Skip to comments.Funny Money: Why Bitcoin Is a Scam
Posted on 12/21/2013 8:55:31 PM PST by narses
In 2009, Satoshi Nakomoto (possibly a real person, possibly a pseudonym for one or more hackers) invented Bitcoin, the first peer-to-peer currency. Bitcoin, which works along the same lines as the Bittorrent network you might use to download movies and music, isnt the first online currency. Linden Dollars, the unit of exchange in Second Life, are widely traded and regulated by game's maker, Linden Lab. Nakomotos innovation was using math-heavy cryptography techniques to create a medium of exchange that doesnt require a central authority or physical tangibility (like gold) to deter counterfeiters and regulate the money supply.
Each time bitcoins change hands, so does a transaction history encoded in a string of characters. This hash value or digest can be decoded by anyone with sufficient computer power and time to devote to the effort. When bitcoins are exchanged, a digest is broadcast to the network of users, a participant does the work of decoding the transaction history, and other users quickly confirm their history is accurate. (The decoders earn a 50-bitcoin bounty for their work.) This happens about once every 10 minutes. Everyone who holds the currency agrees on who owns what, which ensures people cant copy-and-paste their way to millions or defraud other users without the whole network agreeing that it happened.
In other words, Bitcoin isnt just a currency, its a massive experiment in group trust. Its also a hint of the financial system to come and, ultimately, a scam.
You probably heard of the digital cash after it was rocked by sudden changes in value. A few weeks ago the value of the bitcoin briefly plunged to negative eight cents to the dollar as hackers crashed exchanges and digitally ransacked electronic wallets to the tune of $9 million. A single victim claims that hackers absconded with some 25,000 of his bitcoins, worth, absurdly, approximately $375,000 at present dollar-to-bitcoin exchange rates.
Thats a crazy amount of money to have stolen by someone essentially copying a file from your hard drive. And thats just the beginning of whats happening in the world of Bitcoin, which combines enough hackers, monetary policy cranks, and mysterious Japanese corporations to populate a Neal Stephenson novel.
Bitcoin is a libertarians dream come true: a steadily expanding money supply without the state getting in the way of the sweet mechanics of the market. The money changes hands without transaction fees to corporations or government tracking. Thats why Bitcoins most ardent supporters are folks like gold-standard advocates and hard-core Wikileaks partisans. As interest in the currency grows, tech-savvy investors have jumped into the mix, speculating with bitcoins and profiting as demand increases; early adopters reaped returns as large as 1,000 or 2,000 percent.
There are nearly 7 million bitcoins sloshing around the Internet, worth over $100 million. Should you jump in the pool? I wouldnt recommend it.
So far, you cant buy anything with bitcoins that you couldnt purchase more easily with cash or a credit card. Despite rumors that Bitcoin was creating an online Hamsterdam where anonymous users could sell drugs and lord knows what else, Bitcoin isnt truly anonymous unless youre already taking some relatively advanced anonymity steps. Even then, Internet forensics could likely track you down.
More problematically, the economics dont quite work. Currencies are most valuable when lots of people trust and use them frequently. But PayPal has refused to convert bitcoins to cash, and major exchanges like MtGox have fallen to hackers. A currency that you cant convert into anything else isnt worth, well, anything.
But the biggest problem is that, despite its anarchic design, the system presents a huge opportunity for big fish to take advantage of the Internet everyman. Ben Laurie, a respected web security expert and cryptographer, makes a compelling case that Bitcoin wont work because it accrues such a huge advantage to people who can bring the most computing power to bear on clearing transactions. I mean, its nice for the early adopters, so long as new suckers keep coming along, he concludes. But in the long run its just a pointless waste of stuff we can never get back.
Most worrisome is the opportunity for collusion: If any single person or group controlled a majority of computing power in the network, they could rewrite the transactions to take your money. Bitcoin relies on the growth of the network to outpace any single nodes ability to control the bulk of the processing power, but one mining collective, deepbit, currently clears more than a third of all transactions. Already, hackers have used botnets, online networks of computers, to increase their ability to process transactions and mine bitcoins.
These dynamics make watching Bitcoin a lot like watching monetary history in fast-forward. Timothy B. Lee, a tech journalist, paints a convincing scenario in which Bitcoin nodes band together to seize control of the network, becoming the equivalent of online banks as they provide transaction services to everyone else. And if those banks get together to regulate the supply of money, well, thats where central banks come from.
Ultimately, all money is based on trust. Aside from the folks who prefer to base the value of their assets on the hard work of Russian gold miners, most Americans trust dollars because we have some sense that the U.S. government isnt going anywhere and is somewhat accountable to us. Its hard to trust a monetary system concocted and managed by anonymous hackers who arent answerable to anyone.
Bitcoin still offers a glimpse of a future in which the dollar is digitized: No more wasted money printing paper and coins, and instead of stimulating the economy with handouts to banks, the government could just download money onto your USA Cash Card. But we wont want to cede control of our future currency to profit-seeking financial companies (the main advantage of Bitcoins today is their fee-free exchange) or give the government any more ability to track our purchases than they do with cash. Well want a decentralized peer-to-peer monetary system that combines the advantages of Bitcoin with the purchasing power of the dollar.
Assuming, of course, that the dollar has any purchasing power left by the time we want to digitize it.
I’d like to see a respected government create a digital currency.
I must admit that it was a disappointment when they bowed down to US pressure to rat out some depositors :-(
When bitcoins go bad: 4 stories of fraud, hacking, and digital currencies.
With Bitcoin interest (and prices) spiking, you might be considering investing in your own little cache of digital currency. But before you set up a Bitcoin wallet, you should think long and hard about who will watch over your digital wealth. In its relatively short lifespan, Bitcoin wallets and processors have been a target for hackers — and old-fashioned fraudsters. In fact, within the last week, one of the most prominent European exchanges reported it had lost over $1 million worth of bitcoins to hackers.
An academic study published earlier this year by Tyler Moore at Southern Methodist University and Nicolas Cristin at Carnegie Mellon about the risks associated with Bitcoin exchanges reported that 18 of 40 services they studied over three years closed “with customer account balances often wiped out.” In that study, less popular services were more likely to just disappear than popular exchanges — but popular exchanges were more likely to suffer security breaches, which have also been blamed for disappearing bitcoins.
Their research supports the anecdotal evidence about the security of various Bitcoin services — or lack thereof. The forum Bitcoin Talk has a relatively comprehensive list of incidents, but here are a few of the most notable (and costly) stories about investing in Bitcoins going bad.
European payment processor and wallet service loses over $1 million worth of bitcoins
BIPS, a Denmark-based Bitcoin payment processor with a free online wallet service reportedly lost 1,295 bitcoins over the course of a few days earlier this month — just over $1 million worth at current exchange rates. Coindesk reports that the service was the subject of a series of DDoS attacks that appeared to be connected to the heist. The company’s CEO said most of the missing funds were from the company’s own holdings, but a statement addressing the incident noted that some users also took a hit
BIPS has been a target of a coordinated attack and subsequent security breached. Several consumer wallets have been compromised and BIPS will be contacting the affected users.
Inputs.io loses $1.2 million worth of bitcoins to apparent hack
Another online wallet service, Inputs.io, was compromised in late October. Hackers reportedly made off with 4,100 bitcoins, then worth $1.2 million, during two separate attacks — despite an extensive list of security measures. TradeFortress, an individual associated with the service, said that it was a social engineering attack that allowed the adversary to reset the passwords for the system’s cloud-hosting provider. Users are eligible for a partial refund of their losses out of its remaining funds on a sliding scale that decreases based on how much was stored, likely cold comfort for anyone storing significant sums with the service.
Chinese Bitcoin trading platform disappears — with $4.1 million worth of bitcoins
A prominent Chinese Bitcoin exchange that claimed to be based in Hong Kong, GBL, disappeared in late October — along with $4.1 million worth of bitcoins. The platform had only launched in May, and there were a few other red flags, including that it did not obtain a license to operate financial services, according to the Want China Times.
Alleged Bitcoin Ponzi scheme faces SEC suit
In 2011, an individual started advertising returns on Bitcoin investments that sounded too good to be true — 1 percent interest daily via an investment scheme eventually called Bitcoin Savings and Trust. The whole thing looked like a bit of a pyramid scheme and shut down without returning some 500,000 bitcoins (then worth more than $5.6 million) to investors in 2012. And an SEC suit alleges that it was too good to be true, saying the proprietor of the service “falsely promised investors up to 7% interest weekly,” but the actual offering “was a sham and a Ponzi scheme” where he used new investments to pay off outstanding returns and pocketed the rest.
You said a mouthful there FRiend.
I’ll go one further. It is no more of a scam than any other currency on earth. And no less.
Ultimately, all currency is so-called “fiat” currency. All of it. Even if said “money” is in gold pieces of eight. All currency only works as a medium of exchange because the seller agrees to take some of it in exchange for their product or service. The seller agrees to do this only because they believe there will be others who will accept that currency in exchange for something they want.
And ultimately, all death is so-called heart failure”. But that definition cheapens any analysis beyond utility.
A fair point.
If bitcoins can be made secure enough, it’s the way of the future for sure.
I had to wonder the other day when there was a big drop, if it’s a sign of imminent collapse or a great buying opportuity.
Bitcoin will likely be sabotaged to instill FUD. It’s an interesting concept nonetheless.
An imaginary money made up by a hacker. What could go wrong?
Uh... No it's not.
sounds like the Federal Reserve
I wish the author had pointed out the differences between US currency and Bitcoin.
Uh... No it's not.
The US Dollar is backed by a (significant) sovereign taxing power and is created by, and backed by the borrowing of money in a fractional reserve system.
Bitcoin is a phantasm created by an anonymous hacker.
Not even close.
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