Bitcoin is Not Going Away
New York Times editorial writer Joe Nocera had a field day on February 28th raging against “The Bitcoin Blasphemy; which he claims is libertarian “sacrilege” since it is “unconnected to any currency or any government.” It is enlightening that the leftist thought police at the Times would admit Bitcoin is an existential threat to their “full faith” in the dollar and U.S. government as statist religion. The bitcoin currency is hyper-competitive against the dollar, because it operates outside of Congress and the Federal Reserve’s ability to foster inflation as a scam to pilfer American’s wealth. The bankruptcy last month of Mt. Gox as one of the bitcoin exchanges demonstrated that no currency is exempt from criminal theft. But Bitcoin is not going away because the dollar and other paper currencies are designed to aid and abet state-sponsored theft.
Since the Congress passed the Federal Reserve Act in 1913, inflation has destroyed over 96% of its value of the dollar. This has been accomplished through the Fed’s policy of fostering excess government debt to devalue the dollar and “negative real interest rates” to devalue savings by restricting how much banks to pay depositors interest rates that do not keep up with the cost of living. As economist John Maynard Keynes said: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Bitcoin is the name of a group of peer-to-peer payment networks that serve as an open-source form of crypto-currency introduced in 2009 by a software developer with the alias of ‘Satoshi Nakamoto.” Bitcoin was not the first attempt at creating an electronic currency, but it became the first digital tender to gain serious interest and backing by designing a structure that cut out all middlemen, such as PayPal and Visa, to determine if one party was still owned the money or had previously spent it. The bitcoin protocol solved this problem by creating a publicly viewable global ledger, called “blockchain”, showing the sequential transactions of all accounts using bitcoins.
Unlike online credit cards and PayPal-type systems that allow buyers to claim their money back, bitcoin permanently transfers value. Since there is a limit of 21 million on the total number of bitcoins ever available, bitcoins are rare units of value. There have never been any problems with the blockchain registration of bitcoin ownership and 3,797 merchants currently accept Bitcoin as payment.
The value of Bitcoins appreciated by 6,000% to over $1,000 each in late 2013; before dropping back to about $557 today. In the interest of full disclosure, I personally passed on the opportunity to purchase 10,000 bitcoins in 2009 for $2,500; which at one point late last year would have been worth almost $30,000,000.
The value of bitcoins has been cut in half over the last two months due to the collapse and bankruptcy of the Mt. Gox virtual-currency trading exchange on February 26th. Mt. Gox was founded in 2009 by American software hacker Jed McCaleb in Tokyo as a site to trade cards for a game called “Magic: The Gathering.” (Mt. Gox is short for "Magic: The Gathering Online Exchange"). “But McCaleb turned the site into a Bitcoin exchange before the selling it in 2011 to Mark Karpeles,” a French citizen operating in Philadelphia.
Karpeles evangelistically promoted Bitcoin and claimed to be conducting 20,000 trades a day on the Mt. Gox exchange. After filing bankruptcy, Karpeles admits more than 744,000 bitcoins ($475 million) are “missing due to malleability-related theft.” After the bankruptcy filing stated the company has only $32.75 million in assets and $174 million in liabilities, Mt. Gox was sued for fraud and theft. The missing money is especially suspicious since all Mt. Gox clients’ were directed by the company to first transfer ownership of their bitcoins on the blockchain to Mt. Gox, who subsequently provided “zero-confirmation” of the time and the counter-party for customer trades.
Even after their value was cut in half, the spectacular performance of Bitcoin has demonstrated to the world that a currency does not need to be controlled by a government. The central idea behind the concept of currency is ownership. Bitcoins are generally stored in a digital wallet and transactions are recorded on the blockchain shared public ledger. Members with powerful computers are encouraged to maintain the transactional register by "verifying the blockchain" -- solving complex mathematical equations and adding another "block" of transactions to the existing chain.
The strength of Bitcoin is that it only charges merchants less than .1%, versus the 2-4% transaction fees charged by credit cards operators for supposed fraud protection. But the fact that Bitcoin transactions are not reversible virtually eliminates fraud risk.The bottom line is that merchant credit card fees are on 20-40 times higher than bitcoin fees.
The “Bitcoin protocol” is a new technological breakthrough and it is sparking numerous new applications in computer science. Venture capitalists have been quick to invest money in startup businesses that approach bitcoin with unique ideas. One company named Bitcoinx wants to “democratize finance” by creating “colored coins” as crypto-currencies that represent other physical commodities. Colored coins would then act as surrogates to trade stocks, bonds, or any other securities at a fraction of current transaction costs. There is currently an ongoing movement to get the Securities and Exchange Commission to approve an exchange-traded fund for bitcoins.
Libertarians and liberals both profess personal liberty as the foundation of their philosophical beliefs. Libertarians consider liberty to be the lawful ownership of property and any infringement upon that property, such as government sponsored inflation, is viewed by libertarians as an impediment to liberty. In contrast, liberals believe government must employ many “tools” to redistribute wealth to create greater liberty.
Bitcoin remains the libertarians’ best friend and the liberals’ worst nightmare, because Bitcoin is immune from government’s tools designed to redistribute wealth through inflation. The bankruptcy of Mt Gox may give the New York Times and their liberal fellow travelers something to celebrate. But Bitcoin remains a “sacrilege”to the Times “full faith” in the dollar and U.S. government as statist religion. Bitcoin is not going away.
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Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!