Financial Cryptography

BitCoin - the bad news

Predictions based on theory have been presented. Not good. BitCoin will fundamentally be a bad money because it will be too volatile, according to the laws of economics. You can't price goods in a volatile unit. Rated for speculation only, bubble territory, and quite reasonably likened to a ponzi scheme (if not exactly a ponzi scheme, with a nod to Patrick). Sorry folks, the laws of economics know no bribes, favours, demands.

And so theory comes to practice:

Bitcoin slump follows senators’ threats - Correlation or causation?

By Richard Chirgwin.

As any investment adviser will tell you, it’s a bad idea to put all your eggs in one basket. And if Rick Falkvinge was telling the truth when he said all his savings were now in Bitcoin, he’s been taken down by a third in a day.

Following last week’s call by US senators for an investigation into virtual crypto-currency Bitcoin, its value is slumping.

According to DailyTech, Bitcoins last Friday suffered more than 30 percent depreciation in value – a considerable fall given that the currency’s architecture is designed to inflate its value over time.

The slump could reflect a change in attitude among holders of Bitcoins: if the currency were to become less attractive to pay for illegal drugs, then dealers and their customers would dump their Bitcoins in favour of some other medium.

Being dumped by PayPal won’t have helped either. As DailyTech pointed out, PayPal has a policy against virtual currencies, so by enforcing the policy, PayPal has made it harder to trade Bitcoins.

The threat of regulation may also have sent shivers down Bitcoin-holders’ spines. The easiest regulatory action – although requiring international cooperation – would be to regulate, shut down or tax Bitcoin exchanges such as the now-famous Mt Gox. However, a sufficient slump may well have the same effect as a crackdown: whether Mt Gox is a single speculator or a group of traders, it’s unlikely to have the kind of backing (or even, perhaps, the hedging) that enables “real” currency traders to survive sharp swings in value.
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Then the problem of a bubble in digital cash is compounded by theft:

I just got hacked - any help is welcome!

Hi everyone. I am totally devastated today. I just woke up to see a very large chunk of my bitcoin balance gone to the following address:

1KPTdMb6p7H3YCwsyFqrEmKGmsHqe1Q3jg

Transaction date: 6/13/2011 12:52 (EST)

I feel like killing myself now. This get me so f'ing pissed off. If only the wallet file was encrypted on the HD. I do feel like this is my fault somehow for now moving that money to a separate non windows computer. I backed up my wallet.dat file religiously and encrypted it but that does not do me much good when someone or some trojan or something has direct access to my computer somehow.

The dude lost 25,000 BTC which at recent "valuations" on the exchange I calculate as $250,000 to $750,000.

Yeah. When we were building digital cash systems we were *very conscious* that the weak link in the entire process was the user's PC. We did two things: we chose nymous, directly accounted transactions, so that we could freeze the whole thing if we needed to, and we (intended) to go for secure platforms for large values. Those secure platforms are now cheaply available (they weren't then).

BitCoin went too fast. Now people are learning the lessons.

(Note the above link is no longer working. Luckily I had it cached. I'm not attesting to its accuracy, just its relevance to the debate.)

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Also:

• Digital Black Friday: First Bitcoin "Depression" Hits
• http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea?srid=pxt
• http://www.economist.com/blogs/babbage/2011/06/virtual-currency

For those who can stomach more bad news...

1. Bitcoin and tulip bulbs
2. Is BitCoin a triple entry system?
3. BitCoin - the bad news

Posted by iang at June 14, 2011 10:51 AM | TrackBack