Topic: Notes for the sophisticated press (if there is one) (Read 1280 times)

This is probably too long for most of the people in this forum to read, but it seemed useful to say some of this (perhaps for the press), and I don't have a blog, so this seemed like the best place for it.  Here is a list of recurring Bitcoin misconceptions or confusions that too often seem to go unnoticed in the popular reporting of Bitcoin. The tenor of the post is meant to be neutral; I am not either a wild promoter of Bitcoin or an opponent of it. In full disclosure, I was an early miner and recently sold off about 10,000 coins at prices between $65 and $125; I still possess about an equal number to the amount that I sold.

I personally make no predictions as to where the Bitcoin/USD price is headed, although it is hard to dispute that the price is currently almost entirely the result of speculation. Purchasing or selling Bitcoin at the moment is simply, in game-theoretic terms, a beauty-contest game.

As to the points I want to make---

1. Mt. Gox cannot be treated like the "markets" (in stocks or commodities) that most traders, investors, and speculators are familiar with because it is entirely unmonitored and unregulated.  People seem to assume that it has familiar characteristics because it reports bids, asks, etc., and because people can construct charts based on the data it releases, but it is appropriate to approach all such data with healthy skepticism. Mt. Gox. could make up trades entirely; it could also report trades accurately but include transactions for which it is on both sides for whatever purposes it wants. Journalists in particular should be clear that what they are reporting is unmonitored, unregulated data released by a single party with strong vested interests. "Mt. Gox, the largest Bitcoin exchange, reported that the price soared to $X on unusually high volume" is a more accurate statement in a news article than "the price soared to $X on unusually high volume." Journalists should consider investigating the data that Mt. Gox reports; that would be a service to everyone involved, whatever they find. Like so many other individual Bitcoin services, it is very possible that Mt. Gox is, in the end game, a scam. I warned people early on about MyBitcoin (and even Casascius's physical coins, to whose private keys he of course has access - though I like Casascius personally); Mt. Gox could disappoint people in exactly the same way. This is understood by some in this forum, but it is too often forgotten.

2. Even putting that aside, the market in exchange between Bitcoins and dollars is subject to very significant possibilities of manipulation, both in ways extrinsic to Bitcoin itself (e.g., simple large purchases and sales) and in ways intrinsic to Bitcoin (e.g., strategic "51% attacks"). I have pointed out in previous posts what I consider the only flaw in Satoshi's original academic paper, which is that it assumes that various attacks will not occur because it will be more profitable to mine coins than to mount the attacks. That is true only if we can ignore strategic marketplace dynamics.

3. Bitcoin is not presently experiencing monetary deflation. Indeed, it will never itself be "deflationary" from a monetarist standpoint. It will be neither inflationary not deflationary in the long run, as there will be a fixed number of coins. (We can expect extremely mild monetary deflation from coins that are lost over time. That effect is likely to be negligible; it would be equivalent to a small number of people choosing to save rather than spend their coins.) Bitcoin is currently undergoing rapid monetary inflation, and it will continue to do so for years. The rate of monetary inflation for Bitcoin is currently far in excess of that of the US dollar or Sterling.

4. Bitcoin was designed to be decentralised, not to avoid all trust. As security expert Ben Laurie has nicely pointed out, Bitcoin is not and could not avoid 'trust' and is indeed not decentralised in the way most people uncritically imagine. All currency (and all speculatory noncurrencies like gold and silver) are based to some degree on distributed trust. Bitcoin is no different.  It is also not, de facto, decentralised because of the concentration in the exchanges. If Mt. Gox decided not to accept certain coins, that could affect the value of those coins.)

5. The relative decentralisation of Bitcoin, in the end game, will be as expensive as the work needed to secure the block chain. This may end up being very expensive, and it represents a significant potential economic failure modality for Bitcoin that is yet unsolved and uncertain. Holding physical commodities like gold, your major risks are that the market will start to value gold less and that people might steal your gold. Holding Bitcoins, there is an additional risk: it may become very expensive, in the long run, to "spend" your coins. As an analogy, imagine if physical gold got heavier and heavier over time.

6. Bitcoin is not a "billion-dollar market." The current trading price is always, as with nearly anything, a clearing price for small lots. It would be wrong to conclude from the popular 'market-capitalization' figure that all bitcoins could be sold (or bought) for a billion dollars, that a billion dollars has been invested into bitcoin, etc. In short, the number is misleading and best ignored. The total size of the order books on the exchanges would better represent Bitcoin's economic impact, and even that would be misleading because much of that value has no economic impact and reflects cyclic trades.

7. There is little evidence that Bitcoin is being used for significant money laundering by established criminal organizations. Putting aside speculation and related 'savings', however, the primary economic activities for bitcoins are indeed gambling and Silk Road.

8. There is still, at present, no easy way for entirely nontechnical users to invest safely in Bitcoin. Their choices are either to allow a website to own their coins in proxy (in which case they do not in fact personally own their Bitcoins, except in a legally equitable way that would at present be extremely difficult to enforce, practically speaking) or to learn how to use a client like Armory or another secure technique for offline storage. Secure techniques for offline storage are prone to error and confusion; for example, many people who have offline wallets think that they can load the wallet into the mainline client, send some coins to Mt. Gox, and retain their unspent coins in the offline wallet. Because of the way Bitcoin transactions work, that assumption is not ordinarily true, and it has already led to significant losses.