Felix Salmon

Satoshi: Why Newsweek isn’t convincing

Felix Salmon
Mar 10, 2014 04:18 UTC

I had a 2-hour phone conversation with Leah McGrath Goodman yesterday. Goodman wrote the now-notorious Newsweek cover story about Dorian Nakamoto, which purported to out him as the inventor of bitcoin. At this point, it’s pretty obvious that the world is not convinced: in that sense, the story did not do its job.

As Anil Dash says, the geek world is the most skeptical. Almost all of the critiques and notations attempting to show that Dorian is not Satoshi are coming from geeks, which makes sense. If the world is what you perceive the world to be, then there is almost no overlap between the world of geeks in general, and bitcoin geeks in particular, on the one hand, and the world of a magazine editor like Jim Impoco, on the other hand. As a result, there’s a lot of mutual incomprehension going on here, which has resulted in an unnecessarily adversarial level of aggression.

As befits a debate which is centered on bitcoin, a lot of the incomprehension comes down to trust and faith. Bitcoin is a protocol which requires faith in no individual, institution, or state — all you need to believe in is cryptography. Dorian Nakamoto could have told Goodman explicitly that yes, he invented bitcoin — and still a lot of the bitcoin faithful would not be fully convinced unless and until Dorian proved that assertion cryptographically.

Goodman, on the other hand, is a proud journalist, who gets personally offended whenever anybody raises questions about her journalism, her techniques, or her reporting. In a reporter’s career, she says, “you check facts, you are building trust and building a reputation”. Goodman feels that her own personal reputation, combined with the institutional reputation of Newsweek, should count for something — that if Newsweek and Goodman stand behind a story, then the rest of us should assume that they have good reason to do so. There’s no doubt that a huge amount of work went into reporting this story, very little of which is actually visible in the magazine article itself.

In aggregate, says Goodman, an enormous amount of evidence, including evidence which is not public, persuaded her that Dorian Nakamoto was her man. Goodman has not decided whether or how she might publish that evidence. When she appeared on Bloomberg TV, she said that she would love for people to look at the “forensic research” and the public evidence in the case — but, talking to me, she made it clear that she didn’t consider it her job to help out other journalists by pointing them to that evidence. What’s more, she also made it clear that she was in possession of evidence which other journalists could not obtain.

In other words, Goodman spent two months following leads and gathering evidence, both public and private. Eventually — after confronting Dorian Nakamoto in person, and getting what she considered to be a confirmation from him, both she and her editors felt that she was able to say, on the front cover of Newsweek, that he was the guy. The article itself was the culmination of that process, but it did not — could not — contain every last piece of evidence, both positive and negative, public and private, about both Dorian Nakamoto and every other candidate she looked at. The result is not the process, and Goodman feels that she should be given the respect due a serious and reputable investigative journalist, working for a serious and reputable publication.

Newsweek, it’s fair to say, has not been getting that respect, although it has been getting a lot more attention than most purely-digital publications would have received had they published the same story. Jim Impoco, cornered at a SXSW party, said that he finds criticism of his story to be “phenomenally offensive”, and then went on to make the highly ill-advised remark that “we eliminated every other possible person”. But that’s really a messaging failure: he was on the back foot (SXSW is, after all, geek HQ this week, and the geeks are gunning for Impoco right now). Clearly, this was not the time or the place for a considered discussion of evidentiary standards.

That said, both Impoco and Goodman should have been smarter about how they talked about the story, post-publication. Both have been largely absent from Twitter and Reddit and RapGenius and other online places where the debate is playing out; instead, they have been giving interviews to mainstream media organizations, which are often unhelpful. TV interviews devolve into stupid fights; interviews with print or online journalists result in just a couple of quotes.

Goodman spent a lot of time, with me, walking me through her journalistic technique: she started, for instance, by trying to track down the person who initially registered the bitcoin.org domain name, and then followed various threads from there. And yes, she did consider and reject the individuals who are considered more likely candidates by the geek squad. Nick Szabo, for instance, might well look like a good candidate if you’re looking only at the original bitcoin paper, and asking who is most likely to have written such a thing. But when she looked at Szabo’s personal life, nothing lined up with what she knew about Satoshi Nakamoto and his communications. Instead, she found the Dorian Nakamoto lead — and didn’t think much of it, at first. But the more she kept trying to dismiss it, and failing to do so, the more she wondered whether Dorian’s very invisibility — “contextual silence”, she called it — might not be sending her a message.

Towards the end of Goodman’s investigation, when she was preparing to try to meet with Dorian Nakamoto in person, Goodman told Impoco that if it didn’t turn out to be Dorian, then “we’ve got nobody”. That’s what Impoco was most likely talking about, when he talked about eliminating people. Goodman — and Impoco, more recently — was just saying that this was her last open thread, and that if Dorian didn’t pan out as the guy, then they didn’t have a story.

From my perspective, then, there’s a big disconnect between what I now know about Goodman’s methodology, on the one hand, and how that methodology is generally perceived by the people talking about her story on the internet, on the other. With hindsight, I think that Goodman’s story would have elicited much less derision if she had framed it as a first-person narrative, telling the story of how she and her team found Dorian and were persuaded that he was their man. The story would surely have been more persuasive if she had gone into much more detail about the many dead ends she encountered along the way. The fateful quote would then have come at the end of the story, acting as a final datapoint confirming everything that the team had laboriously put together, rather than coming at the beginning, out of the blue.

That storytelling technique would not persuade everybody, of course: nothing would, or could. And, more importantly, it isn’t really what Impoco was looking for. Even the piece as it currently stands was cut back a few times: the final version was pared to its absolute essentials, and, like all longform magazine journalists, Goodman wishes that she might have had more space to tell a fuller story.

But here’s where one of the main areas of mutual incomprehension comes into play. Impoco and Goodman are mainstream-media journalists producing mainstream content for a mass audience; Goodman’s article was probably already pushing the limits of what Impoco felt comfortable with, given that he couldn’t reasonably assume that most of his readers had even heard of bitcoin. Impoco was interested in creating a splashy magazine article, for the print reincarnation of a storied mass-market newsweekly. Of course, seeing as how this is 2014, the article would appear online, and would reach the people who care a lot about bitcoin, who were sure to make a lot of noise about it. But they weren’t the main audience that Impoco was aiming for. Indeed, in early 2012, when Impoco was editing a much smaller-circulation magazine for Reuters, I sent him a draft of what ultimately became this article for Medium. He passed: it was too long, too geeky. Even if it would end up reaching a large audience online (it has had over 200,000 page views on Medium), it didn’t have broad enough appeal to make it into a magazine.

Similarly, while Goodman has done a lot of press around her article, most of it looks like a tactical attempt to reach the greatest number of people, and build the most buzz for her article. So she’s been talking to a lot of journalists, especially on TV, while engaging relatively little on a direct basis with her online critics. There’s no shortage of substantive criticism of Goodman’s article online, and of course there is no shortage of venues — including, but not limited to, Newsweek.com — where Goodman could respond to that criticism directly, were she so inclined. But instead she has decided in large part not to join the online debate, and instead is pondering whether or not to write a self-contained follow-up article which might address some of the criticism.

There’s a good chance that follow-up article will never come, and that Goodman will simply cede this story to others. And you can’t necessarily blame her, given how vicious and personal much of the criticism has been, and given how many of her critics seem to have made their minds up already, and will never be persuadable. Goodman has said her piece, and there are surely greatly diminishing returns to saying a great deal more.

Still, it’s just as easy to sympathize with the frustration being felt by the geeks. Appeals to authority don’t work well on this crowd — and neither should they. If the US government can lie about the evidence showing that there were weapons of mass destruction in Iraq, it’s hard to have much faith in an institution which, 18 months ago, slapped “HEAVEN IS REAL” all over its cover. (That story, interestingly enough, was demolished by another mass-market magazine, Esquire.)

Indeed, both sides here have good reason to feel superior to the other. From Newsweek’s point of view, a small amount of smart criticism online has been dwarfed by a wave of name-calling, inchoate anger, and terrifying threats of physical violence. And from what you might call the internet’s point of view, Newsweek is demonstrating a breathtaking arrogance in simply dropping this theory on the world and presenting it, tied up in a bow, as some kind of fait accompli.

The bitcoin community is just that — a community — and while there have been many theories as to the identity of Satoshi Nakamoto, those theories have always been tested in the first instance within the community. Bitcoin, as a population, includes a lot of highly-intelligent folks with extremely impressive resources, who can be extremely helpful in terms of testing out theories and either bolstering them or knocking them down. If Newsweek wanted the greatest chance of arriving at the truth, it would have conducted its investigation openly, with the help of many others. That would be the bloggy way of doing it, and I’m pretty sure that Goodman would have generated a lot of goodwill and credit for being transparent about her process and for being receptive to the help of others.

What’s more, a bloggy, iterative investigation would have automatically solved the biggest weakness with Goodman’s article. Goodman likes to talk about “forensic journalism”, which is not a well-defined phrase. Burrow far enough into its meaning, however, and you basically end up with an investigation which follows lots of leads in order to eventually arrive at the truth. Somehow, the final result should be able to withstand aggressive cross-examination.

At heart, then, forensic analysis is systematic, scientific: imagine an expert witness, armed with her detailed report, giving evidence in a court of law. Goodman’s Newsweek article is essentially the conclusion of such a report: it’s not the report itself, and it’s not replicable, in the way that anything scientific should be. If Goodman thinks of herself as doing the work of a forensic scientist, then she should be happy to share her research — or at least as much of it as isn’t confidential — with the rest of the world, and allowing the rest of the world to draw its own conclusions from the evidence which she has managed to put together.

A digital, conversational, real-time investigation into the identity of Satoshi Nakamoto, with dozens of people finding any number of primary sources and sharing them with everybody else — that would have been a truly pathbreaking story for Newsweek, and could still have ended up with an awesome cover story. But of course it would lack the element of surprise; Goodman would have to have worked with other journalists, employed by rival publications, and that alone would presumably suffice to scupper any such idea. (Impoco was not the only magazine editor to turn down my big bitcoin story: Vanity Fair also did so, when the New Yorker story came out, on some weird intra-Condé logic I never really bothered to understand. Competitiveness is in most magazine editors’ blood; they all want to be first to any story, even if their readers don’t care in the slightest.)

Instead, then, Newsweek published an article which even Goodman admits is not completely compelling on its own terms. “If I read my own story, it would not convince me,” she says. “I would have a lot of questions.” In other words, Goodman is convinced, but Goodman’s article is not going to convince all that many people — not within the congenitally skeptical journalistic and bitcoin communities, anyway.

Goodman is well aware of the epistemic territory here. She says things like “you have to be careful of confirmation bias”, and happily drops references to Russell’s teapot and Fooled by Randomness. As such, she has sympathy with people like me who read her story and aren’t convinced by it. But if there’s one lesson above all others that I’ve learned from Danny Kahneman, it’s that simply being aware of our biases doesn’t really help us overcome them. Unless and until Goodman can demonstrate in a systematic and analytically-convincing manner that her forensic techniques point to a high probability that Dorian is Satoshi, I’m going to remain skeptical.



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The Satoshi Paradox

Felix Salmon
Mar 7, 2014 08:06 UTC

Newsweek wanted a scoop for its relaunch cover story, and boy did it deliver: it uncovered the identity of Satoshi Nakamoto, the inventor of bitcoin. Who then promptly came out and denied everything. Which means that one of the two is wrong: either Nakamoto is lying through his teeth, or Newsweek has made what is probably the biggest and most embarrassing blunder in its 81-year history.

But before we try to work out what the answer is, it’s important to separate out the various different questions:

  1. Is Dorian Nakamoto the inventor of bitcoin, Satoshi Nakamoto?
  2. Do we, and/or Newsweek, have enough evidence to conclude, with certainty, that Dorian Nakamoto is the inventor of bitcoin?
  3. Is it reasonable to believe that Dorian Nakamoto is the inventor of bitcoin?

My tentative answers to the three questions are “we don’t know”; no; and yes.

One way to look at this problem is to try to calculate probabilities, and do some kind of Bayesian analysis of the question, given that either Dorian is Satoshi, or he isn’t. (To make matters even more complicated, Dorian’s given name is, actually, Satoshi. But you know what I mean.) But here’s the problem: if you believe either of the two possibilities, you have to believe in a reasonably long series of improbable propositions. Call it the Satoshi Paradox: the probability that Dorian is Satoshi would seem to be very small, and the the probability that Dorian is not Satoshi would seem to be just as small — and yet, somehow, when you add the two probabilities together, the total needs to come to something close to 100%.

The place to start is the Newsweek article, which brooks no doubt about the matter, and which is told using all the power of narrative journalism. The author, Leah McGrath Goodman, has constructed her 4,700-word article as a case for the prosecution, taking us with her on her quest for evidence and ultimately trying to persuade us that there can be no doubt: Dorian is Satoshi.

Goodman adduces lots of evidence, starting with the crazy coincidence of Satoshi’s name. Dorian’s name is Satoshi Nakamoto. He is an accomplished engineer and mathematician: “brilliant”, according to his brother. He was happy to correspond with Goodman until she asked him about bitcoin — at which point he stopped replying to emails and even called the cops on her. Dorian’s brother even predicted his response to Goodman’s article: “He’ll deny everything. He’ll never admit to starting Bitcoin.”

Goodman says that Dorian, “for most of his life, has been preoccupied with the two things for which Bitcoin has now become known: money and secrecy”. He’s a libertarian, whose daughter says that he is “very wary of the government, taxes and people in charge”. He’s 64, which would help explain slightly old-fashioned aspects of Satoshi, like his use of reverse Polish notation and his worrying about saving disk space. And then there’s the smoking gun — the quote that he gave to Goodman when she arrived at his doorstep.

“I am no longer involved in that and I cannot discuss it,” he says, dismissing all further queries with a swat of his left hand. “It’s been turned over to other people. They are in charge of it now. I no longer have any connection.”

This fits exactly with what we know about Satoshi: that he was deeply involved in bitcoin at the beginning, but has had basically nothing to do with it in recent years. It’s well short of an outright confession, of course — but if you add up all of the circumstantial evidence, it’s pretty hard to believe that everything is some bizarre coincidence. Goodman has presented a lot of pieces of the puzzle — and they fit elegantly together, at least at first glance.

On the other hand, even within the article there are signs that it’s not as clear cut as all that. There’s Goodman’s admission, in the article, that she “plainly needed to talk to Satoshi Nakamoto face to face” — something she never really did, except for a few quick words spoken in front of police officers while he was trying to make her go away. Goodman also quotes Gavin Andresen, the person most publicly associated with the development of bitcoin, as saying that even in the early days, Satoshi “went to great lengths to protect his anonymity”. Which hardly squares with the thesis that he was using his real name.

Then there are the duff notes in the piece. “This is the guy who created Bitcoin? It looks like he’s living a pretty humble life.” That, supposedly, is a verbatim quote from a Temple City cop: it’s possible that a cop uttered those words, but that doesn’t stop them from sounding like very bad expository dialogue. And Goodman can certainly overstretch, as for instance here:

There is also the chance “Satoshi Nakamoto” is a pseudonym, but that raises the question why someone who wishes to remain anonymous would choose such a distinctive name.

Remember that the pseudonym theory was not a mere theory, up until yesterday — it was almost universally accepted as the truth. In terms of Bayesian priors, you need very strong evidence to be persuaded that “Satoshi Nakamoto” is not a pseudonym. And this argument doesn’t even come close.

There’s also the whole question of Satoshi’s English, where Goodman can be seen placing a very hard thumb on the scales. Dorian’s English is not good: you can see that in his Amazon reviews, or in the letter he sent about a proposed Los Angeles rail project: “good secruity system against usage of rail as a get away means from the low income generated theives/criminals from area of east LA et. al must be also put in place regardless of the rail passage chosen.”

That kind of language can be seen too in Dorian’s email correspondence with Goodman: “I do machining myself, manual lathe, mill, surface grinders.” Goodman uses this as evidence for her case: she characterizes Satoshi’s original bitcoin proposal as being “somewhat stiffly written”. She also says, reading the original bitcoin paper, that “the punctuation in the proposal is also consistent with how Dorian S. Nakamoto writes, with double spaces after periods and other format quirks.”

But in fact the proposal is written in deeply fluent English:

Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust.

How is it possible that Goodman would notice double spaces after the periods, here, but would not notice that the sheer fluency of the language is quite incompatible with everything we know about how Dorian writes and speaks? She even quotes an email from Satoshi to Andresen: “I wish you wouldn’t keep talking about me as a mysterious shadowy figure. The press just turns that into a pirate currency angle. Maybe instead make it about the open source project.” This is breezy, colloquial English — and it’s entirely incompatible with Dorian’s language. The discrepancy is hard to square — and is all the more glaring for the fact that Goodman doesn’t even attempt to address it directly.

Then there’s the whole question of finances. Dorian “fell behind on mortgage payments and taxes” in the 1990s, reports Goodman, and lost his home to foreclosure; what’s more, he doesn’t seem to have had a steady job in well over a decade. And yet, famously and notoriously, he has never sold a single one of the million bitcoins he’s credibly assumed to own, despite the fact that, according to Goodman, he and his family “could really use the money”.

Because all bitcoin transactions are public, and because the specific coins Satoshi owns have been identified, selling or spending those coins would give the world a huge clue as to Satoshi’s identity. But with hundreds of millions of dollars at stake, it begs credibility to believe that Dorian couldn’t have found a way to sell at least some of his coins.

Even within Goodman’s piece, then, there are reasons to doubt her thesis. And in the wake of Dorian’s interview with the AP, there are more. His lack of fluency in English is clearly real; he has a credible explanation for the words he said in front of Goodman; and he has a guilelessness to him which would be very hard to fake, especially over the course of many hours with a skeptical reporter.

Put all that together, along with various other problems surrounding things like the time zone of Satoshi’s postings, and there would seem to be a lot of doubt that Dorian is, in fact, Satoshi.

At this point, it’s easy to fall down a rabbit hole of second-order second-guessing. It’s not particularly credible, for instance, that a libertarian engineer named Satoshi Nakamoto would never have heard of bitcoin until three weeks ago, and would, even after today’s news, “mistakenly” call it “bitcom”. What’s more, Dorian’s deny-everything reaction (and the official denial from Satoshi) is entirely consistent with Goodman’s article.

But the fact is that if you believe that Dorian is Satoshi, you have to accept that there are still a lot of things which don’t really add up. And conversely, if you believe that Dorian is not Satoshi, then you at the very least have to wonder at the astonishing number of coincidences that Goodman has uncovered.

Which means that the responsible thing to do, from Newsweek’s perspective, would have been to present a thesis, rather than a fact. For instance, when Ted Nelson attempted to reveal Satoshi’s identity last May, he put together a video where he put forward a theory which he said was “consistent, plausible, and, I believe, compelling”. He then took a step back, and let the bitcoin community more generally come to their own conclusions about whether or not to believe him; in the end, they (generally) didn’t.

Newsweek could have done that. It could have said “here’s a theory”, and then let the world decide. Many people would have believed the theory; others wouldn’t. And lots of us would probably have changed our minds a few times as we weighed the evidence and as Dorian’s own words came out.

But Newsweek didn’t want a theory, it wanted a scoop. And so, faced with what was ultimately only circumstantial evidence, it went ahead and claimed that it had uncovered Satoshi — that, basically, it was 100% certain.

That decision was ill-advised. Newsweek certainly got lots of buzz for its return to print — but it’s now getting just as much buzz for going to press with what is looking increasingly like a half-baked theory. Personally, I don’t know whether Dorian is Satoshi — but I think I can be pretty safe in saying that the probability is somewhere in the range of, say, 10% to 90%. In other words, it’s possible; it might even be probable; but it’s not certain. And anybody who says that it is certain is wrong.

I believe that Goodman believes that Dorian is Satoshi. I believe that Jim Impoco, my ex-boss, who’s now the editor of Newsweek, also believes that Dorian is Satoshi. But belief is not enough. Dan Rather believed that the Killian documents were genuine; Hugh Trevor-Roper believed that the Hitler diaries were genuine; Lara Logan believed that Dylan Davies was telling the truth about Benghazi. Big scoops are dangerous things.

It would have been less satisfying, for Newsweek, to leave a bit of wiggle room — to present the Dorian-is-Satoshi theory as just a theory, rather than as fact. But it is only a theory. And ultimately, it’s always better to be Ariel Dorfman than it is to be Paulina Salas.


It’s hard to say who created BTC. In time, I think we’ll get the true answer.

Bitcoin Faucet List

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Can bitcoin capitalize on the death of Mt Gox?

Felix Salmon
Feb 26, 2014 18:33 UTC

In November, I said that I was waiting for bitcoin to get boring – and it certainly isn’t boring yet. The death of Mt Gox has created headlines saying things like “Bitcoin future in doubt” and “Mt. Gox Meltdown Spells Doom for Bitcoin”; those, in turn, have sparked their own backlash of people saying that in fact this development is one of the best things that could have happened to the cryptocurrency.

The truth of the matter is that it’s too early to tell. Mt Gox was a unique institution in the bitcoin universe: it was there from the beginning, and people have been moaning about it from the beginning. It was always a badly-run and far too opaque institution; if bitcoin is ever going to really take off — if Ben Horowitz is going to win his socks – then the death of Mt Gox was surely necessary sooner or later. At the same time, however, Mt Gox was for many years the cleanest dirty shirt in the bitcoinverse, and historically accounted for the lion’s share of trading in the currency. That’s one of the reasons why it somehow managed to be sitting on such an enormous lode of bitcoins at the time it went belly-up.

The rumor is that 744,408 bitcoins are “missing due to malleability-related theft which went unnoticed for several years”; that’s hundreds of millions of dollars that have been stolen, and it’s almost impossible to believe that Mt Gox was so incompetent as to not be aware, for years, of a nine-figure hole on its balance sheet. Instead, it quietly sold itself not only as a trading venue but also as a wallet service: store your bitcoins with us, they’re safe here. So long as the number of people using Mt Gox as a wallet was greater than the number of bitcoins that had been stolen, the service could continue. But then, when the run started, Mt Gox collapsed — inevitably — in a matter of days. It’s a Ponzi scheme, essentially — just one that looks like it was driven by theft rather than avarice.

The Mt Gox fiasco is literally an order of magnitude larger than the previous largest bitcoin scam, the theft in July 2011 of 78,739 coins from a wallet service called MyBitcoin. The Mt Gox implosion is on a massively larger scale than even the shutdown of Silk Road, where some 171,955 bitcoins disappeared. As a result, it’s fair to say that the end of Mt Gox is also the end of bitcoin as we have known it to date — a wild-west world of hackers and discussion forums and pseudonyms and Tor accounts and — as one highly-active page puts it — numerous “Heists, Thefts, Hacks, Scams, and Losses.”

Now, we enter the world of Bitcoin 2.0: an arena of well-capitalized companies with VC backing; of sober joint statements using terms like “trustworthy and responsible” and “comprehensive consumer protection.” Of course, all these promises have been made before, not least by Mt Gox itself; the big questions are whether (a) this time is different; and whether (b) this time will be seen to be different by a population that has — quite rationally — had little faith in bitcoin to date.

My tentative answers to those two questions are yes and no, respectively. I actually do believe Coinbase and other next-generation bitcoin companies when they say that they’re much more robust than their predecessors. But I don’t believe that regulators, and the public at large, will believe them. Bitcoin is based on mistrust, which makes it almost impossible for this circle to be squared. There is a small number of cryptogeeks who really love the paradox that they can trust the protocol precisely because they don’t need to trust any given institution. Regulators, it’s fair to say, tend not to be among them. And neither are normal people, who don’t understand the math behind bitcoin, and who have no real ability to secure their coins on their own, and who therefore need to be able to trust whatever institution they’re using to store their bitcoin-denominated wealth.

In order for the end of Mt Gox to be a blessing for bitcoin, we’re going to need to see an influx of new entrants into the asset class — people who never trusted Mt Gox, but who are happy to trust (say) Coinbase. The bitcoin faithful — who include the likes of the Winklevii and Barry Silbert, along with Ben Horowitz — will happily celebrate the end of Mt Gox and try to use it as a way to persuade the general public, and regulators, that the field is growing up and can be trusted. The big question is whether anybody is going to believe them. And so far, I’ve seen no evidence that’s happening. As far as the public is concerned, Mt Gox was bitcoin. Most of us who never bought any bitcoins in the first place feel as though we likely dodged a bullet. And we have no particular desire to enter that war zone now, even if it is marginally safer than it was before.

PHOTOS: Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014. REUTERS/Toru Hanai 

A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014. REUTERS/Pawel Kopczynski 


I’ve come to believe that a cryptocurrency that is designed to include a central bank, in which the size of the “mining” transaction in each new block could be adjusted through broadcast software updates from the central bank, might actually have some viability. Under this system, the central bank would have control over the rate of money supply growth. You could also tweak things so that the mining transaction was required to make deposits to two wallets — one belonging to the mining collective, for distribution to their members who contribute computational power to help process transactions; and one to the wallet of the central bank itself, thus retaining some of the value of seigniorage. You’d probably want to have some kind of system for rotating through central bank wallets, so that you weren’t accumulating too much value in one place. Maybe the bank would broadcast a new wallet ID every week or so, and would empty out the old wallet on a regular basis.

I still think there could be problems with scaling the volume of transactions in a way that doesn’t risk frequent forks in the blockchain.

One way to process more transactions is to make it easier to find a valid block (put looser constraints on a valid hash). Go too far in this direction, and you’ll hit a point where the first valid block can’t spread to the full network fast enough to become entrenched before an alternative valid block is found. The system can cope with this if it doesn’t happen often, and doesn’t tend to result in subsequent blocks getting attached on both sides of the fork before the fork is resolved. Speed is the enemy of stability.

The other way would be to simply include more transactions in each block, but it seems like this could be a serious problem if you tried to scale existing bitcoin volumes up to the kind of volume that exists in dollars today — several orders of magnitude. It’s not clear to me what kind of pressure this would put on mining hardware.

There’s also the fact that if quantum computing ever solves the problem of testing many hashes at once, whoever owns the first computer that can do that will instantly be able to compromise the entire cryptocurrency system. But they would probably pose a non-trivial threat to existing networked banking systems too. :-P

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Why bitcoin won’t disrupt digital transactions

Felix Salmon
Feb 7, 2014 04:12 UTC

I like to keep my feet warm, and so I’m very glad that in five years’ time, Ben Horowitz, the co-founder of Andreessen Horowitz, is going to be sending me a pair of luxurious alpaca socks. The bet, which originated on RapGenius, is now a reality, thanks to Planet Money. And while NPR has written the broadcast up as a story, it falls to RapGenius, again, to annotate it. And it’s in the RapGenius annotations where things start getting interesting.

Horowitz expands on his statement that bitcoin is a “computer science breakthrough” by saying this:

Bitcoin is the first scaled network where you can transfer (not copy, transfer) a piece of digital property from one person to another with no central authority. This paves the way for a dizzying number of super high value applications such as a fee free stock exchanges, smart contracts that can programmatically be executed and enforced, and many other awesome things.

Horowitz, here, is looking forward to a world where bitcoin provides the rails upon which all manner of commercial transactions can run: potentially, it’s much larger than payments alone. In recent columns, both Dan Primack and John Gapper have also made this point.

There’s something else that the Primack and Gapper columns have in common: they’re both behind a paywall. Essentially, they’re digital goods which are non-rivalrous (if you read Gapper’s column, that doesn’t prevent me from reading it too), but also excludable (the FT can prevent certain people from reading the column, on the grounds that they haven’t paid enough money).

The incredible growth of the internet can be attributed in large part to the fact that most of the content on the web is both non-rivalrous and non-excludable: this blog post, for instance, can be read by any number of people, and is freely accessible to all. But now Horowitz is looking forward to expanding the web to include what he calls “digital property”: essentially, digital goods which are not only excludable but are rivalrous as well.

A good example might be shares of a company’s stock: such things haven’t existed in physical form for many years, but they’re still highly rivalrous. After all, the entire basis of the stock market would fall apart if I could somehow give you a copy of my stock while holding onto that same stock myself. A large part of the technology underpinning stock exchanges is the way in which they have to ensure that once you sell a share, you no longer own it, and you can’t sell it a second time. That’s also the technology which underpins bitcoin, except bitcoin transactions take many orders of magnitude more time to clear than stock transactions do.

In theory, there are all manner of clever things which can be traded in a distributed manner, using the open-source bitcoin protocol; most of them involve “coloring” coins in some manner, so that a bitcoin serves as a token of ownership of something else. There is a lot of valuable rivalrous digital property out there, and a lot of companies, including Thomson Reuters, make a lot of money by helping to manage it. The technology involved tends to be tried and tested (to the point at which any failures are very big news), and the players involved tend to be extremely conservative. On top of that, the costs are often extremely low: the simple transaction costs involved in trading stocks, or large quantities of foreign exchange, are very close to zero these days.

So while in theory there is the possibility of disruption in this space, I’m not holding my breath. The Race to Topple Bloomberg, as the headline of Aaron Timms’s recent Institutional Investor article puts it, has been going on for the best part of 20 years now, with no visible success. (I first asked Mike Bloomberg whether he was worried about competition from the open internet for an article I wrote back in 1996.) I’m happy that Satoshi Nakamoto managed to solve the Byzantine Generals Problem — but while that might be a necessary condition for these particular walls to start falling, it’s far from a sufficient one.

The internet has been an amazing and revolutionary force, which has brought entire industries to their knees, and which has created a huge amount of wealth for Silicon Valley venture capitalists. But what Horowitz and Primack and Gapper are talking about here is the hope that a whole new protocol — bitcoin — will essentially do for digital transactions what the internet did for communications, just by dint of being cheap and open-source. I wish it luck, but it’s going to need it. Because it’s up against formidable incumbents, in the form of both huge corporations and entrenched government interests. My bet is on Goliath, not David.


Bitcoins stolen from Silk Road. Site manager is “really, really sorry”.

There are good reasons why most people use cash only for trivial transactions that are too small to be worth the bookkeeping required for other forms of payment.

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Waiting for bitcoin to get boring

Felix Salmon
Nov 30, 2013 23:16 UTC

Something of a milestone was reached very early in the morning of Friday, November 29, a time when most Americans were either sleeping off their Thanksgiving excesses or out seeking Black Friday bargains. At the end of Wednesday, the price of gold, on Comex, had closed at $1,240 per ounce; that market would not reopen until Friday morning. And then at about 1am Friday, EST, there was a trade on Mt Gox, the largest bitcoin exchange, which valued each coin at $1,242. If only briefly and theoretically, at that point in time a bitcoin was worth more than an ounce of gold.

Bitcoin, by its nature, is a highly volatile asset, which is prone to astonishing run-ups in price. Check out these three one-year charts of the bitcoin price:




The first chart is the year to June 2010; the second is the year to April 2013; and the third is the current chart. Without looking at the y-axis, they’re basically identical.

To put it another way, there is nothing surprising about what bitcoin is doing right now; it has done it many times in the past, and it will probably do it in the future as well. After all, there’s no way to calculate the fundamental value of a bitcoin: indeed, it’s probably easier to justify a price of $1,000 per bitcoin than it was to justify a price of $10. At least now it’s increasingly looking like a Thing, complete with Congressional hearings and front-page-of-the-FT publicity stunts.

The latest bright idea from Alderney — that the tiny island (population: 1,900) should print physical bitcoins backed by electronic bitcoins — is certifiably bonkers. For one thing, the whole point of bitcoin is that it isn’t going to suffer the same fate as all those currencies which the government promised were backed by something else. (The dollar was backed by gold, once; the Argentine peso was backed by the dollar. Neither lasted, and if the burghers of Alderney ever change their mind about the bitcoin backing, or it gets hacked or stolen, the owners of the physical bitcoins are going to have no recourse.)

More weirdly, the Alderney bitcoins are going to have about £500 worth of gold in them, which makes no sense at all. Let’s say that the gold in the coin is worth $800, while the bitcoin backing it is worth $1,000. What, then, would the coin be worth? It can’t be much less than $1,000, at least as long as it can be redeemed for an electronic bitcoin, or a bitcoin’s worth of pounds sterling. But by the same token, it can’t be worth much more than $1,000, because numismatists don’t tend to value gimmicks very highly, so it’s not going to have significant value as a collector’s item. And the most you could sell it for, in terms of its fundamental value, is the value of one bitcoin. Which means that there’s no point whatsoever in pouring £500 worth of gold into it — the gold doesn’t increase the value of the coin at all.

All of which is to say that the FT is splashing all over its front page a crazy bitcoin scheme which is never going to happen. “An independent company will provide the Bitcoins,” explains the newspaper, credulously. “If the price plunged, neither Alderney nor the Royal Mint would lose anything.” But what independent company would ever do such a thing? The company would essentially need to hand over its bitcoins to Alderney, would probably have to help fund the cost of manufacturing the coins out of gold, and would get essentially nothing in return for the huge risk it was taking that all its coins would become worthless.

The news here, then, is not so much that there’s some new cockamamie scheme involving bitcoins — a new such scheme is dreamed up every day. Rather, it’s the way in which the bitcoin bug has infected news editors to the point at which they’ll splash any old vaporware silliness all over their front pages. One of the less reported aspects of the bitcoin story is the way in which editors tend to be much more excited about it than reporters, who are generally more skeptical, and who worry that their own reporting will only serve to inflate the bubble even further.

This is something which should worry the bitcoin faithful, if they really want to see bitcoin become a broadly-used global currency. After all, press coverage of bitocins runs in lockstep with the bitcoin price: it’s times like this, when the price is at its fluffiest, that bitcoin gets written about the most. (If it’s not physical bitcoins, it’s hard drives in landfills.) The largely unspoken assumption behind all such stories: bitcoin is an asset class, and people should get excited about it when (and, implicitly, only when) the price is going up. This is what I think of as the CNBC Premise: when an asset rises in price, that is necessarily a Good Thing, and when it falls in price, that is always a Bad Thing.

The CNBC Premise has never made much sense with respect to currencies, however. And with respect to bitcoin in particular, its most exciting aspect is not its value, but rather its status as an all-but-frictionless international payments mechanism. If you want bitcoin to really take off with respect to payments, you actually don’t want to see crazy price spikes — such things are the best possible way of stopping people from using bitcoins for payments. After all, if your bitcoins are doubling in value every few days, why on earth would you want to spend them?

For me, the most interesting period in the short history of bitcoin was the period from roughly the beginning of May to the end of September, when the volatility in the price of bitcoin was relatively low, even as the price was pretty high* — more than $100 per coin. And more generally, it’s the long flat areas of the three charts above, rather than the attention-grabbing spiky bits, that bitcoin bulls should get excited about. If and when those long flat areas last for years rather than months, bitcoin might start becoming a boring, credible currency. We’ll know that bitcoin has made it to the next level not when editors all want to write about it, but rather when editors don’t want to write about it, because it’s just another way of people paying each other for stuff.

*Update: As Joe Weisenthal points out, stability at a high price is more bullish for the bitcoinverse than stability at a low price, because the higher the market capitalization of bitcoin, the greater the amount of commerce that can be transacted in it.


Great article. Bitcoin should be approached prudently with an eye towards risk management. We comment on this and similar issues on our blog.

http://www.bitmorecoin.com – Quick and easy way to buy Bitcoin in the UK.

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The FBI and the legitimation of the bitcoinverse

Felix Salmon
Oct 2, 2013 21:57 UTC

Did the FBI just deal a fatal blow to bitcoin? Zero Hedge is at his most apocalyptic this afternoon, saying that “the end may be nigh” for bitcoin now that Silk Road, the bitcoin-fueled drugs bazaar, has been closed down by the Feds. Even Adrian Chen, who has done most of the best reporting on Silk Road, was shocked by what the FBI found:

According to the indictment, Silk Road was bigger than anyone had suspected: It boasted over $1.6 billion in sales from 2011-2013, which resulted in $80 million in commissions. (Researchers had previously estimated that Silk Road was doing about $22 million in total sales per year.)

Chen, too, sees today’s news as bearish for bitcoin: “the extent to which Silk Road underpinned the Bitcoin market is pretty amazing,” he tweeted. After all, the complaint reveals that from February 2011 through July 2013, Silk Road’s revenues totaled 9,519,664 bitcoins — that’s almost as many as the total number of bitcoins in circulation (11,744,575).

But although I’m skeptical about bitcoin’s future, I don’t see today’s news as bad for the cryptocurrency. In fact, quite the opposite. If Silk Road is now shut down and if no one else manages to enter the vacuum caused by its disappearance, then the FBI will at a stroke have managed to remove the single skeeviest aspect of bitcoin, and the main reason why people like Chuck Schumer are so suspicious of it.

On top of that, the numbers in the FBI complaint are highly misleading. The complaint says that Silk Road’s total revenue, of 9.5 million BTC, and commission, of 614,305 BTC, “are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates, although the value of Bitcoins has fluctuated greatly during the time period at issue”. That’s putting it mildly. Here’s how Chen described Silk Road back in June 2011:

Mark, a software developer, had ordered the 100 micrograms of acid through a listing on the online marketplace Silk Road. He found a seller with lots of good feedback who seemed to know what they were talking about, added the acid to his digital shopping cart and hit “check out.” He entered his address and paid the seller 50 Bitcoins—untraceable digital currency—worth around $150. Four days later the drugs, sent from Canada, arrived at his house.

Those 50 bitcoins are part of the FBI’s 9.5 million BTC total, but rather than being worth $50, the FBI is now valuing them at about $6,300. As a result, the $1.2 billion number should be taken with a monster pinch of salt. Besides, if you consider that the FBI is looking at 898 days of Silk Road activity, that averages out at a pretty modest 10,600 BTC per day. That’s hardly the “underpinning” of the bitcoin market, which normally sees somewhere between 200,000 BTC and 400,000 BTC per day in total trading volume.

The US government doesn’t seem to have a reflexively negative attitude towards bitcoin: in a letter sent on August 12 to Janet Napolitano, Senators Thomas Carper and Tom Coburn write that while virtual currencies come with “threats and risks”, there should also be “a sensible regulatory framework” which will “ensure that rash or uninformed actions don’t stifle a potentially valuable technology”. Meanwhile, while Treasury certainly wants to regulate such currencies, they don’t seem to want to outlaw them.

In other words, for anybody wanting to see the broader adoption of bitcoin, the shuttering of Silk Road should be considered a necessary and very welcome step — and one which will help support its value over the medium term. Sure, the price fell today — but not egregiously so: it was about $140 in the morning, briefly fell as far as $110, and is now back to $125. By bitcoin standards, that’s a surprisingly low amount of volatility on a big-news day. And with Silk Road gone, a significant source of downside tail risk has now been effectively removed from the bitcoinverse.

So if the shuttering of a significant source of bitcoin demand isn’t bad for the currency, what would cause its demise? The answer is basically just neglect. Bitcoins are a fad, and they’re a fad which will pass, a bit like Beanie Babies. There was no one thing which caused the market in Beanie Babies to implode, it was more that people just moved on to other things. Bitcoin’s the same: newer, shinier virtual currencies will arrive, the techno-utopians will latch onto something else, and eventually the people holding bitcoins will understand that if an asset doesn’t throw off any cashflow, the only way to make money from it is to sell it at a higher price than you bought it. In other words, bitcoin is the ultimate speculative vehicle, one which you might be able to trade in and out of, but one which has no value at all as a buy-and-hold investment. Which is something to bear in mind when you read the next big Bloomberg article on bitcoins as an asset class.


So Bitcoin = Beanie Babies…

I’ve read all your Bitcoin articles and more and more they seem to be written as hopeful “I told you so” with little downside risk if the author is wrong.

I’m sure if and when Bitcoin is mainstream as an asset and perhaps as a currency as well, you’ll just write “While I didn’t think that blah blah blah, blah blah blah happened and changed the blah blah blah that I based my original opinions on. However, if it hadn’t been for that one blah blah blah I would have been proved correct.

My money is on you looking like the internet skeptics of 1996.

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The bitcoin bug bites SecondMarket

Felix Salmon
Sep 26, 2013 05:58 UTC

I have to admit I’m disappointed in this one. It’s no secret that I’m very skeptical about what’s likely to happen when small, risky investments start getting lots of publicity thanks to the ban on general solicitation being lifted. And I’m even more skeptical about funds which do nothing but invest in bitcoins. But at the same time I like quite a lot of the SecondMarket business model. They provide a valuable service to private companies, and they have every ability to carve out a nice little niche for themselves as an accreditation and investment platform — a one-stop shop which allows companies and funders both to avoid much of the onerous paperwork normally associated with private investments.

The problem is that SecondMarket isn’t just a service for issuers and investors. It has also, of late, become a lead-generation engine — or, to put it another way, a mechanism for selling schmucks to wolves. SecondMarket has contact details for a very large number of accredited investors, many of whom trust the company and the reputational capital it has built up over the years. If you send enough of those investors investment pitches for diamond funds, or art funds, or space-based vaporware, the sillier among them will bite. And, eventually, regret doing so. SecondMarket’s investor list is a valuable thing, but the company isn’t behaving in the manner that you’d expect of an owner of something precious and valuable. Instead, it seems to be happy renting its list out to just about anybody.

SecondMarket began life as a way to monetize illiquid fixed-income investments during the financial crisis; it then morphed into a quasi-exchange for Facebook shares. Both businesses were lucrative, but both also came to a natural end, and now it seems that the company is not particularly confident in its ability to make similar sums as a high-end services company. So observers who discerned a whiff of desperation when they first started receiving pitch emails are not going to be surprised by SecondMarket’s latest development: a bitcoin fund.

Bitcoin Investment Trust is basically exactly the same thing as the Winklevii’s bitcoin ETF, only it doesn’t need SEC approval — it’s limited to accredited investors. (But it can still be marketed in public, now that the general solicitation ban has been lifted.) That means it’s even more problematic than the Winkleproduct — it has all the same downsides, plus added illiquidity! If you buy into this trust, you still can’t do the single most useful thing that anybody can do with bitcoins, which is sell them or trade them. (Bitcoins are a combination of currency and commodity; this trust strips out the interesting bit, which is the currency part, leaving just the stupidly speculative commodity aspect.) You still have to pay a fee of 2% per year to SecondMarket for all the work they’re doing sitting on your bitcoins. And then, if you ever do decide to sell, you have to pay another 1.5% fee to get out. On top of that, if you buy into the trust after January 1, you’re also going to have to pay a 1.5% fee to get in.

SecondMarket CEO Barry Silbert is a big booster of bitcoins — he thinks that in 30 years’ time, they’ll be worth lots of money. He’s even put together a 14-page investor presentation, saying that bitcoins could be worth $7,692 apiece if they wind up being worth 1% of the value of the world’s gold today. So let’s say you invest $1,367 in ten bitcoins today: in 30 years’ time, they might be worth $76,920.

On the other hand, if you invest $1,367 in the bitcoin trust, and pay a 1.5% fee, then you only end up with 9.85 bitcoins. And then if you lose 2% of your bitcoins every year for the next 30 years, and then you lose another 1.5% when you sell, your total bitcoin holding in 30 years’ time will be just 5.29 bitcoins. Even if they’re worth $7,692 each, that’s a total of just $40,709 — you’ve ended up paying SecondMarket a full 47% the money you would have made if you’d just sat on the bitcoins yourself.

More profoundly, this announcement marks the end of SecondMarket as an agnostic platform, and the beginning of SecondMarket as a booster of specific investments. The company has already seeded its bitcoin trust with $2 million of its own money — it’s making a big bitcoin bet, and is actively encouraging all of its users to do likewise. Silbert knows that the bitcoin trust is risky: that the most likely scenario is that it goes to zero. It’s a lottery ticket, basically — but one which pays a constant stream of management fees to Silbert’s company, and which risks putting investors off SecondMarket for good if it fails.

Silbert has a Wall Street background, and SecondMarket is a registered and fully regulated broker-dealer. As such, it really should be bending over backwards to be as conservative and sober as it can — no one wants their broker-dealer to be some risky fly-by-night operation offering investments with massive downside. If you’re a broker-dealer, job one is always to be as trustworthy as possible. And getting involved in bitcoins is not a great way of demonstrating trustworthiness.

I have spoken to Silbert about this, at some length, but I still don’t really understand (a) why he’s doing this; and (b) why he’s doing this under the auspices of SecondMarket. Bitcoin does breed True Believers, and Silbert might well be one of them — but that’s no reason to put at risk the reputation of the company he’s spent so many years building up. I don’t necessarily think that SecondMarket has definitively jumped the shark today — I think that it can probably recover from this misstep if it tries. But a bitcoin trust is not a good idea. It didn’t make sense when the Winklevii first came up with it, and it makes no more sense now that SecondMarket has followed their lead. No sensible investor should go anywhere near it, and anybody using SecondMarket as a platform should be more than a little concerned that their trusted broker-dealer has taken this highly unorthodox road.


Mr. Salmon, you’re missing an important angle. To those who really understand Bitcoin, it is not just some payment system or fun/speculative investment. Bitcoin (if it grows to some certain level) will change the financial system of the planet.

Now, you can argue it will never get there. Or, you can argue that the changes wouldn’t be good (such as if you prefer governments control peoples’ private property). Whether one is right or wrong on those arguments, please understand that if Bitcoin does not fail, it will become something very powerful and very special. And it will be the set of individuals and businesses that seized the technology in its early years – when everyone else thought it was a joke or scam – who will be proudly looking back on what they helped accomplish for humanity.

Hyperbole? Let’s check back in ten years.

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Financial innovation of the day, Winklevii edition

Felix Salmon
Jul 2, 2013 17:59 UTC

You can see why they called it the Winklevoss Bitcoin Trust. Without their name in there somewhere, they would never have gotten a respectful thousand-word article in the NYT just for making a speculative SEC filing. To be clear: this thing is a really, really silly idea, from a pair of brothers whose main ambition, these days, is to be the biggest helminths in the bitcoinverse.

As I explained back in April, bitcoin is a combination of two things: it’s a very interesting payment mechanism, and it’s also a highly stupid and speculative store of value. With their new product, the Winklevii are basically separating the two, and selling — for an extra fee — the stupid-investment part of bitcoin without any of the benefits of the much more interesting and useful payments-mechanism aspect. As Peter Thal Larsen points out, you might as well buy an ETF which holds dollars.

Still, if you want to own bitcoins, and you never want to spend your bitcoins, and if you want to pay the Winklevii for the privilege of looking after your bitcoins on your behalf, and if you trust that the Winklevii, after putting out a huge shingle saying “millions of dollars worth of bitcoins stored here”, won’t get hacked and lose all their coins, — then, well, then I’m afraid I have bad news for you. Which is that the SEC will never, ever, approve this product. After all, this is an asset that senators want to ban, an asset which is probably illegal under US law, and an asset that is mainly known for its ease of facilitating money laundering, tax evasion, and the purchase of contraband material. It’s hard to see why the SEC would do anything whatsoever to legitimize that asset as an investible asset class.

Still, the Winklevii have made their SEC filing now, and have received lots of press around it. Just by doing that, before getting any kind of regulatory approval, have helped to make the idea of bitcoins just that tiny bit more legitimate. They’re even trying to invent a whole new asset class — they call it the DMBA ETP, for Digital Math-Based Asset Exchange-Traded Product — in the hope that they can somehow jump onto the ETF bandwagon with the same unerring sense of timing they displayed with their initial bitcoin announcement. (Price of bitcoins then, on April 11: $165. Price of bitcoins today: $90.)

ETFs themselves are looking a bit shaky right now: the market support they need from “authorized participants” doesn’t seem to be able to keep up with the billions of dollars flowing in and out of the asset class. ETFs have never been more popular as an asset. At the same time, the big banks — which are needed to underpin the market — “may no longer be willing to support ETFs in volatile markets”, in the words of the FT. The result, Bloomberg reports, is that many of the less liquid ETFs are seeing increasingly alarming gaps between their own values and the values of the securities they represent.

On Saturday, Blackrock — the world’s largest provider of ETFs — became so worried about all of the negative chatter surrounding the asset class that it put out a truly extraordinary statement, saying that “during the market volatility of the past few weeks, ETFs performed precisely as they are designed to do”, and that (in bold print) “more and more ETFs are becoming the true market”. In other words, if the price of an ETF is lower than the price of the underlying stocks, then, well, that’s just because the ETF is a better indication of the true market price than the stocks themselves are. This is a truly glorious argument, in the Humpty Dumpty sense of the word:

Said Humpty Dumpty: ‘There are three hundred and sixty-four days when you might get un-birthday presents —’

‘Certainly,’ said Alice.

‘And only one for birthday presents, you know. There’s glory for you!’

‘I don’t know what you mean by “glory”,’ Alice said.

Humpty Dumpty smiled contemptuously. ‘Of course you don’t — till I tell you. I meant “there’s a nice knock-down argument for you!”‘

‘But “glory” doesn’t mean “a nice knock-down argument”,’ Alice objected.

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.’

Here, Humpty Dumpty is Blackrock, and Alice is, well, Izabella Kaminska, I guess.

As Jonathan Kahn notes today in a letter to the FT, it’s never particularly reassuring, in the wake of the financial crisis, that an asset class is supported by large banks who have a financial incentive to provide liquidity to the market. Because when you really need that liquidity, those banks are going to be nowhere to be found.

If this is a problem with ETFs in general, it’s a particularly enormous problem with the Winklevii’s monstrosity. So, rather than paying any further attention to their ridiculous stunts, I would advise a much more sensible alternative for anybody looking for an easy and legitimate way to buy and store bitcoins. Here’s a press release from OpenCoin today, announcing that anybody with a Ripple account — something you can easily set up for free, online, in any currency, and which I explained back in April — can now use that account to pay anybody in the world in bitcoins. A Ripple account, then, can be used to store bitcoins, if that’s what you want to do, or you can keep your money in a real currency instead: it’s up to you. And whatever form your money is in, you can use it to pay for things in bitcoins as well. In other words, it does everything that the Winklevii are offering to do, plus a lot more, without charging a management fee.

Ripple, bitcoin, ETFs — all of these are financial innovations, and financial innovations have a deservedly bad name these days. All of them have potential downsides. But most of them at least serve a real purpose, and have their defenders. The Winklevii, muscling in to the financial-innovation game, are being much more selfish about the whole thing. They’re going to fail; I just hope they don’t cause too much harm to others in doing so.


1. Start asking the kind of questions you ask here about the ability of a bitcoin to store value, and next thing you know you’ll be asking the same questions about most of the major world currencies (including USD), and the answers aren’t that different. Yes, the “full faith and credit…” and so on and so forth, but if/when it ever comes to the point where that backing is truly needed, is the same moment where it’s not worth the paper it’s printed on.

2. If you’re going to criticize, think a few steps into the future. You’re standing on the sidelines throwing mud at the first few moves of a chess match. Please, intelligently debate how bitcoin & new methods of payment/currency might play out, but this article is simply a weather report on what’s already happened. No value added.

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Why bitcoin’s rise is nothing to celebrate

Felix Salmon
Apr 3, 2013 13:50 UTC

I’ve posted a very long piece on bitcoin over at Medium. Obviously, I’d love for you to go over there and read the whole thing — or at least save it somehow for reading later. But here’s the heart of the article:

Volatility is a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next? Currencies need a modicum of stability; indeed, one of the main selling points of bitcoin was that it couldn’t be destabilized by government institutions. But that comes as scant comfort to people watching the value of a bitcoin behave like some kind of demented internet stock during the dot-com bubble.

In reality, then, bitcoin doesn’t really behave like a currency at all. In terms of its market value, it looks much more like a highly-volatile commodity. That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen – to the point at which they would effectively erase the distinction between a commodity and a currency.

But is that a good idea?

The answer, of course, is no. It’s a bad idea to turn a currency into a commodity, because if the price of the commodity goes up, then everybody using the currency suffers from enormous deflation. Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today. That’s a pretty good sign that bitcoins don’t work as a currency.

More profoundly, it’s incredibly corrosive to try to build a currency on mistrust, as bitcoin has attempted.

It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust. Money, in other words, is a key ingredient in the glue which keeps the social compact together. (What we’re seeing in Cyprus is in large part a demonstration of what happens when that compact starts becoming unglued.)

Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. It’s nihilistic.

It’s fun to watch the bitcoin bubble, but it’s also important to understand that almost no one actually wants to live in the kind of world that bitcoin enthusiasts are looking forward to. Thankfully, the rising price of bitcoins is not some kind of market signal telling us that we’re closer to that world. But at the same time, it’s certainly not something to celebrate.


“Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions.”
Close, the only minor tweaks i would make are that a) they’re not regulated, b) they’re not scrutinized, c) they’re primarily responsible for running our economy into the ground, and d) stealing all of your money. The are not “given a job”, they actually are the driving force behind most policy, which you can hopefully see is quite SHIT nowadays.

Regarding bitcoin being “built on mistrust” you’ve got to be kidding me. You clearly have a lot to learn when it comes to bitcoin. There is a lot of fear in ignorance when it comes to technically challenged individuals. As the revolutionary tidal wave of next generation technology sweeps over the planet many panic and get swept out to sea rather than understand what the situation is and adapt.

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