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Bitcoin follow-up*

2013/05/07

*I want to say thank you to Markus Sagebiel, @msgbi on Twitter, for drawing my attention to many of the following links and for great comments.

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After my recent bitcoin update, debates about the nature and chance of survival of the cryptocurrency were going on. Markets remain volatile and there were bad news again. One referred to Silk Road, the anonymous online market.

Willard Foxton from The Telegraph asked: “The Online Drug Marketplace Silk Road Is Collapsing – Did Hackers, Government Or Bitcoin Kill It?

And Michael Fowlkes from the Market Intelligence Center wrote in Bitcoin Volatility Spikes Again As Silk Road Website Crashes:

 “While I have argued against buying into the Bitcoin rally on more than one occasion, I will be the first to admit that illegal drug purchases are far from their only use. Bitcoins do have a place in today’s world, but the wild price fluctuations are going to continue to occur until it matures and becomes more accepted by the mainstream.”

Other incidents included

–  the collapse of a bitcoin exchange partnership to manage operations in the U.S. and Canada as CoinLab filed a lawsuit against key Bitcoin exchange Mt. Gox alleging breach of contract in a deal to manage North America operations;

–  the closing of bank accounts of Bitcoin businesses in the U.S. and Canada;

–  the closing of Polish and German bank accounts of Bitcoin-24, the largest bitcoin exchange in Europe, on demand of the German prosecutor’s office in a fraud investigation.

Ian Steadman on Wired added to the bleak picture reporting of a study of the Bitcoin exchange industry which has found that 45 percent of exchanges fail, taking their users’ money with them:

“Computer scientists Tyler Moore (from the Southern Methodist University, Dallas) and Nicolas Christin (of Carnegie Mellon University) found 40 exchanges on the web which offered a service of changing bitcoins into other fiat currencies or back again. Of those 40, 18 have gone out of business — 13 closing without warning, and five closing after suffering security breaches that forced them to close.”

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As I mentioned before, regulators become growingly aware of the currency and related problems. Recently, the U.S. Commodity Futures Trading Commission (CFTC) announced to be examining the issue. Quoting Bart Chilton, one of its five commissioners, in the Financial Times:

“It’s not monopoly money we’re talking about here – real people can have real risk in these instruments, and we need to ensure that we protect markets and consumers, even in what at first blush appear to be ‘out there’ transactions.”

But, the FT authors also mentioned that as CFTC jurisdiction generally does not extend to cash markets unless exchanges list derivatives contracts based on them, Bitcoin would not become subject to CFTC jurisdiction unless it becomes the basis for a derivatives contract.

In Germany, according to heise online, Oliver Flaskämper from Bitcoin.de worried about an international legal prohibition.

(In Germany, bitcoin is still widely unknown, as BITCOM, the German Federal Association for Information Technology, Telecommunications and New Media found out. BITCOM is “the voice of the information technology, telecommunications and new media industry in Germany” representing more than 1,700 companies. According to a Forsa poll conducted for BITCOM, 85 per cent of Germans have never heard of the currency, but 20 percent could imagine using it some day.)

In a similar context, Max Keiser asked What If All Bitcoin Exchanges Were Shut Down By Various Governments?”

His conclusion was that

mining of bitcoin would continue but spending them becomes a problem since there would be no quoted price. The bitcoin protocol is about mining bitcoin not pricing bitcoin. There is nothing in the protocol about establishing a market price for bitcoin; you need a market for that, but what if all the exchange markets are shut down?

As a consequence, he proposed

“that some entity, possibly the Bitcoin Foundation (and this can be done on a non-profit basis), make a market in bitcoin and broadcast a current price for bitcoin (a peg)”.

Dan Kaminsky wrote on Wired in Let’s Cut Through The Bitcoin Hype: A Hacker-Entrepreneur’s Take that governments probably can’t kill Bitcoin, but:

“Don’t think, by the way, that a thing like Bitcoin can’t be co-opted by governments. A global public ledger is a very good system for everyone seeing if taxes are being paid or not. The network could literally reject transactions that don’t include a tax declaration, and directly pay to a bitcoin account controlled by taxation services. Everything can be subverted.”

Robert Wood, a tax lawyer, pointed to the consequences of reporting rules. In Sorry Bitcoin, IRS Gets Reports on Forbes he asked (the IRS or Internal Revenue Service is the U.S. government agency responsible for tax collection):

“are merchants and professionals that accept Bitcoin reporting them as income? I bet they are, and some people paying in Bitcoin must be deducting payments too. If you’re in business, don’t you almost have to?”

And he added:

“If you pay an employee in Bitcoin, you can’t withhold some of the Bitcoin and send it to the IRS. The IRS treats it as pay in kind, just as if you paid in groceries or anything else of value. You must value what’s provided, withhold income and employment taxes in cash and send the money to the IRS.”

According to CBC news, Revenue Canada Says BitCoins Aren’t Tax Exempt:

“… there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes.

‘Barter transaction rules apply where BitCoins are used to purchase goods or services,’ Canada Revenue Agency spokesman Philippe Brideau said in an email.

Barter is the exchange of one good for another good without the use of cash, such as when a farmer who grows vegetables trades with another who raises chickens. Many Canadians don’t realize such exchanges are taxable, but they are.”

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Currently, worldwide more and more people are gathering experience with Bitcoin, both as producers and users.

Vocativ wrote:

 “The closest to a central bank committee for the world’s favorite new currency are the seven core developers of bitcoin”,

and made an interview with one of them: A Conversation With One oOf Bitcoin’s Inventors: ‘I’ve Given Away Over 15,000 Bitcoins’

Although most miners work in pools, Fernando Alfonso III on The Daily Dot drew the attention to people who

“have broken away from the pack and turned their homes inside out, investing in computers capable of solving thousands of mathematical problems at once.”

He wrote that some

are building computer rigs so ridiculous they could literally burn a house down”

and included some photos to give you an idea.

Eric Limer on Gizmodo has more about Digital Drills: The Monster Machines That Mine Bitcoin, photos included. He remembered the beginnings:

“It all started so simply. Just after Bitcoin’s birth in 2009, and before its current surge of popularity, mining could be done by a run-of-the-mill CPU in just about any old computer. Back then—and still today—Bitcoins are mined by using computing power to solve a complex cryptographic equation. If your computer is lucky enough (or really, powerful enough) to get a right answer, you’ll create coins. So given enough time, a CPU can actually get some mining done. And back in the early days, if you could get free power to run it from your dorm room, library, or office, and the exchange rate was high enough (a buck or two), you could stand to make some spare pocket change.

So how did we get from there to giant rigs that consume $150,000 of electricity daily? It was inevitable, really. Especially after Bitcoins actually became worth something.”…

Sal Cangeloso asked on ExtremeTech One Bitcoin By The Numbers: Is There Still Profit To Be Made? and described his experience as a lonesome miner :

“Look on my works, ye Mighty, and despair! I have mined a Bitcoin. This was not much of an accomplishment a year or two ago, but in 2013, after the infamous early-April peak at $260, unearthing a Bitcoin is no easy task. Competition is on the rise and we are getting close to the end of the good ol’ days of Bitcoin; the time when a desktop computer or two have any real mining capabilities.

And the result?

Bitcoins earned: 1.00

Value today: $133.58

Total time: 14.5 days

Rigs operating: 2-3

Hours spent setting up and tinkering: 5

Current hashing rate: ~850Mh/s

Peak hash rate:  2700Mh/s

Average hash rate: 924 Mh/s

Minimum wattage: 700W

Peak wattage: 1440W

Current efficiency: 1.2Mh/W

Peak efficiency: 1.88Mh/W

Total power cost: ~$24.05 (@ $0.15/kWh)

Number of time pool went down: at least 2

Number of 502 errors encountered when checking 50btc.com: Countless

On the consumer side, on May 1, Kashmir Hill from Forbes started her experiment of Living On Bitcoin For A Week, which makes a fascinating read:

“On Tuesday morning, I emptied my wallet of all of the cash and credit cards before I left my house. Many journalists have been writing about the mechanics of buying Bitcoin and the resulting heart palpitations as they watched the dramatic rises and falls in the digital currency’s worth over the last few weeks. But that’s just a story about gambling. My editor issued a different challenge to test the currency’s legitimacy: “Don’t just buy Bitcoin. Live on it for a week.” …

As I write this, it is day 5 of the week and Kashmir Hill has officially moved into a new home that accepts Bitcoin as rent.

In Bitcoin: The Berlin Streets Where You Can Shop With Virtual Money, Kate Connolly and Guy Grandjean from The Guardian have a video of  Kreuzberg, Berlin, where Bitcoin has expanded off the internet into the local economy. There you can see how paying with bitcoins in local stores works.

Mike “Mish” Shedlock discovered Bitcoinstore, which offers 500,000 electronic products for sale, include high-end digital cameras, and accepts only bitcoins as payment. Mish’s interview with the store owner, who is living in Japan and is also called the Bitcoin Jesus, is very interesting.

There is progress in other respects as well. In Bitcoin Is A Step Closer To Becoming A Part Of Your Web Browser, Christopher Mims, Quartz, describes on Business Insider how

“bitcoin has now passed the first round of approval required to become a standard for the web, alongside other familiar “schemes” which allow elements on a webpage to, for example, open your email application when you click on an email address on a webpage. This is the first time a payment system has ever been legitimized in this way.”

He gives an example:

“Imagine you’re buying socks or more likely, since this is bitcoin, assault rifles stuffed with heroin. On the checkout webpage, the “buy” button could use the “bitcoin:” link, which would automatically pop open your bitcoin wallet, which might reside in an external application, on another website, or even in your browser itself. In any event, it would make paying with bitcoin dead easy and absolutely universal.”

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With rising popularity, demand for, and supply of, information is growing. Brett Scott (Suitpossum) described How To Explain Bitcoin To Your Grandmother:

“As anyone who doesn’t have a degree in advanced computer science knows, Bitcoin is conceptually tricky. Thus, when your grandmother is wanting to buy marijuana off the Silk Road and begins asking you to explain Bitcoin to her, what do you do? Ever since early 2012, when I asked the question ‘what the hell is Bitcoin?’, I’ve been trying to find ways to explain it to myself. Initially I used the example of the Borg from Star Trek, but more recently I’ve come to believe that one key to describing it is to start from normal currency, and to then describe Bitcoin in relation to that, rather than trying to describe it as a standalone phenomenon. I’m no Bitcoin expert, so this is still a work-in-progress (Warning!), but next time granny asks you, here’s a rough-and-ready way you might lay down the foundations (I’ve deliberately included a lot of repetition, because that’s important when learning). …”

For those who wish to start from the beginnings, and in greater detail, Khan Academy offers a video series on Bitcoin.

If you are interested in statistics, you may want to have a look at Blockchain whereyou find much information about activities, markets and prices including graphs and charts showing

Total Bitcoins In Circulation

Market Capitalization

Total Transaction Fees

Number Of Transactions

Number of transactions excluding popular addresses

Number Of Unique Bitcoin Addresses Used

Number of transactions per block

Total Output Volume

Estimated Transaction Volume

Estimated Transaction Volume

USD Exchange Trade Volume

Trade Volume vs Transaction Volume Ratio

Market Price (USD)

Cost % of transaction volume

Cost Per Transaction

Hash Rate

Miners Revenue

Mining Operating Margin

Average Transaction Confirmation Time

Bitcoin Days Destroyed Cumulative

Blockchain Size.

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Bitcoin is stimulating all sorts of discussions. Here are two examples:

In A Point Of View: Bitcoin’s Freedom Promise John Gray argued on BBC that this promise is an illusion:

“Believers in Bitcoin are confident that it can protect them not just from governments but also against humankind as a whole. Instead of relying on politicians and bankers, or the vagaries of democracy, Bitcoin’s users put their faith in the laws of mathematics.

For them the cyber-currency is governed by an incorruptible formula that – like the eternal forms envisioned by Plato, immaterial abstract ideas standing outside of time – is untouched by human error and folly.

The trouble is that unlike the tranquil spiritual ether imagined by the ancient Greek mystic, cyber-space is all too clearly a human artefact. A site of unceasing warfare – abounding in worms and viruses, vulnerable to attack and decay, and needing scarce resources and energy to operate – the virtual realm of the internet is a projection of the human world with all its conflicts.

A virtual currency can’t escape the dangers of actual societies. Cyber money may have many practical uses and provide an alternative to banks. It can’t be a way out from history’s intractable dilemmas.”

JP Koning wrote an interesting blog post about What Equity Markets Can Learn From Bitcoin And Ripple. It starts:

“This isn’t a bitcoin post. But it cribs some ideas from bitcoin and applies them to equity markets. Specifically, I’m going to play around with the idea that if equity markets were to adopt a bitcoin-style distributed ledger system, then some of the destabilizing effects of the so-called latency wars might be mitigated.

Historically, most databases and ledgers have been maintained at a central hub. In order to get access to this information, users have had to walk into the building that houses the records, or sign into a server that stores them. …

A centralized order book is hardly democratic since those closest to the hub can consistently use their informational advantage to game those who are furthest away. …

Which brings us back to bitcoin and the idea of a distributed ledger. Here we have a solution to the tiered nature of information reception from a central hub. Why not have a network of independent nodes store a stock’s order book, listen for new quotes and trades, verify the identities of traders, and update the distributed order book? The neat thing about storing data in a distributed fashion as opposed to a hub is that information is freed from geography. Rather than sitting on a computer in Mahwah, New Jersey, the order book is everywhere. This would help to mitigate the unfairness issue that plagues central order book markets.”

From → Markets

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