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APR 30, 2013
Bitcoin has been in the news quite a bit lately. We celebrated the first bank to interface with the virtual currency in a WealthCycles.com article in January, and since then Mike Maloney has been inundated with requests for comment.
During one of Mike’s recent Australian presentations, the peer-to-peer network phenomenon Bitcoin came up in one of the question and answer sessions. Here’s the clip:
Mike hits on all of the big points:
· Bitcoin is an experiment; Mike is for whatever the free market picks. If it turns out to be an honest system, Bitcoin could act as the world’s payment system.
· Mike wonders if the computer code underlying the Bitcoin system is vulnerable to being compromised.
· Government/central bank deposit grab in Cyprus is an attack on depositors’ purchasing power, just as printing paper currency is. Like gold, Bitcoin seeks to nullify this kind of abuse, as Bitcoins, like gold, are limited in supply.
The Cyprus deposit-grab motivated people to buy Bitcoins. Prices of the online currency shot up above $60, Mike notes, as Europeans traded out from under the control of current currencies. When we deposit funds in a bank, we are creditors to that bank, yet few of us deposit funds in the expectation of suffering overnight losses.
Mike’s point is that overnight losses are happening every day; they’re just small, incremental losses and thus go virtually unnoticed by most of us.
If prices rise 3% annually over 10 years, “that’s 34% that they stole from your purchasing power, and they do this continuously, but very, very slowly, so that we’re the frog in the pot that eventually boils,” Mike explains.
Richard Caetano, Head of Product Design at Paymium, was kind enough to help us clarify some points of concern. Paymium facilitates using the Bitcoin protocol (code), similar to the way in which Skype helps people to make phone calls over the internet protocols.
We were very interested in whether the Bitcoin code could be compromised, and whether Bitcoin could function as the world’s monetary system. To understand the answers to these questions, it is necessary to undestand a bit more about how Bitcoin alrady works.
First, the current version of the Bitcoin protocol supports 8 decimal places; the smallest unit would be 0.00000001. However, the protocol can be modified to support smaller amounts. Mining Bitcoins is limited, and on average, the mining gets harder and slower as you go, just as with metals. As Caetano explains, “This curve is to offset Moore’s Law, which says that computing power will double every 18 months. The last fraction of a coin is predicted to be mined in 2040.” A maximum of 21 million Bitcoins is the coded limit, and when a Bitcoin is lost, that deflation of supply is permanent—a Bitcoin can’t be recovered. Caetano continues:
"Because lost coins cannot be replaced, there is a tendency for coins to deflate over time.
Most Bitcoiners welcome this in the light of all the inflation created by our current monetary system. Most will say Bitcoin was modeled after gold and silver. If the coins are lost, the value lost will be absorbed by all other coins held."
From this starting point we see that the maximum number of units in a Bitcoin system is presently limited to some number under 2.1 quadrillion.
The global monetary system is larger than this, so should Bitcoin catch on, the topic of divisibility will return. As we underline above, the Bitcoin code can be changed should the value rise to the point where using the minimum unit (a satoshi) would be akin to being able to use only dollar bills to give change. The worry is that the code could be changed to increase the supply of coins as well.
As David Morgan pointed out (along with correctly identifying the issue of lack of anonymity from government eyes), if 51% of Bitcoin transaction clearing is operated by cartel, they could implement new code on their “transaction-clearing farm.” The other 49% may choose to keep the old code.
The idea is that a cartel that is able to gather a majority of transaction processing could selectively turn off transactions. Morgan writes:
"So this is just the credit card fees we have now all over again, except then they will also have a public global record of all transactions in the world (total end of privacy)."
Morgan says developers of Bitcoin who hang out at bitcoin.stackexchange.com claim this concern is only an opinion.
We asked Caetano if averting central control of the currency is as simple as telling the users to avoid the new code with the expanded Bitcoin supply. Here was his response:
"I believe so."
That’s it for Caetano’s answer, but it was enough for us to get the thrust of what matters. Maintaining free communication and the freedom to speak is critical in safeguarding humanity’s right of free exchange.
For a free-market monetary system such as Bitcoin to succeed, the monopolized channels of internet connection we use today would have to be replaced with a peer-to-peer net, where we connect to one another via a dynamic mesh—for free. This eliminates the few, centralized data pipelines now monitored by the U.S. National Security Agency. Currently, matching Bitcoin transactions to your local home address just isn’t possible without today’s gateway to the world’s information: your local internet provider.
On what to do from here, again, Mike is right. The free market of consumers is the ultimate regulator and will make the final call quite publicly. As Mike Maloney reaffirms, the best thing we can do to secure freedom from monetary monopolization is to be informed and to help educate others:
“If we have this crisis and enough people know what’s going on, and they [planners] come up with a new hocus-pocus scam to try to run on us, and we say NO, that is the age of enlightenment, coming out the other side and having a better tomorrow.”
Caetano also shared a bit of proper Bitcoin terminology with us:
• bitcent = 1 cBTC = 0.01 BTC
• mbit (pronounced em-bit) or millibit = 1 mBTC = 0.001 BTC
• ubit (pronounced yu-bit) or microbit = 1 µMTC = 0.000001 BTC
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