Bitcoin critic’s top ten list

11 Nov

Well, the nice weather has continued for some considerable time, but at last I return to the task of refuting the top ten objections to Bitcoin posited by my skeptical friend, starting in my April 8 post, which you can find here.

But first, I would like to update a pertinent fact from an earlier post which supports my overall thesis. On April 2, 2013, I wrote that my initial investment of $100 in Bitcoin was worth $1,272, or an annualized 776% gain. That investment is now (4:43 pm EST, 11/11/2013) worth $4227, or 1,933% annualized. BTC continues to be the most lucrative investment of the millenium.

So, on to the top ten objections to Bitcoin…

4. The transactions are supposedly “safe” because, because they’re public record. We’re supposed to believe in this safety despite the fact that major data portals like Facebook, Google, Bing, Twitter, etc. can now deduce or infer with high probability incredible amounts of information about your career, sexual orientation, political views, etc by just the kinds comments you make on your Facebook profile and news feed. Yet, somehow, we’re supposed to believe that there isn’t enough processing power in the world to deduce who is associated with which transaction in a bitcoin log.

I must admit, I find this statement of objection somewhat confusing. It appears my friend means “anonymous” when he says “safe”, and yet he believes that the proponents of Bitcoin are promoting the completely transparent character of the Bitcoin blockchain as a source of anonymity. If this were true, I would agree that this is a ridiculous assertion. In reality, there has never been any claim by anyone who understands Bitcoin, that transactions on the Bitcoin network are guaranteed to be anonymous. It is well known that every Bitcoin transaction that ever has or ever will occur, can be easily traced from the recipient to the sender, back to each previous sender, and ultimately to the miner who first created the Bitcoin, through the Bitcoin addresses recorded in the blockchain. In this regard, Bitcoin transactions are far less anonymous than cash transactions wherein the payer and payee are unknown to each other and no written record is kept. On the other hand, Bitcoin transactions can easily be initiated without revealing any personal information about the participants other than the IP address of the payer. Thus if a payer takes care not to disclose his or her ownership of a specific Bitcoin address, it is far from trivial to deduce his or her identity. It may in fact be impossible, for example if the payer initiates the transaction on the WiFi network of a McDonald’s restaurant. In this regard, Bitcoin transactions are far more anonymous than bank-mediated transactions, such as credit or debit card or PayPal charges, where detailed personal information is always collected and stored by the bank holding the payer’s account.

On the other hand, if my friend is questioning the safety of Bitcoin with regard to the integrity of the transactional history and the protection against fraudulent double spending, I can only say that the “public record” of Bitcoin transactions is exactly what guarantees their safety. It is a fact that the entire history of Bitcoin transactions is recorded on each and every one of the tens or hundreds of thousands of active nodes in the Bitcoin network, and that the validity of each and every one of the hundreds of millions of transactions that have ever occurred on the Bitcoin network has been agreed to by a majority of those nodes.

The safety of BTC balances from theft or fraud is an entirely different subject which does not seem to be germane to this discussion, but which I will probably address in future posts.

5. While there are ways to cash into bitcoin, it’s extremely difficult to cash out of it.

Actually, it is really the other way around, although I would not characterize the transaction on either end as “extremely” difficult. There are several competing exchanges which mediate trades between BTC and at least 35 major world currencies. Opening an account on these exchanges can be accomplished on-line by anyone with a computer and an Internet connection. Transferring funds to one’s account can also usually be achieved with either an Internet link or a phone, although depending on the regulatory regime of the user’s home country, the process may be involved and may require up to a week, and may involve transaction fees on the order of 3-5% of the amount transferred. Cashing out can also be accomplished on-line or by phone, and usually involves a simple wire or ACH transfer of funds from the user’s BTC exchange account to his or her bank. Again, there will probably be transaction fees.

In addition, many, if not most, people who have managed to acquire BTC actually have no interest in cashing out. The purchasing power of BTC, as well as the number of merchants accepting BTC for purchases are both rising. Unless a BTC owner lacks sufficient USD or other national currency income to meet his or her needs, why would he or she want to exchange BTC for a fiat currency?

Finally, “cashing in”, while currently more difficult through an exchange, may also be accomplished by selling one’s products or labor for BTC. Currently, selling products for BTC can be as easy as downloading a smartphone app, but finding a customer with BTC to spend can be very difficult. Convincing your employer to pay your wages in BTC can also be very difficult, but again, the incentives tend to favor an increase rather than a decrease in merchants accepting BTC in payment and employees demanding a wage paid in BTC.

6. Even if you buy the theory that there will never be more than 21 million bitcoins (because you were promised that, right?), that quantity is nowhere near large enough to actually serve as a viable currency in a world economy consisting of over 7 billion people. We’re supposed to believe that this will be accomplished by subdividing bitcoins into subunits called “satoshis” (named for the fictional creator of bitcoin), although no one has actually been able to figure out how to accomplish this subdivision.

This one has me shaking my head in disbelief. First, there will never be more than 21 million BTC. This is not a promise, it is a fact. If you do not believe it, and don’t wish to take my word for it, you can download and examine the Bitcoin source code, and use your own mathematical reasoning ability to confirm it in your own mind. If that fails, it is because your mathematical reasoning ability is at fault.

As to the question of “Satoshis”. I don’t know what source of misinformation convinced my friend that “no one has actually been able to figure out how to accomplish this subdivision.”  In fact, the Bitcoin protocol is designed to accept 8 digits to the right of the decimal in all BTC calculations. That is, 1 BTC = 100,000,000 Satoshis. My investment of $100 bought 1.25 million Satoshis. 21 million BTC = 2.1 quintillion Satoshis (roughly the same as the number of US pennies, depending on which measure of money supply you favor). If this quantity of currency units ever becomes too small, the Bitcoin protocol can be modified (it’s only software), and if adopted by a majority of the active network nodes, will become the new standard.

If any of my readers still think “Satoshis” are a figment of the imagination, please email your Bitcoin address to gmautry@gmail.com, and I will send you one.

7. Supposedly, only the last bitcoin gets subdivided (according to Wikipedia). That’s just plain wacko!

I generally trust the accuracy of Wikipedia, but this statement is simply false. If it actually appear(s/ed) in Wikipedia, I agree it is/would be “just plain wacko”. But it is not true. Again, if you don’t believe me, download and analyze the code (or email me for a Satoshi which was not subdivided from “last bitcoin”).

8. Bitcoins are backed by … well … nothing. It’s fiat money issued by “the market”, which of course is why we’re all supposed to say, “Oh, what a wonderful idea!” … even though it’s a crackpot idea.

A full answer to this objection deserves an entire post of its own, which will be forthcoming. For now, I will simply point out that “fiat money” is money whose “value” is backed by state government decree. It is, by definition, backed by coercion. Any money which derives it value from free market transactions is, by definition, uncoerced, the opposite of “fiat”.

9. No one seems to have thought about how people will track all the public transactions associated with bitcoin if it somehow managed to become a popular, world-wide currency despite all the strikes against it. I suppose we’d all have to end up carrying around storage arrays so we can make sure we aren’t being cheated, right?

Just like we all carry around storage arrays now to make sure we are not cheated by Bank of America and JP Morgan? (Oh, right, we are cheated by those guys.) Actually, I have the last 5 years worth of Bitcoin transactional data on my laptop as I write and it takes up all of 22.4 Gigabytes. Suppose the traffic on the Bitcoin network doubled every year until it had completed replaced Visa and MasterCard, then leveled off. In that case, it would fill up one of my 1 Terabyte external drives sometime in 2017, and then I would need to add another Terabyte every year or two thereafter. But wait, I forgot about my wallet on Blockchain.com. That gives me access to the entire Bitcoin blockchain in the cloud, on my smartphone, so I don’t even need to run the Bitcoin client or store the blockchain on my laptop at all.

I don’t mean to be too dismissive of this question, because frankly, this is something that has concerned me as well. It just seems that a currency which is utterly dependent on every user having access to a complete record of the transactions conducted in that currency is bound to become fatally unwieldy in the course of time. However, having done the math, it is apparent to me that the existing protocol will not be defeated by this weakness within the next decade, and I believe that a decade is more than enough time for the problem to be solved. This is where I surrender to faith.

10. I could go on, but why bother? The whole concept is a nut job.

I could go on as well, but why bother? My friend, the critic, is sadly misinformed.

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