that handle such transactions have experienced frequent outages that prevent some people from accessing their accounts or executing a trade for a period of time, especially when are there large movements in the price of bitcoin. So don’t assume you’ll be able to sell any time you want.
What is the value based on, besides scarcity?
What buyers and sellers think bitcoin is worth. In other words, a lot of psychology.
How are Bitcoins stolen?
The bitcoin blockchain itself is very secure, but bitcoins can be stolen from an account if thieves are able to log into your account and send the bitcoin to another account they control. Once bitcoin is transferred, it can’t be recovered. Thieves typically break into other people’s accounts by stealing logon and password info. That makes it extremely important to use all possible measures to safeguard a bitcoin account, including two-factor authentication with a mobile phone. You also have a “private key,” which is a third layer of security that you might need at some point, if there are questions about who’s logging into your account. This key is typically a string of keyboard characters that should be stored where it can’t be lost or stolen or accessed through the internet.
How does bitcoin generate revenue?
Bitcoin itself doesn’t generate revenue. It’s best thought of as a commodity, similar to gold, that has a market price but doesn’t generate economic activity, the way a business does. When the value goes up, bitcoin can create profits. But when the value goes down, it can also create losses.
Miners earn money–paid in bitcoin–for creating bitcoin, which helps cover the cost of time and computer power that the process requires. They also earn small transaction fees from bitcoin users.
What’s the difference between bitcoin and other cryptocurrencies?
That depends which currency you want to know about, and there are hundreds of them now. (Yahoo Finance recently added full data and charts for 105 of them.) Some coins, like bitcoin cash, bitcoin gold or litecoin, resulted from forks of the main bitcoin code. Then there are coins that run on their own blockchain, like ether (the token of the ethereum network) or XRP (the token of the ripple network).
Do you have to report bitcoins to the IRS?
The IRS considers bitcoin to be the equivalent of property, with profits (or losses) taxed more or less the same as the proceeds from a sale of stock. The IRS recently won a court ruling against Coinbase that requires the exchange to report information on customers who had more than $20,000 in annual transactions from 2013 to 2015. It seems inevitable that the IRS will treat profits and losses from cryptocurrency bets the same as it treats other investment income.
How easy is it to cash out of cryptocurrencies?
Not as easy as you’d like. Bitcoin is not as liquid as other investments, in part because settlement can take more than a week, under good circumstances. Volatility and surging demand has caused frequent outages on exchanges such as Coinbase and Kraken, and you can’t sell if you can’t access your account. If such outages occur amid panic selling, some bitcoin holders might be unable to sell for a fairly long time, which could make steep losses worse as the price drops and people who want to sell, can’t. That’s one thing that could harm confidence in the asset.”(1)
Some Bitcoin History
“For those that are not already aware, Bitcoin uses the SHA-256 hash function, created by none other than the National Security Agency (NSA) and published by the National Institute for Standards and Technology (NIST).
Yes, that’s right, Bitcoin would not exist without the foundation built by the NSA. Not only this, but the entire concept for a system remarkably similar to bitcoin was published by the NSA way back in 1996 in a paper called “How To Make A Mint: The Cryptography Of Anonymous Electronic Cash.“
The origins of bitcoin and thus the origins of crytpocurrencies and the blockchain ledger suggest anything other than a legitimate rebellion against the establishment framework and international financiers.
The truth is, the internet is also an establishment creation developed by DARPA, and as Edward Snowden exposed in his data dumps, the NSA has total information awareness and backdoor control over every aspect of web data.
Cryptocurrencies are built upon an establishment designed framework, and they are entirely dependent on an establishment created and controlled vehicle (the internet) in order to function and perpetuate trade. How exactly is this “decentralization”, again?
Total Information Awareness
Total information awareness is the goal here; and blockchain technology helps the powers-that-be remove one of the last obstacles: private personal trade transactions.
Years ago, a common argument presented in favor of bitcoin was that it was “completely anonymous.” Today, this is being proven more and more a lie. Even now, in the wake of open admissions by major bitcoin proponents that the system is NOT anonymous, people still claim anonymity is possible through various measures, but this has not proven to sway the FBI or IRS which have for years now been using resources such as Chainanalysis to track bitcoin users when they feel like doing so, including those users that have taken stringent measures to hide themselves.
Bitcoin proponents will argue that “new developments” and even new cryptocurrencies are solving this problem. Yet, this was the mantra back when bitcoin was first hitting the alternative media. It wasn’t a trustworthy assumption back then, so why would it be a trustworthy assumption now? The only proper assumption to make is that nothing digital is anonymous. Period.
Bitcoin Isn’t an Alternative to International or Central Banking
Cryptocurrencies like bitcoin are in no way a solution to combating the international and central banks. In fact, cyrptocurrencies only seem to be expediting their plan for full spectrum digitization and the issuance of a global currency system.
Bitcoin could easily hit $100,000, but its “value” is truly irrelevant and consistently hyped as if it makes bitcoin self evident as a solution to globalism. The higher the bitcoin price goes, the more the bitcoin cult claims victory, yet the lack of intrinsic value never seems to cross their minds. They have Scrooge McDuck-like visions of swimming in a vault of virtual millions. They’ll only accuse you of being an “old fogey” that “does not understanding what the blockchain is.”
The fact is, they are the one’s that do not really understand what the blockchain is — a framework for a completely cashless society in which trade anonymity is dead and economic freedom is destroyed.”(2)
Make no mistake….the goal is to create a cashless economic system on a world wide basis.
“Despite the incredible penetration of credit and debit card transactions into economic aggregate, and the boom in internet shopping, few will comfortably admit that a cashless society is nearly upon us.
Over the years, futurists and commentators alike seemed to agree that a cashless society will be a slow creep, and would automatically phase itself in simply by virtue of the sheer volume of electronic transactions that gradually make cash less available and more costly to redeem, or exchange. This is still true for the most part. What few counted on, however, was how the final push would take place, and why. Some will be surprised by these new emerging mechanisms, and the political and sinister implications they ultimately lead to.
It has long been the dream of collectivists and technocratic elites to eliminate the semi-unregulated cash economy and black markets in order to maximize taxation and to fully control markets. If the cashless society is ushered in, they will have near complete control over the lives of individual people.
The financial collapse which began in 2007-2008 was merely the opening gambit of the elite criminal class, a mere warm-up for things to come. With the next collapse we may see a centrally controlled global digital currency gaining its final foothold. The cashless society is already here. The question now is how far will society allow it to penetrate and completely control each and every aspect of their day to day lives”(3)
“The central banks are planning drastic restrictions on cash itself. They see moving to electronic money will first eliminate the underground economy, but secondly, they believe it will even prevent a banking crisis. This idea of eliminating cash was first floated as the normal trial balloon to see how the people take it. It was first launched by Kenneth Rogoff of Harvard University and Willem Buiter, the chief economist at Citigroup. Their claims have been widely hailed and their papers are now the foundation for the new age of Economic Totalitarianism that confronts us. They sit in their lofty offices but do not have real world practical experience beyond theory.
Considerations of their arguments have shown how governments can seize all economic power and destroy cash in the process, eliminating all rights. Physical paper money provides the check against negative interest rates, for if they become too great, people will simply withdraw their funds and hoard cash. Furthermore, paper currency allows for bank runs. Eliminate paper currency and what you end up with is the elimination of the ability to demand to withdraw funds from a bank.
Paper currency is indeed the check against negative interest rates. We need only look to Switzerland to prove that theory. Any attempt to impose say a 5% negative interest rates (tax) would lead to an unimaginably massive flight into cash. This was already demonstrated recently by the example of Swiss pension funds, which withdrew their money from the bank in a big way and now store it in vaults in cash in order to escape the financial repression. People will act in their own self-interest and negative interest rates are likely to reduce the sales of government bonds and set off a bank run as long as paper money exists.
The only way to prevent such a global bank run would be the total prohibition of paper money.
The Financial Times argued last year that central banks would be the real winners from a cashless society:
Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began…
The introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.
If all money becomes digital, it would be much easier for the government to manipulate our accounts.
Indeed, numerous high-level NSA whistle-blowers say that NSA spying is about crushing dissent and blackmailing opponents … not stopping terrorism.
This may sound over-the-top … but remember, the government sometimes labels its critics as “terrorists“. If the government claims the power to indefinitely detain – or even assassinate – American citizens at the whim of the executive, don’t you think that government people would be willing to shut down, or withdraw a stiff “penalty” from a dissenter’s bank account?
If society becomes cashless, dissenters can’t hide cash. All of their financial holdings would be vulnerable to an attack by the government.
This would be the ultimate form of control. Because – without access to money – people couldn’t resist, couldn’t hide and couldn’t escape.”(4)
The bottom line, as the corporate parasites say, is that a cashless economy equals slavery.
“Ask yourself this: Why is it that central banks around the world (including the BIS and IMF) are investing in Bitcoin and other crytpocurrencies while developing their own crypto systems based on a similar framework? Could it be that THIS infusion of capital and infrastructure from major banks is the most likely explanation for the incredible spike in the bitcoin market? Why is it that globalist banking conglomerates like Goldman Sachs lavish blockchain technology with praise in their white papers? And, why are central bankers like Ben Bernanke speaking in favor of crypto at major cryptocurrency conferences if crypto is such a threat to central bank control?
Answer — because it is not a threat.
They benefit from a cashless system, and liberty champions are helping to give it to them.
The Virtual Economy Breeds Weakness in Society
The virtual economy breeds weakness in society. It encourages a lack of tangible production. Instead of true producers, entrepreneurs and inventors, we have people scrambling to sell real world property in order to buy computing rigs capable of “mining” coins that do not really exist. That is to say, we may one day soon be faced with millions of citizens expending their labor and energy in order to obtain digital nothings programmed into existence and given artificial scarcity (for now).
Real change requires actions in the real world. Removing banking elitists and their structures by force if necessary (and this will probably be necessary). Instead, freedom activists are being convinced that they will never have to lift a finger to beat the bankers. All they have to do is buy and mine crypto. The day will come in the near future when the folks that embrace this nonsense will wake up and realize they have wasted their energies chasing a unicorn and are ill prepared to weather the economic reset that continues to evolve.
To maintain a real economy in which people are self reliant and safe from fiscal shock, you need three things: tangible localized and decentralized production, independent and decentralized trade networks that are not structured around an establishment controlled system (like the internet is controlled), and the will to apply force to protect and preserve that production and those networks. If you cannot manufacture a useful thing, repair a useful thing or teach a useful skill, then you are essentially useless in a real economy. If you do not have localized trade, you have nothing. If you do not have the mindset and the community of independent people required to protect your local production, then you will not be able to keep the economy you have built.
This is the cold hard truth that crypto proponents do not want to discuss, and will dismiss outright as “archaic” or “not obtainable.” The virtual economy is so much easier, so much more enticing, so much more comfortable. Why risk anything or everything in a real world effort to build a concrete trade network in your own neighborhood or town? Why risk everything by promoting true decentralization through localized commodity-backed money and barter systems? Why risk everything by defending those systems when the establishment seeks to crush them? Why do this, when you can pretend you are a virtual hero wielding virtual weapons in a no risk rebellion in a world of electronic ones and zeros?
In truth, the virtual economy is not legitimate decentralization, it is a weapon of mass distraction engineered to kill legitimate decentralization.“(2)
The Bitcoin Mania Bubble
You may have heard the recent Bitcoin craze referred to as ‘Tulip Mania’.
If you’re not familiar with this reference, here’s an explanation:
“Tulip mania (Dutch: tulpenmanie) was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. It is generally considered the first recorded speculative bubble.”(5)
“The price of a rare tulip bulb on the futures market in Amsterdam in January 1637 was equal to ten times the annual wage for a skilled crafts worker. A single bulb was reportedly exchanged for 1,000 pounds of cheese at the height of tulip mania. The market collapsed precipitously starting in February 1637, bottoming out in May 1637.
According to Economist Brian Dowd,
“By the height of the tulip and bulb craze in 1637, everyone.. rich and poor, aristocrats and plebes, even children had joined the party. Much of the trading was being done in bar rooms where alcohol was obviously involved…bulbs could change hands upwards of 10 times in one day. Prices skyrocketed… in 1637, increasing 1,100% in a month.”
Bitcoin, the original crypto-currency, was valued at $.08 in July 2010; $8100 on November 20, 2017, and $17,900 on Dec.15 2017. The sky is apparently the limit.
The danger, of course, is not just that at some point the bigger fools, the last purchasers of bit coin and the long term holders (“hodlers” in crypto-speak) will loose some or all of their money. That would be regrettable. But like straight forward pump and dump market manipulations of a stock, some will win while others loose.
But, as in 2007 and 2008, the creative greed behind global financialization is creating a bubble in Bitcoin and many other crypto-currencies, as investors pile into markets, just as they did in Holland in 1637. There is a real and, rapidly emerging threat that bit coin and its ilk could follow dynamics similar to mortgage back securities as the basis for highly leveraged and complex financial instruments, like credit default swaps that were traded in unlimited volumes with no limits based on the actual number of mortgages.
Cyrpto-currency has now entered the leveraged futures market. Speculators now can leverage futures purchases 15 to one. This means a 7% drop in the price of Bitcoin (a familiar phenomena) could wipe out an ‘investor’s’ capital, returning us quickly to the momentous margin calls of 2007-8. And there is no limit to the number of futures contracts.
Derivative instruments of more complexity and undefined risks are almost certain to swiftly appear as they did in 2007 when, for example, insurance giant AIG took enormous bets to earn premiums on credit default swaps on mortgage backed securities. And those securities were AAA rated. The sudden collapse of mortgage backed securities led to a liquidity crisis. The securities could not be sold for almost any price and the giant financial institutions on wrong side of the bets were suddenly bankrupt.
As Frances Coppola in Forbes points out,
“As more and more financial institutions with connections to the real economy pile into the cryptocurrency mania, the chances of a similar disastrous collapse rise ever higher, and along with it, the likelihood of Fed or even a government bailout.”
The intent of those driving the explosion of cryptocurrency prices is not a desire to use cryptocurrency as a low cost, reliable medium of exchange verified by a transparent block-chain, but as a magic carpet to wealth. If you’d bought $100 worth of bit coins in 2010, they would be worth $1.79 million as of Dec. 15. 2017. It is paradoxical that cryptocurrency, allegedly meant to free us from fiat currency, finds its liquidity and value in the all mighty dollar.
And Bitcoin is also seeing the transaction costs for Bitcoin transactions soar rising to $20 charged by block-chain “miners” whose computers verify transactions and at the same time create more blocks and produce more Bitcoins as part of the solution of the algorithm that verifies transactions. Far from being a means for very quick, cheap, anonymous financial transactions, bit coin is becoming slow and expensive to use.
By making cryptocurrency into an investment, which is part of a get rich quick scheme, as opposed to a free instrument of exchange and trade, it has become just another arrow in the quiver that’s making the rich richer and worsening the already grotesque distribution of income. Cryptocurrency speculation will make some people rich, as does day trading and house flipping, where many more will loose than win.
The Bitcoin and cryptocurrency bubble will not end well.”(6)
(5) Tulip Mania