Bit Coins
Bitcoin The Libertarian Introduction by Erik Voorhees
Written by Drew Subject: Wallet Voting***Originally published in Freedom's Phoenix Magazine - April 13, 2012***
Republish, copy, and distribute at will.
Republish, copy, and distribute at will.
Originally Posted onErik's blog at http://evoorhees.blogspot.com/2012/04/bitcoin-libertarian-introduction.html
What it is, how it's used, and why you should care.
Erik Voorhees - April 11, 2012
"When a state currency is challenged, the state itself is challenged,
and market forces move swiftly around sickly, depreciating inhibitors."
· Introduction
· What is Bitcoin?
· How does it work?
· Why is Bitcoin valuable?
· No really, WHY is Bitcoin valuable?
· How does one obtain it?
· Being careful with money
· What can one do with it?
· Bitcoin vs. The State
· Bitcoin and Disruption
· Useful Resources
Introduction
There
has been much talk about Bitcoin within libertarian and economic
circles. It's becoming a buzzword, but like all new systems that break
onto the public stage quickly, Bitcoin brings with it excitement,
speculation, rumor, and downright confusion. To be sure, Bitcoin is
complicated. After all, it's an entirely new global monetary system -
both a currency and a payment network for that currency.
Like
all powerful tools, it's important for those interested in using
Bitcoin to spend some time engaging in the due diligence of education.
Similar to a bicycle, once you know how to use Bitcoin, it will feel
very easy and comfortable. But also like a bicycle, one could spend
years learning the physics that enable it to operate. Such deep
knowledge is not necessary to the actual rider, and in the same way one
can enjoy the world of Bitcoin with little more than a healthy curiosity
and a bit of practice.This
article is a primer on Bitcoin: an overview of the fascinating new
phenomenon from the perspective of a humble libertarian who cares more
about the ramifications for human liberty than about the technical
protocol and brilliant science underlying the network.
The
basics of Bitcoin are all covered here, ranging from a light technical
overview to due diligence to monetary economics and theory. You'll also
find an extensive list of resources to bring you up to speed on this
most fascinating thing to happen in the realm of anarcho-capitalist
technology since the internet itself.
What is Bitcoin?
Bitcoin is two things: it is a digital currency unit and it is the global payment network with which one sends and receives those currency units. Both the
currency unit and the payment network share the same name: Bitcoin.
As
a currency unit, consider Bitcoin like other currencies. The world has
euros, dollars, yen, gold and silver ounces, and now it has Bitcoin as
well. The properties of the Bitcoin currency unit are as follows:
· There
will never be more than 21 million in existence, and they are released
over time at a declining rate (at the time of writing, about 8.5 million
Bitcoins exist).
· Each Bitcoin is divisible by one hundred million. You can thus possess 0.00000001 Bitcoins.
· Bitcoins are perfectly fungible, they are divided and combined seamlessly in your account.
· It
is theoretically impossible to make a fake Bitcoin (to fully understand
why this is true, one needs to study cryptography and fairly advanced
mathematics).
· As
a currency existing in a perfectly free market, Bitcoins always have a
market price. At the time of this writing, this price is about $4.80
each. Because Bitcoin is global, there are also market prices for
Bitcoin in every major national currency from yen to Brazilian reals.
· Bitcoins
are traded like other currencies on exchange websites, and this is how
the market price is established. The most prominent exchange is MtGox.com
So
those are the details of Bitcoin as a currency unit, but Bitcoin is
also a payment network. As a payment network, Bitcoin replaces the
function of banks (especially the Federal Reserve as money creation is
not at the whim of any person nor group), inter-bank funding networks
(like SWIFT and SEPA), payment processors (like PayPal) and remitters
(such as Western Union). The entirety of these massive industries as
they relate to the creation, storage, accounting, and transfer of money
has been usurped by Bitcoin. If Bitcoin succeeds, it is likely that
PayPal and Western Union would be removed from the marketplace. The
Federal Reserve (and every central bank) would be made redundant.
"Disruptive technology" is thus an understatement.
How does it work?
But
how does Bitcoin work, you ask? How does it replace the functions for
which we've so long relied on (and been beholden to) governments, banks,
and payment companies?
To
use Bitcoin, you traditionally download the software (though you can
also use an "ewallet" system, discussed later). The software acts as
your "bank account." It stores a secret code on your computer, and this
code enables funds to be spent from your bank account. In Bitcoin
terminology, this bank account is called your "wallet." So your wallet
sits on your computer, and as soon as one has this wallet software one
can receive and send Bitcoins to other wallet-holders anywhere in the
world. It is as fast and easy as sending an email (easier because you
don't have to bother writing a message!).
You
don't need a name, an address, a Social Security/Slavery number, or any
personal information of any kind. Nobody "approves" you for Bitcoin.
It's free and open-source software. You get it from Bitcoin.org.
Transactions are sent and accounts are secured using what's known as "public key cryptography." Every account has a public key and a private key - both of which are long strings of numbers and letters. Your wallet software knows your private key, and this allows it to send money. To send money to someone, you merely need to know their public key (basically their bank account number). If you have your private key
plus their public key, a transaction can be created and the funds are
deducted from your account and credited to the receiver's account,
without anyone else having a say in the matter.
As mentioned, your account is merely defined as a long string of numbers and letters:
1PGFCtrJHUsc7fs4LGWLmXUEwuKyDaHuRa
Thus,
your account has no personal information attached to it. You do not
need to divulge any information whatsoever in order to obtain a Bitcoin
account. This means you can receive, store, and spend Bitcoins with relative anonymity. The anonymity is relative because if you post your address
anywhere that can be attributed to you (like on your Facebook page),
then of course one can see that the account belongs to you, and money
going to it would not be anonymous.
Bitcoin
therefore works as a peer-to-peer network upon which account holders
can transfer Bitcoin currency between accounts instantly and with
relative anonymity. So long as an account holder protects her private key, her funds remain perfectly secure and only she can send them to someone else (and nobody can stop her).
Why is Bitcoin valuable?
This
is perhaps the most important topic to address, as nothing else matters
if Bitcoin has no value. What makes Bitcoin worth anything? Isn't it
just "fake"? Isn't it just a made-up pretend virtual currency? Many say,
"I can't hold it, I can't see it, and thus it's artificial and not
worth my time." Let's challenge this understandable initial reaction.
Let's demonstrate why Bitcoin is valuable, and very much worth one's
time.
Financial
privacy has long been symbolized by the notorious "Swiss bank account."
Yet, anyone with a Swiss bank account has to trust that bank, and as
we've seen in the last couple years, "bank privacy" even in Switzerland
is a myth - banks there have been bending over for the US government and
divulging customer information. So imagine having a private, numbered
Swiss bank account, but without having to bother with the Swiss bank
itself. That is Bitcoin. Instead of placing your trust in a regulated
bank governed by fallible humans, Bitcoin enables you to place your
trust in an unregulated cryptographic environment governed by infallible
mathematics. 2+2 will always equal 4, no matter how many guns the
government points at the equation.
Bitcoin is thus the only currency and money system in the world which has no counter-party risk to hold and to transfer. This is absolutely revolutionary and you should read the preceding sentence again. Gold advocates will point out that physical gold bullion has no
counter-party risk, but that is only true for storage in your own home.
Store it in a vault or bank and you have counter-party risk. And sending
gold? You have to trust all sorts of people if you wish to transfer
your gold somewhere else or spend it across distance.
Bitcoin means complete ownership of money both in storage and transfer. Nobody can prevent you from having it. Nobody can prevent you
from spending it. Even if one's home is broken into, or even if the
government issues a "confiscation order" (as they did with gold in
1933), one's Bitcoins are perfectly safe. Try fleeing a country with
$1,000,000 in bullion without the government knowing about it. Easier
said than done. With Bitcoin, it's almost easier done than said - you
could put $1,000,000 of Bitcoin on a USB drive, or even write the
private key on a piece of paper, or just email the wallet file to
yourself to be retrieved outside the country.
Starting to see the value? Never in the history of the world has an individual had this ability. It is unprecedented.
No really, WHY is Bitcoin valuable???
At
this point, skeptics should say, "okay fine, you can store and spend
Bitcoins without interference, but what gives them initial value? Why do
they have a price?" It's a very good question, and even expert
economists have struggled with the answer.
But
really, the answer is simple. Bitcoins have value because A) they are
useful and B) they are scarce. Combine those two attributes in any asset
and you will discover it has a price. The moment the first Bitcoin was
traded to someone in exchange for something else, an exchange rate
(market price) was established. Subsequent exchangers agreed or
disagreed with that rate, and made further trades accordingly. Bitcoin
thus spontaneously developed a price, as do all things in an open market
if they are sufficiently useful and sufficiently scarce.
Let's
look at value a little further, because it's a contentious issue with
Bitcoin. There are many (including Paul Krugman) who believe Bitcoin
isn't worth anything and is no more than a speculative bubble fad.
As
any Austrian economist can tell you, money is merely that commodity in
an open market which best satisfies the properties necessary for useful
exchange. Gold and silver take the cake every time a violent government
doesn't get in the way... or at least, this is true historically. But,
this doesn't mean that gold and silver are "perfect, infallible money."
Indeed, there are practical problems. One can't easily divide and
combine silver coins to make change. One can't easily send large values
of gold across distance without hiring security and waiting for
transport. One must pay storage fees, or risk theft at home. And, while
difficult, it is possible to make fake gold and silver ingots and pass
them off in trade as real.
So
then it follows that if gold and silver are not perfect money (though
admittedly the best we've had), perhaps mankind could discover or invent
something that was even better. This is the Bitcoin experiment - the
question of whether Bitcoin, with its specific attributes, is an even
better form of money than what the marketplace currently enjoys (or in
the case of state fiat, is forced to use). If the Austrians are right,
and a marketplace tends to chose the medium of exchange which best works
as money, and Bitcoin's specific attributes make it excellent money,
then perhaps the marketplace will, over time, increasingly use it for
such.
The
answer so far, is yes. Bitcoin is finding more and more niches for
early adoption, which further supports its market price, providing
confidence to holders that it will retain value, and this further lends
Bitcoin to be used for still more purposes. It's an organic and messy
process, full of trial and error, potholes, brilliant innovations and
terrible failures. But that's what an open marketplace is, no? Every day
a more resilient economy is being built, and not at the point of a gun,
but voluntarily - not by decree of Bernanke, but by spontaneous,
self-interested private order.
Many
have made the argument that "nothing backs Bitcoin." And this is true.
Bitcoin cannot be redeemed for any fixed value, nor is it tied to any
existing currency or commodity. But, neither is gold. Gold is not backed
by anything - it is valuable because it's useful and scarce. Cars are
not backed by anything, they are merely useful as cars and thus have
value. Food is not backed, nor are computers. All these goods have value
in proportion to their usefulness and scarcity, and one merely needs to
see the usefulness of Bitcoin to understand why, without backing from
any government nor corporation, without being tied to any fiat currency
or existing commodity, it commands a price on the market and rightly so.
How does one obtain it?
When
one understands why Bitcoins are useful and therefore valuable, one
might wish to obtain some. But how? Well, how does one obtain any
currency? There are two basic ways, either by selling goods and services
for it, or by buying it at an exchange.
We'll
examine buying at an exchange first. "Exchanges" are simply websites
where buyers and sellers come together to trade one currency for
another. If you have an account at an exchange, and fund the exchange
with Bernanke Bucks, you can buy Bitcoins.
The practical steps for doing this are as follows:
Step 1) Create a free account at a trustworthy exchange like MtGox.com or CryptoXChange.com or (mainly for Europeans) Intersango.com.
Step 2) Put money in the exchange by using an intermediary like Dwolla.com or (much faster with a small fee) BitInstant.com. Dwolla will link to your bank account and takes 3-5 days to move money
from your bank to the exchange. BitInstant, comparatively, allows
anonymous cash deposits up to $500 at a time and takes under an hour.
These cash deposits are made by you at any major bank branch (you don't
even need a bank account). Within 30-60 minutes of your cash deposit,
BitInstant will credit your exchange account with your USD. You can
literally have your first Bitcoins 30 minutes after reading this
article.
Step 3) Once your funds are at the exchange, you can buy Bitcoins at the
current market price. The coins then stay at the exchange in your
account until you send them somewhere else (to your personal wallet or
someone you'd like to pay, etc). If you want to sell Bitcoins for
dollars, you simply do the process in reverse - send the Bitcoins to an
exchange, sell them at market price, and transfer the USD to your bank.
The
Bitcoin market is fully-liquid and operates 24/7 with no holidays. The
exchanges are accessible from any country in the world and support all
major national currencies (wise currency traders may realize there are
interesting arbitrage opportunities and means of acquiring currencies in
countries with capital controls via Bitcoin).
The
other way to get Bitcoins is to sell goods and services for them, just
like you sell goods or your labor for dollars. Being able to receive
Bitcoins is as simple as putting your Bitcoin address on your webpage,
and you get this address automatically once you have a Bitcoin wallet.
There is no "sign up" or "approval" to be able to accept Bitcoin. You
can be any age, and in any country. Just get the wallet software (from bitcoin.org) or use an "ewallet" such as Paytunia.com, and paste your Bitcoin address for the world to see. Anyone who knows your Bitcoin address can send you Bitcoins instantly.
For
small businesses who would like a more advanced way to accept and track
Bitcoin payments for website orders, there are a few good merchant
solutions. Paysius.com is the best -
it will plug into your site (using common shopping cart plugins) and
enable your customers to select "Bitcoin" as payment during checkout
instead of credit card or PayPal, etc. (this doesn't replace those
methods, it merely gives your customers a new option). Further, because
very few businesses can pay their salaries and suppliers in Bitcoin
(yet), systems like Paysius give the business the ability to
auto-convert incoming Bitcoins into normal USD and have that deposited
in the company bank account. Fees are much lower than credit card
processing, and Bitcoin payments have zero chargebacks or reversals
(it's impossible to reverse a Bitcoin payment) so merchants can securely
accept payment from any country with no more risk of reversal, which
should be a welcome relief to those who have been burned by PayPal or
credit card fraud. Other than Paysius.com, Bit-pay.com is another good option for merchants to accept Bitcoin.
So that's it - that's how you get Bitcoins. Just buy them, or sell stuff in exchange.
Being careful with money
This
is where many people have justified concerns. Bitcoin requires a high
degree of personal responsibility, and so users need to know the basic
rules for using Bitcoin safely. The bad news is, if you screw up, you
can lose money and never get it back. The good news is, with a few basic
pointers and some practice, you can use Bitcoin extremely securely, without fear of loss. Do not get into Bitcoin without understanding these basic concepts:
Concept 1) Bitcoins are like cash and are thus stored in a specific physical
place. This means, you must always be mindful of where your Bitcoins
are, and what risks that location presents. For example, if your coins
are on your computer, and you don't back them up somewhere else (yes,
they can be backed up easily), and the computer crashes, your money is
gone. There is no company you can call to complain about it... the money
is lost forever. Similarly, if you store your coins with an online
service (like an ewallet or exchange), then you are trusting that
service to hold your coins safely. If you give your coins to someone who
is not trustworthy, they can run away and you'll never get them back.
You wouldn't give $100 cash to someone you don't trust. The same is true
with Bitcoin. So if the coins are in your possession (on your computer
or smartphone), you must be mindful of them, back them up, and keep your
systems secure. If the coins are held for you by someone else, then you
must be able to trust that party. This is the most important safety
concept of Bitcoin.
Concept 2) Wherever you keep your Bitcoins, they will be protected with passwords.
If coins are on your computer in your wallet file, and someone learns
your wallet password and they obtain your wallet file, then they can
spend your coins! Similarly, if you keep coins with a service provider,
and someone learns your login information, they can steal your coins.
Use strong passwords whenever you deal with Bitcoin (more than 12
characters) and keep them always in a safe place. Funds are not
protected by government-mandated and taxpayer-subsidized FDIC insurance -
a Bitcoin bank cannot just type in digits into your account to
replenish funds stolen by your own carelessness with your password.
Concept 3) When coins are on your own computer (meaning you're using the wallet software from bitcoin.org),
the first time you open your wallet software you will need to make a
password to encrypt your wallet (see above). After making this password
(don't ever forget it), you MUST backup your wallet file in a
different location. This file is where your money is stored. The file
name is "wallet.dat" and backing it up is as simple as copying the file
and putting it somewhere else. To find your wallet.dat file:
---------
On
Windows, you must first tell your computer to "Show hidden files and
folders" - look up how to do this online. Then, you can find your wallet
here:
C:Documents and SettingsYourUserNameApplication dataBitcoin (XP)
C:UsersYourUserNameAppdataRoamingBitcoin (Vista and Windows 7)
If you're on a Mac, you can find it here:
~/Library/Application Support/Bitcoin/
--------
Put
this wallet.dat file on a USB drive in your safe or mail it to your
parents. Burn it to a CD and put it in a bank safety deposit box. Put it
on a different computer. You can even email the file to yourself.
Better yet, do two or three of the above. You only need to back up the
wallet file once at the beginning (you don't need to do it every day or
week, etc), and you should do it before you've received any money. Back
it up, keep it safe, and the likelihood of you losing your Bitcoins will
be lower than you dying in a car crash. If you don't back it up, the
likelihood of you losing your coins is almost guaranteed.
Concept 4) Liberty advocates love free markets. But, with freedom comes
responsibility. Bitcoin exists in a free market. It is not regulated,
tracked, or overseen by anything other than cold hard mathematics. Thus,
the companies and organizations you find in Bitcoinland are often
unregulated and private. A Bitcoin-based company doesn't even need to be
registered as a company anywhere, because it doesn't need a business
checking account or an IRS extortion number (known as an EIN). While
this means Bitcoin enables truly free trade on a global scale, it also
means Bitcoin users need to be careful and prudent. Don't buy things
from companies or websites you don't trust. You may never see your money
again, and there is no way to "reverse" a payment. With Bitcoin,
reputation and history are everything. If you wouldn't give cash to a
stranger in an alleyway, don't give Bitcoins to a stranger online. Enjoy
the free market, and be a responsible adult.
Concept 5) Remember that Bitcoin should still be considered an experiment. As
resilient as the system has proven to be, it is still new. The value of a
Bitcoin could drop to zero tomorrow. This means under no circumstances
should people invest money in Bitcoin which they cannot afford to lose.
Bitcoin is a highly volatile commodity with an extremely uncertain
future. Grandmothers should not be putting retirement money into Bitcoin
(nor in US dollars, for that matter).
What can one do with it?
As
for what's currently available, the most basic thing one can do with
Bitcoin is buy products and services from anyone who accepts Bitcoin. A
partial list can be found here: https://en.bitcoin.it/wiki/Trade There is also the booming illicit drug market known as Silk Road, where
almost any substance imaginable can be purchased for Bitcoin. Accessing
Silk Road requires further security precautions such as the use of Tor,
which is beyond the scope of this article.
Next, donations are made very efficient via Bitcoin. Groups from Wikileaks to indie film companies and animal shelters accept Bitcoin donations.
Bitcoin works great for donations because micro-transactions are
possible (you can't send $0.10 to a charity via PayPal, because the fees
are larger than $0.10... but with Bitcoin you can). If you want to
accept donations for anything, put a Bitcoin address on your website. It
costs you nothing. Want to donate to Wikileaks? Here's their address:
1HB5XMLmzFVj8ALj6mfBsbifRoD4miY36v
Like
to gamble? Bitcoin lets US players actually play poker online. The
government can't stop the payments, after all. Sites such as SealsWithClubs.eu are gaining popularity, with larger casinos being built.
Want
to send money to friends or family overseas? Use Bitcoin. Instead of
paying Western Union $40, just send Bitcoins for free. Remittance
markets are one area where Bitcoin really shines, because it passes
across borders instantly and with no possibility of regulation nor
interference. Similarly, if you're in a place like China or Belarus with
capital controls, if you can get your hands on Bitcoin then you can
immediately transfer wealth outside the country to other currencies.
Want gold or silver to store value acquired via Bitcoin? Try a site like Coinabul.com
Work
with freelancers or have a business that pays people in other
countries? Use Bitcoin. After all, Bitcoin enables "under the table"
payments to anyone, anywhere. Paying a contractor in Italy or India is
now as easy as sending an email.
Want
to protect wealth or move it privately? Bitcoin transcends all borders
and regulations. No longer do you need to have your wealth sitting in an
account that can be frozen or seized.
Basically,
anything you can do with "money" generically, you can do with Bitcoin -
yet you now have no governmental restriction upon that activity. If
you're a merchant, why not start accepting Bitcoin as payment? It's easy
to integrate if you use a system like Paysius.com.
If
you think Bitcoin could be used in a creative new way, then go build
the system! Just as few people understood the power of the internet in
the early '90s, the same is true with Bitcoin. And just as with the
internet, it is attracting builders and entrepreneurs all over the
world.
Bitcoin vs. The State
Now
we get to the more fun part, which is especially relevant to any
libertarian discussion of Bitcoin. This is the manner by which Bitcoin
supersedes government control. "Okay," people say, "so Bitcoin is new
and the government doesn't regulate it yet, but they will!"
Unfortunately for the government, they cannot. No person nor group of
people can defy the laws of mathematics upon which Bitcoin is built.
Private
websites on a hosted server can be taken down by the government. We saw
this in amazing clarity recently when MegaUpload was taken down by the
US government, even before any trial or finding of criminal activity had
been accomplished. It should be assumed that the government can take
down any site it wishes, with or without the legal cover of legislation
like SOPA and PIPA (which merely give legal blessing to powers already
assumed and demonstrated). So this means that any website that dealt in
Bitcoins could be removed and shut down. The exchanges would be the
first target.
Yet,
even here the government runs into trouble, because websites can be
mirrored, copied, and hidden very easily. Taking down Bitcoin websites
would be like cutting the heads of a Hydra - for each successful
severance, publicity and the profit motive would compel more sites to
spring up (case in point: how many file sharing sites exist, other than
MegaUpload?).
In
fact, certain sites have proven impossible for the government to take
down altogether. Take the example of The Silk Road, which is a brazen
website selling illicit drugs. US Senator Chuck Schumer expressed angst
in this regard, though he's pitifully impotent to remove the site
because it exists on what's known as the "dark web," on servers hidden
via cryptography. If the above-ground Bitcoin websites are shut down,
the below-ground sites will flourish. And every time a high profile site
is taken down, Bitcoin would get free publicity around the world.
So taking down websites is an inadequate strategy if the government wishes to impede Bitcoin. What else could they do?
Within
one country, at least, a government could prohibit individuals and
businesses from openly accepting Bitcoins (and if this happened in the
US, it'd be the ultimate sign that the Supreme Court had fully abandoned
its proper responsibilities). Suppose the US Government did ban the
acceptance of Bitcoin: it would mean Bitcoin could only be accepted in
secret. This would harm the economy significantly, but wouldn't come
close to stopping Bitcoin (and indeed, unless every government did this,
Bitcoins could be openly accepted in other countries leading to capital
flight which would pressure governments not to outlaw it in the first
place).
But
what about the more obvious attack method - can't the government just
"shut down" Bitcoin transfers? Amazingly, no. Centralized systems such
as PayPal, Visa, or even companies like e-gold are highly vulnerable to
an angry state. The thugs must merely break down the door, confiscate
the servers, and throw the owners in jail. This is why any centralized
system must ultimately bend to the government's will, acquiescing to
money-laundering and
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