What I should have said was "Of course"

Being an evangelist I make it a point to mention that I work with Bitcoin when getting to know anyone.  Most people have heard of it now and most people still know next to nothing about it.  I will typically get the question, "So, should I get some bitcoin?"  And for some reason I always seem to answer "Yeah, not sure about that."  Why?  Why do I do this?  Some evangelist I am.  Here is a reflection of my own failings in this arena.

Bitcoin is too expensive.  This was my personal bias merging in with my general advice.  A bitcoin was $1100 at the time.  I was not willing to buy bitcoin at that time so why should I tell other people that they should?  I think the argument is valid but I need to back it up with my reasoning on the individual situation.  I tend to assess situations, give a recommendation, and not give people background data so they can make their own decision.  I need to work on that.

You are not ready for Bitcoin.  Part of my assessment of an individual is whether I feel they can start up a client, encrypt their wallet, and backup their wallet in alternative locations.  Really the barrier right now is "are you capable of being your own bank."  That kind of responsibility is just too damn high, especially if they have to figure out how these things are accomplished and not just perform the tasks.  The last thing I want to do is recommend people get bitcoin just to have them go and lose their wallet.

No, you cannot have my bitcoin.  If setting up a scheme to protect your local wallet isn't hard enough, try explaining the hoops people have to go through to get bitcoin.  If you wanted bitcoin bad enough you would already have found out how to get them on your own.  Anything I would tell you would just confirm your bias that it is too hard to get your hands on bitcoin and you will give up before you try.  The simplest way for them to get bitcoin is to purchase them from me directly.  I may be an evangelist but I am not going to be sucked dry of my bitcoin just to proclaim the good news of Bitcoin.  Afterall, bitcoin is difficult to acquire with all the hoops you have to jump through, even for me.  And yes getting sucked dry would happen.  I have found that the hardest part of selling bitcoin is telling people that you have no more to sell them.  It is like a spigot connected to suction.  You want to let a little out but staunching the flow becomes a chore.

In short, I want to be a better evangelist.  What I should be telling people is, "Of course, I think everyone should own bitcoin.  It is still not an easy thing and you will have to work to get it, but it is rewarding."

My thoughts on Casascius in trouble

According to the website casascius.com and a followup report by Wired the company (Casascius) was contacted by FinCen with language that made them take a step back and turn off operations for the time being.  Right now it is hard to separate speculation from actual news but I thought I would weigh in on what I have heard.

For those that don't know Casascius, they are the 800 pound gorilla in the physical bitcoin market.  They produce metal coins that are hollow in the center and cardstock with a secret key printed on it is placed into this space.  The hollow space with the printed key is then covered with a tamper evident sticker.  The result is a fancy cold storage wallet that you can give to someone else with confidence that the secret key was not accessed.  The public key (actually firstbits of the public key) are printed on the coin so that you can verify the balance of the coin.  I have some Casascius coin and I would definitely recommend them for people who like collectibles and want to introduce Bitcoin to new comers in a way that they will understand.

FinCen is the enforcement branch of the US treasury.  They deal with money laundering and other financial crimes.  Where factual reports of this case and speculation seem to blur is what exactly FinCen had a problem with regarding Casascius.  The consensus opinion seems to be that the business process Casascius uses can lend itself to money laundering so it needed to register itself with FinCen as a money transmitter and verify and keep records of its customers.  Here are the specifics to how that works.  When you order a 1 bitcoin coin from Casascius you pay Casascius 1.25 bitcoin (this is not the current rate, just an example).  You pay .05 BTC for shipping and .2 BTC for the markup and when you get your coin in the mail Casascius will send 1 BTC to the address of the coin.  The problem is that Casascius is collecting bitcoin from orders from all over the place and the 1 BTC that is going on the coin is not necessarily part of the 1.25 BTC you originally sent.  There is nothing wrong with that, it is just that FinCen wants you to be registered and follow their rules and regulations for your customers if you are doing that.

If, on the other hand, Casascius was charging .25 BTC for the coin as a blank and telling the recipient that it was up to them to charge the coin then Casascius is not transmitting money.  They are just taking payment for a product.  Whatever happens, I am very interested to see how this all pans out.

Not many thoughts

I was busy moving over the weekend and got a cold on top of that.  Most of my thought regarding Bitcoin are on two different projects I am running through to see if I would like to bring either of them to light.  If either go anywhere I will certainly be announcing them here as well as other places.

Personal outlook on deflationary currency

A big argument against deflationary currency is that people will horde it and not spend it because it will be worth more tomorrow and spending means they lose out.  A great counter argument is that people will start to value durable products over disposable products which would be good for society, but I wanted to counter the idea of hoarding versus spending with inflationary currency head on.

I am saving for retirement.  I am a natural saver, I am frugal and disciplined, and I am barely doing good enough although compared to my peers I am a superstar.  People like to put thing into perspective in terms of today's money.  I need to save $1.5 million to retire how I would like to.  If they are retiring in 30-40 years what they will find out is they really need $4 million to retire how they are imagining because of the erosion of the value of their dollar.  At current rates I am not going to meet that inflated goal which means that I have to save more.  That's right, inflating currency means I cannot spend if I want a reasonable self reliant retirement.  If you want to keep up with inflation you have to put your nest egg at risk in investments.

Now if I have a deflationary currency I start feeling richer as my currency buys more.  It is pretty well known that the way to get people to shop is to make them feel richer.  They don't have to be richer, they only have to feel it.  This is was a major source of fallout in the sub-prime market.  A lot of people were getting cheap money and felt richer without actually being richer.  When that reversed, people stopped buying things even though inflation was still present.

Another argument I would like to address is that with a deflationary currency you don't risk it by investing in the future.  I would address this by saying this one has me stumped.  If I put myself in the mindset of having a deflationary currency I really don't want to invest.  Holding the currency is investment enough.  I am not sure that I see a way around this one and I think it is a real problem.  It would be great if someone could explain this one to me because I believe in the power of crowd funding innovation and unseating the stodgy old dogs of yesterday.

PSA: Your bitcoin does not exist in your wallet

It is a commonly repeated falsehood that your bitcoin wallet contains your bitcoin.  It does not and making the correct distinction is very important for people to grok if they want to keep their bitcoin safe.

Your bitcoin, my bitcoin, everyone's bitcoin exists on the blockchain.  That is it, end of story.  You don't have bitcoin in your wallet file.  What you have in your wallet file is the key to access the bitcoin at a specific address.  I have heard it described like this.  The user facing portion of the blockchain is like a post office with a bunch of P.O. boxes.  The backend of the blockchain is a system of automated servitors that can put transactions into any of these P.O. boxes.  As I stated in a previous post, bitcoin is a unit of measure and these transactions are measured in bitcoin.  You enter this post office with your key that will only fit one P.O. box.  If that box (bitcoin address) contains transactions, you can take these transactions from your box and command the backend automated servitor to put the transaction into any P.O. box you want.  In truth all of this is done in one step.  You create a transaction that is signed with your secret key and it is the job of the network to verify that your transaction is legitimate but for purposes of metaphor I am breaking it up into the things that are going on.

The reason that this distinction is important for people wanting to keep their bitcoin secure is that there are ways to attack their bitcoin addresses that have nothing to do with gaining access to their system.  The most common mistake is in the use of Brain Wallets.  A Brain Wallet is a way to derive a Bitcoin secret key from an easier to remember phrase.  SHA256 hash your phrase to generate a 256-bit number which is your key.  Now if the concept of having bitcoin in your wallet is true then once you get your bitcoin into your wallet everything would be safe as long as you protect your wallet.  But we know that is not true.  Bitcoin is stored on the blockchain.  What happens is that attackers know that other people are using Brain Wallets and they use sophisticated programs to try words, phrases, and permutations to see if any of them yield bitcoin when hashed into a 256-bit number.  This attack is done locally on their machine against the local copy of the blockchain (because every full client has a full copy of the blockchain).  Because it is all done locally, they can attack this word space as fast as their computers will let them which turns out to be billions of attacks per second.  If they stumble upon the same Brain Wallet you have set up, they have the key to your P.O. box.  They don't need access to your computer, it does not matter if your wallet is encrypted.

This attack does not work against raw random Bitcoin secret keys because the full space of 256-bit numbers is so large.  The fastest cluster of computers would be working for millions of years before they would have hope of stumbling across the first address that actually contained bitcoin.  So my message above does not mean Bitcoin is unsafe, just keys that are derived from the smaller space of memorable phrases.

Erik Voorhees is my hero

I am going to take a break from my usual subpar writing and just post a link to an open letter from Erik Voorhees to Peter Schiff:
http://www.reddit.com/r/Bitcoin/comments/1rxmk3/my_open_letter_to_peter_schiff_followup_from_the/

I one day hope to meet Erik.  He is inspirational in his eloquence and patience in the field of Bitcoin apologetics.  Digging into SatoshiDice was mind altering.  All I have to watch for now is my own bias clouding my judgement when Erik gets something wrong.

Ponzi, Pyramid, and Tulip oh my!

There are three things that someone can say about Bitcoin that gives you license to no longer listen to them when they are talking about Bitcoin.  Without further adieu they are:

Bitcoin is a Ponzi scheme:  This can be translated into "I don't know anything about Bitcoin, and/or I have no idea what a Ponzi scheme is."  Peter Schiff was using this one (actually he used all three) and the interviewer had to stop and ask Peter if he knew what a Ponzi scheme even was.  A short description is that someone sets up an opaque investment claiming that they deliver a guaranteed return.  When people who were suckered in at the beginning attempt to divest themselves, the Ponzi operator pays them out with money that later suckers are contributing.  Paying out to early investors amplifies the trust in the scheme operator and more suckers join in.  The keys to refuting Bitcoin as a Ponzi scheme are that it does not meet any of the strict criteria of a Ponzi scheme.  Ponzi operations are opaque where Bitcoin is about as transparent as value trading has ever been.  Ponzi operations are centrally organized where Bitcoin is distributed.  Ponzi schemes to not have second and third runs.  When they collapse and unwind the fund is gone.  Bitcoin price has gone through several "busts" and then it rebounds.

Bitcoin is a Pyramid scheme:  This can be translated as "I have no idea what a pyramid scheme is.  Dear God, what is Bitcoin."  Again, a simple description of a pyramid scheme should be all that is needed to show why Bitcoin is not one.  A pyramid scheme involves a single party recruiting friends and family to get involved and to recruit their friends and family and then sending a percentage of the involvement up the chain to the top.  The idea is that the real work is recruiting and the scheme will last until there isn't another sucker to be found by the lowest tier.  Bitcoin, however, is a free market.  While the people first involved can and will benefit more than those late to the game, it is no different than an early investor in a company.  It would seem that Bitcoin evangelists are just trying to find the next sucker to bolster the value of their stash.  A true Bitcoin evangelist does not encourage speculation for speculations sake.  They will talk about the value of Bitcoin as a tool in hopes that you will also see value in using it.

Bitcoin is the next Tulip Mania:  This comparison is simultaneously the most absurd and the most relevant.  It is absurd because most people are not talking about the actual happenings of the tulip price bubble, but what they in their modern 21st century ivory tower of knowledge consider to be a good example of people acting stupidly.  Where it turns relevant is when you look at the actual story.  Pulling tulips out of their 17th century context means not understanding how rare and prized they were and how difficult it was to get viable progeny.  It was one of the first examples of the use of a speculative futures market and people who were not interested in acquiring tulips were purchasing tulips.  This is relevant with Bitcoin because people are acquiring with no intention to use it.  It seems beyond a reasonable doubt that speculation has a great deal to do with the current price of bitcoin.  That is really where the comparison should end though.  It is difficult to assess how it parallels tulips because 1) there is no futures market for bitcoin, you can really only directly acquire it and 2) even if there was a futures market, transferring and acquiring bitcoin is far easier than tulips so the futures market magnifier would be much smaller or that magnifier is already built in.  There is also an issue of comparing the desirability of a tulip with the utility of a bitcoin especially when said utility would dampen the need for a futures market.  While tulips may have been nice to have and would have been seen as a show of personal success, bitcoin should last a lot longer if it can prove to be a better way to get things done.  There is always value in utility.

People talk about bitcoin price, don't believe them

Everyone's favorite topic when it comes to bitcoin is price.  I understand why, the price is exceptional, but it focuses attention on the wrong things and gives voice to the wrong people, namely the speculators.  It also gives a metric to judge the success of Bitcoin that really is ancillary at this point.

But you cannot escape the debate and it is important to note because speculation can end up helping and/or hurting Bitcoin.  It is also inevitable that speculation will enter a market where value is important.  So I wanted to give my opinion on price speculation and tell you what to look out for when listening to other people.  I believe that in 4 years the price of a bitcoin will be around $10,000.  I base this on adoption rate the value of the trade market for Bitcoin as a protocol.  When you are trading something of value back and forth, the value of the medium has to expand to match what it is being traded for.  I believe the market will have to expand to $200 billion for what is being traded in Bitcoin in this time.

The big question on people's lips right now is $1000, is that a bubble?  Every time I have tried to predict a bubble I have been incredibly wrong.  I told my father in March that I did not understand why a bitcoin was $45 and he should not buy in at that price.  Bitcoin has not seen $45 since that time.  There was a bubble to $250 and an over correction down to $65 but $45 was not seen.  So that is part of my opinion on how to look at other people's opinions.  They do not know.  If they are correct it is on accident.  Don't let anyone tell you they knew what was going to happen after the fact unless they were the ones that manipulated the market.  Anyone who talks without humility and absolutely knows what is going to happen is full of crap.  Anyone who uses words like "obviously" and "fool" and other bullying manipulative language and does not back it up with math is not worth listening to.

People worth listening to will tell you how they came to their conclusion so you can decide whether you believe the data they used to reach that conclusion.  Also, short term predictions should never be believed because data really only works in the long term.

Altcoin boom!

Over the past week, the real appreciable gains have been in the altcoins.  Maybe they are playing catch-up.  Maybe there is a psychological barrier regarding the bitcoin price and people are looking for (and fulfilling their own prophecy) the next up and coming crypto-currency.  Whatever the case I got a surprise dropped on my lap when I remembered that for a year I was simultaneously mining Namecoin with my Bitcoin.  Now if only the Namecoin client wasn't so inefficient updating its own blockchain so I could do something with them.

My take on the altcoin market tends to be fairly curmudgeonly.  They don't provide anything I need that bitcoin does not already do.  Litecoin in particular draws my ire because it really seems to bring nothing new to the table.  Faster confirmations at the cost of a more cumbersome blockchain.  I do, however, shine to the argument that the altcoin space is a great place to prove out other ideas to bring into bitcoin and I also believe that having more avenues in this space makes the activity of crypto-currency that much more robust and able to survive attack.  If basic investment has taught us anything is that you diversify to mitigate risk.

Bitcoin 101: bitcoin is a unit of measure

There seems to be plenty of introductions to Bitcoin on the internet but most of them seem to focus on the technology and gloss over the important tidbits you need so that you have a proper frame of reference.  So I am going to post my own Bitcoin 101 in segments and I hope it encompasses what you need to know before being introduced to Bitcoin.

bitcoin (lowercase 'b') is not a thing, it is a unit of measure: What gets most people hung up at the beginning is this idea that I have a bitcoin and then it is somehow divided into parts of a bitcoin.  The mental image is that I sent part of this bitcoin to someone and it gets mixed with other parts of bitcoin and somehow it all traces back to some original single bitcoin.  That paradigm is incorrect.  Don't let the name fool you.  Don't think of it like a coin.  Instead what someone will send you is a transaction and that transaction will be worth a certain amount of bitcoin.  That transaction is measured in bitcoin.  In truth US dollars are like this as well.  Someone will hand you a bill that is measured as 20 dollars, or a coin that is measured as 5/100 of a dollar.  There is no originating dollar that your nickle is part of.

In summary, the thing that is sent on the Bitcoin network is a transaction (or spend).  This transaction is measured in bitcoin.

Another kind of Altcoin

SatoshiDice opened my eyes to another facet of the power of Bitcoin.  For those who have not heard of SatoshiDice it is bitcoin gambling.  You send bitcoin to a predetermined address.  The transaction id of that bitcoin send is hashed using a predetermined "salt".  The value produced by this hash is compared to another predetermined number.  If your hash is lower, you win and the bitcoin prize is immediately paid back to the address you sent from.  While that explanation is not exact it is close enough to explain what is going on.

Now I want to talk about how SatoshiDice works from a server/service perspective.  The front end of SatoshiDice is a web server that at the very least must provide information about where to send bitcoin to make a bet.  I will call this the point of discovery because it is the touch point with the user where the user discovers the information needed for them to proceed.  In order to access this point of discovery the user has to know that they need to go to SatoshiDice.com and browse there with their browser.  In order for that server to be known as SatoshiDice.com the owner of the server has to register SatoshiDice.com coupled to an associated IP address for the server with a global nameserver.  Nameservers are used to route internet traffic to the correct end server.  Because you have to register everything and the physical location of the server is known because of the associated IP address it means that the point of discovery is physically findable by those with means to do so.  This is an issue for gambling sites that have been declared illegal.  In order for people to find your server you inherently have to provide a route for people to physically find your server.

The server that actually process the gambling for SatoshiDice does not face the same limitation of opening itself up to physical discovery.  That server is merely a node accessing the distributed bitcoin network.  Bitcoin works because you have all bitcoin information and the secret keys you have allows you to access and modify certain parts of that information.  Because of this you can set up your server anywhere that has internet access and you do not need to broadcast location information about the server.  The workhorse of the gambling operation is run on a server that can avoid confiscation and can move immediately without external coordination.

A fork of the Bitcoin code base (an altcoin) can be created to give the point of discovery the same benefits that as the SatoshiDice gambling server.  Specifically the script section of the transaction can be expanded in size to accommodate additional information.  In my vision this larger script allocation would simply be filled with html.  A browser could then be repurposed to monitor a single address and parse transactions as web pages.  All clients have the entire blockchain so technically each node has the entire "internet" on their machine much like each participant in Bitcoin has the full transaction history of Bitcoin.  Now if you want to publish information meant to be a point of discovery (like hosting a website) you would instead send a transaction to a known publication address with the webpage as a payload in the transaction.

A full system of page updates and market driven page importance could easily be worked into the system.  Pages could appear in order of importance by the amount of altcoin paid to the publication address.  A system of hashtags could be used to reference and bump pages or submit edits.

Thank you China???

I am an American in every sense of the word.  I love the freedoms that are afforded to me.  I moan and gripe about any type of infringement on that freedom.  I participate where I can in our democratic process.  I think our government is horrible and full of horrible, greedy, and sometimes inanely stupid people but I am glad I can say that without fear of reprisal.  And I am subtly arrogant enough to mean people of the United States when I say American even though that term is valid for Canada, Central, and South America.  Although it is kind of like the term Asian never referring to Russians.

All that said, thank you China!  United States "paid for" representatives have been more than ready to brand bitcoin as "illegal activity" at the behest of their main financial supporters.  It was too small for anyone to actually make any actions against it, but the language was clear enough.  Germany showed interest in bitcoin by acknowledging it and defining its use and how the government would deal with it, but they are our allies and still a small percentage of our economic might so business continued as usual.  Then China did roughly the same thing and the whole game changed.

When it come to the only fight that matters (economic dominance) China is a real contender and they contend.  The move for China to embrace bitcoin as legitimate can only be viewed as a direct shot at the the US.  The notion that China would embrace a pseudo-anonymous currency it cannot control because it thinks it is a good idea is absurd.  China loves the idea that maybe there is a financial instrument that will undermine US dollar dominance as a reserve currency and they can get in on the ground floor and take a large stake.  Now when being attacked, when self preservation is at stake, US representatives actually take notice and start acting like maybe they are not paid to create laws for the short term benefit of large private donors.

Language about bitcoin in the Senate hearing did a full 180 including some Senators recanting things they had previously said with the tried and true "I never said that, you just misunderstood what I was saying."  It was a great moment for bitcoin and was brought about by competing markets.  Some part of me marvels at the timing of the China stance and the Senate hearing.  I do not believe it to be coincidental but I am not ready to put in an opinion on what it might mean.

Bitcoin, the Euro that actually makes sense.

I would like to thank reddit user BCLaraby for pushing me down this train of thought and crystallizing these ideas with his post (http://www.reddit.com/r/Bitcoin/comments/1r20ts).  He claims that Bitcoin is truly the first world currency.  It is a currency that absolutely anyone can participate in and nothing in the bitcoin protocol can keep others out.  In a way it is the grown up version of Euro experiment and the way bitcoin is set up it should be obvious why bitcoin is leagues better than the Euro at the very thing the Euro was designed to do.  I will attempt to explain.

The Euro was put in place to grease the wheels of commerce.  It is a single currency that could cross sovereign borders and would be accepted everywhere.  It removed the clog of currency conversion which was either placed on the visitor (waste of time and additional expense) or the retailer (stockpile, risk, clearinghouse, additional expense) and these effects were only magnified in large commerce.  Suddenly the European countries worked a little more like the United States where you were technically crossing governing borders, but the people and commerce became much more homogenized.  Where the Euro idea breaks down and why it works in the United States is that unlike countries in Europe, states are not sovereign.

Sovereign nations are allowed to make unilateral decisions and typically what keeps them in check from making really bad decisions is the fact that they are held culpable for the decisions that they make.  This is true in monetary policy.  If a government borrows more than they can pay back or fractional reserve banking and government policy creates states of hyperinflation then the nation has to deal with their destroyed currency.  But when that currency is the same as the currency of your sovereign neighbors, you will drag them down with your problems.  Being a sovereign nation the other countries cannot tell you what to do.  You can declare bankruptcy, but your status still hurts your neighbors in very meaningful ways.  It is in their best interest to help you out and you have learned that you can be irresponsible and in the end get away with it.  Whether they are helped or not, irresponsible nations will destroy the Euro.  One way to get around this is to violate and remove the sovereignty of troubled nations stating that they can't be trusted so you must be allowed to govern them.  You can effectively use the monetary system to conquer your neighbors.  Some people believe this was the intent of the Euro all along.

Bitcoin allows all nations to participate in a global currency without risking their own sovereignty.  The system is simple enough to be self governing and the governing body (the miners) are distributed without regulation as to who can participate.  Because there is no method to expand money supply you can't use the tried and true "create more" method to destroy money value.  Because the entire process is opt in you can simply state what you are willing to trade it for or trade for it.  Markets will be less prone to manipulation because there isn't anything convoluted or hidden to manipulate.  Complicated instruments based on bitcoin will undoubtedly be made, but they will be exterior to the bitcoin protocol.  And finally, bitcoin will not replace any other currency.  I have never believed that a country would switch to just use bitcoin.  It facilitates transactions and can be (relatively) universally accepted, but fiat currencies should still be used for local business and credit markets.  This is decidedly unlike the Euro that usurped local currencies and made them go away.

Bitcoin can serve to grease the wheels of commerce by being a universally accepted "reserve" currency that anyone down to individuals can participate in without exposing participants to the risks of irresponsible neighbor behavior.

Finally, some energy taken out of the market

Lately the bitcoin market has housed a palpable energy and exuberance that, to me, felt dangerous.  People have been panic buying and driving the price up.  The panic was a physical presence and was fundamentally flawed.  The last time this occurred in the bitcoin market was in April and the cold dose of "wake the hell up" came in the form of technological market manipulation carried out on MtGox.  The ensuing crash was an over correction and the market took a while to stabilize again.  The danger that I have been feeling with this market is that someone would again pull a manipulation and send people into a state of panic selling.  Fortunately the energy seems to have been released in a more stable way.  There was a final state of euphoria as the Senate hearing on crypto-currencies showed that the US was going to be shining a favorable light on bitcoin.  The regular market timers saw this as their cue to take profits from the new comers and many probably bought back in during the crash effectively stabilizing the price.

It should be noted that this "easy landing" saw a high of $900 and a low of $500 in the span of a few hours.  This is the world of bitcoin where a 45% correction is considered a normal boat rocking and not a capsizing.

Also to be noted is that amidst all this chaos, Bitstamp suffered closure from what was probably a DDoS attack.  No doubt the work of some opportunists but I doubt it really paid off for them like the April attack of MtGox did for the previous attackers.  Between April and November, we have seen an incredible diversification and maturity in the bitcoin community and this market reaction appears to be the proof.