Posts Tagged ‘bitcoin’

A bad time to invest in Bitcoin

Sunday, October 8th, 2017

Back in 2013 I urged people to invest in Bitcoin.

Yesterday someone asked my cleaning lady to invest in Bitcoin.

Now if someone had asked her to accept payment in Bitcoin, or send payment in Bitcoin, then this would be compelling evidence that one should invest in Bitcoin.

But when cleaning ladies are asked to invest in Bitcoin, not a good investment.

When Bitcoin began, everyone was a miner, and everyone was a peer, everyone stored the entire blockchain. Which was great, but did not scale. And now people are struggling with half assed ideas about how to get it to scale.  Bitcoin can no longer deliver on its original promises, has not figured out what new promises to make, and many of the new promises are unworkable, or are scams, or are likely to turn into scams.


Monday, September 25th, 2017

Our financial system is corrupt and oppressive. Cryptocurrencies represent an opportunity to route around that system, and make lots of money doing so.

Cryptocurrency is real, and presents the opportunity to make enormous amounts of money. Also, cryptocurrency scams are real, and present the opportunity to lose enormous amounts of money. Like the dot-com bubble in the 90s, you can add the concept of blockchain to just about anything and have a ‘business’ worth millions, no matter how idiotic the original idea. The vast majority of initial coin offerings are investments in businesses that are not providing anyone with any value, have no real customers and no obvious prospect of ever having any real customers.

The successful altcoin will be genuinely decentralized, as bitcoin was designed to be, originally was, and to some extent still is. Most of the altcoins, possibly all of them except the Bitcoins and Ethereum, are furtively centralized.

It will use, or at least offer the option, of Zooko type wallet names, as Bitcoin and Ethereum do.

It will be scalable to enormous numbers of transactions with low transaction costs, as Steemit and Ripple are, but Bitcoin and Ethereum are not.

It will support sidechains, and exchanges will be sidechained.

It will be a blogging and tweeting platform, as Steemit is, and will be a decentralized blogging and tweeting platform, as Steemit is not.

Every website reporting on the altcoin boom and the initial coin offering boom has an incentive to not look too closely at the claimed numbers. Looks to me that only Bitcoin and have substantial numbers of real users making real arms length transactions. Maybe Ethereum and Ripple also. The rest are unlikely to have any significant number of real, arms length, users. The white papers don’t tell you the qualifications of the people running the operation, or what they are going to do, what milestones they hope to reach.

The crypto coin business is full of scammers, and there is no social pressure against scammers, no one wants to look too closely, because a close look would depress the market. There is no real business plan, no very specific or detailed idea of how the coin offering service is going to be of value, how it is going to get from where it is now, to where it is going to usefully be. It is very hard to find out how many real users a crypto currency has, and how much stuff is available denominated in that crypto currency.

Most of the alt currencies are just me-too copies of bitcoin, not adding any substantial value, and/or they cannot scale, and they are deceptive about how centralized and how vulnerable to state attack they are. Nearly all of them are furtively centralized, as Bitcoin never was. They all claim to be decentralized, but when you read the white paper, as with Waves, or observe actual practice, as with Steemit, they are usually completely centralized, and thus completely vulnerable to state pressure, and quite likely state seizure as an unregulated financial product, thus offer no real advantage over conventional financial products. When you buy an initial coin offering, you are usually buying shares, usually non voting shares, in a business with no assets and no income and no clear plan to get where they will have assets and income, as in the dot com boom.

The numbers show that Bitcoin is number one, ethereum number two, ripple number four, and number eighteen, but my wild assed guess is that Bitcoin is number one, steemit number two, ethereum number three. I have absolutely no idea where ripple stands. No one is providing data that would enable us to estimate real, arms length users.

Bitcoin exchanges are banks, and banks naturally become fractional reserve institutions. Bitcoin exchanges are furtively and secretly investing customer deposits, without reporting the resulting term transformation.

Genuinely free market banks, and bitcoin exchanges are genuinely free market banks, have a financial incentive to engage in term transformation – borrow short, lend long. Which is great for everyone until a rainy day comes, rains on everyone, and everyone withdraws their deposits all at the same time, and suddenly all those long term loans cannot be liquidated except at a loss, whereupon the banks exchanges turn to the state, and so begin the transition from a backed currency to a state currency, ceasing to be free market banks.

The trouble with fractional reserve is that free market banks, banks trading in a backed, rather than state, currency, tend to deny, understate and misrepresent the term transformation risk, making them slowly, and often unintentionally, drift into becoming scams. If the reserve fraction is visible to customers, then we could rely on caveat emptor. Right now, however, every bitcoin exchange is drifting into becoming a scam.

We need, and we could easily have but do not have, a system where the amount of bitcoins owed to customers by an exchange is knowable and provable, and the amount of bitcoins owned by an exchange is knowable and provable, so that the reserve fraction is visible, whereupon the exchange would have to provide information about the extent and nature of its term transformation, or else would likely lose customers, or at least would lose large, long term customers. This would involve the decentralized cryptocurrency making each exchange a sidechain operating a centralized cryptocurrency backed by the decentralized cryptocurrency. Which would also help mightily with scaling.

Bitcoin and ethereum is truly decentralized, in that it is a protocol that any entity can use, and that in practice lots of entities do use. If the government grabs some hosts, or some hosts do bad things, they can just be ignored, and the system continues elsewhere. They also use Zooko type identities, which in practice means your wallet name looks like line noise. This is outstandingly user hostile, and a reason so many people use exchanges, but it provides the core of resistance to state power.

Unfortunately, Bitcoin and Ethereum face scaling limits. Maybe ethereum will fix its scaling limits. Bitcoin does not seem to be fixing them. This makes Bitcoin and Ethereum transactions inherently expensive, which is likely to prevent them from replacing the corrupt and oppressive US government controlled financial system. has a far superior design which does not result in scaling limits – although we have yet to see how its witness election system will perform at scale – as the system scales, money holders have less incentive to vote, less incentive to vote responsibly, and voting will inherently cost more. is also highly centralized. The altcoin that will win will be the one needs to be scalable all the way to Visa and Mastercard levels, and needs to be visibly decentralized, visibly resistant to state seizure, and needs to have a mechanism that makes the fractional reserves of exchanges visible to exchange users.

Bitcoin was genuinely decentralized from the beginning, and over time became more centralized. Big exchanges and a small number of big miners are on the path to inadvertently turning it into another branch of the oppressive and corrupt government fiat money system.

The new altcoin offering are for the most part not genuinely decentralized. They have a plan for becoming genuinely decentralized some time in the future, but the will and ability to carry the plan through has not been demonstrated.

I like the steemit design. The witness system is scalable, the witness election system has problems which may be fixable, or may be inherent.

But I have a suspicion that investing in steemit is only going to profit whoever owns, not the owners of steemit currency.

According to Steemit documentation, it looks like a well designed cryptocurrency that deserves to replace Bitcoin, because it is more scalable, more user friendly, and more immediately usable.

Well, that is what it looks like. Except its front end is the website, and any one website can easily be seized by the feds. If actually decentralized, it should be a bunch of websites using a common crypto currency and a common identity system,

Remember usenet: A common protocol, and an internal name system. The particular host through which you accessed it did not matter all that much, because all hosts had to behave much the same. Steemit should be something like usenet with money, and it is not.

The way usenet worked, anyone (meaning anyone’s computer and his client program) could join as a client by having an agreement with a host, and anyone (meaning anyone’s powerful and well connected computer system) could join as a host by having an agreement with a few existing members.

A successful altcoin needs to be a blogging platform like Steemit, but it also needs to be a federation, like Usenet or Mastodon. Many of the blogs will be offering goods or services for cryptocurrency.

Then one could be more sure that success of the federation currency would benefit owners of the currency, rather than owners of a single central website.

Needs to be Mastodon with the ability to support a blog like post, and like Steemit, and unlike Mastodon, to send and receive money. is with the ability to send and receive money.

Bitcoin has a decentralized name system, rooted in Zooko style names that are not human intelligible. Its resistance to state power comes partly from the fact that there are several miners and anyone can be a miner, and partly from its decentralized name system.

Steemit has a communication and blogging system. But if I hold steemit currency, connects that to my phone number, which the government connects to my true name. All that handy dandy data that the government would like all in one place that you can serve a warrant on or mount a raid on. Or just sell for profit.

Need a decentralized communication, identity, name, and blogging system, unlike’s centralized communication and blogging system, and a name system that is resistant to government intervention and control, like Bitcoin’s name system. Thus the blogs offering goods and services for crypto currency will be resistant to regulation or seizure by the state. When a ruler meddles as much as our state does, he gives dangerously great power to those dangerously close to him. The regulatory state inevitably drifts into anarcho tyranny, or, like Venezuela, into violent and chaotic anarchy.

But we also want human readable names. How can we square Zooko’s triangle? (As Aaron Schwarz famously asked, and then infamously gave a very stupid answer.) I will give my answer as to how a crypto currency can square Zooko’s triangle in a following post. (The answer being, much as namecoin does it.)

The bitcoin crisis

Thursday, June 29th, 2017

There can only be one.

There can only be one money, at the root of all others. Money is a measure of value, a store of value, and a medium of exchange, and you want to uses the same medium of exchange and measure of value as everyone else.

At the very beginning, I said the trouble with bitcoin, as originally designed, is that it does not scale. Everyone, to be a peer, to be an equal participant, has to store and process everyone else’s transactions, thus the cost of each transaction increases with the number of peers. I estimate the current cost of a transaction to be about a thousand dollars, most of which is carried by people speculating in bitcoin, hoping that as the USG empire collapses, bitcoin, rather than gold, will replace the dollar.

Bitcoin is reaching, indeed has substantially exceeded, its inherent limits. For it to become the one, it has to get away from a system where everyone processes everyone’s transactions, and stores everyone’s transactions.

The sidechain proposal is a way of getting away from that without a hard fork, so that your transactions are not seen by everyone, merely by enough people, and not stored by everyone forever, but only by a very small number of people forever.

Altcoins are hard fork proposals, which if they fix the scaling problem could become the one. At present the total value of altcoins is roughly equal to the total value of bitcoins.

At present, the true cost of bitcoin transactions is so outrageously high it cannot possibly become the one. It must die, and everyone invested in bitcoins will lose all their money, unless the sidechain proposal provides a forkless path to a world in which the true cost of bitcoin transactions is reduced to something reasonable.

But the interest in crypto currencies is so very great, the amount of money invested in crypto currencies is so very great, that one shall succeed. The amount of serious money invested is so very great that it looks overwhelmingly likely that as the USG empire falls, crypto currency, rather than gold, will replace the US$.

And that one shall be one that allows low, rather than hidden, transaction costs. Likely an altcoin rather than bitcoin, because the weight of special interests in bitcoin makes it hard to get to there from here.

But the wise investor should invest in gold, should invest in bitcoin in the hope that the scaling problems can be fixed without a hard fork, and should invest in an altcoin that has solved the scaling problem. And the last time I took a good look, none of them had actually solved the scaling problem, though many of them were hoping to solve it, claiming they had solved it, or had plans for eventually solving it.

The sidechain proposal has been kicked around for three years, and bitcoin’s transaction cost has been getting rapidly worse all this time.

Anyone who invests in bitcoin, is investing hoping that scaling can be fixed, for if scaling is not fixed, bitcoin will surely die. The current true cost of bitcoin transactions is absolutely unsustainable.

Bitcoin crisis

Friday, January 15th, 2016

Back in the beginning, I argued bitcoin would not scale.

The counter argument was that we could muddle our way through somehow with ad hoc solutions, which could be sort of true, in principle.

The scaling problems started to bite in 2013.  They are now biting really hard.

The scaling problems are now well and truly here.  Downloading the blockchain is slow and expensive.  Doing transactions is slow, unpredictable, expensive, and unpredictably expensive.

Any solutions hurt, are partial, incomplete, unsatisfactory, and will  disadvantage some people financially.   Civil war in the bitcoin community has ensued over which people it is to be.

That outcomes are determined by weight of computing power (the miners) rather than weight of bitcoins owned has led to problems.  The miners don’t face the same incentives as the people trying to do bitcoin based businesses.

Bitcoin has grown to about as large as it can get.  It is doing about as many transactions as it can do, arguably rather more transactions that it is really suited for doing.  Any fixes are at best small tune ups to get a little bit more performance out of the system, are at worst just burden shifting and burden hiding – hence the civil war. I have been trying to design a coin that could scale, by having a dispersed blockchain, where no one entity has to keep all transactions.   You keep your own transactions, and summary information about entities you transact with, and summary aggregate information about all transactions, and the chain of hashes that links the ownership of your money and your transactions into the global hash, which chain would only grow as log of the total number of transaction, rather than grow with the total number of transactions. This means that parts of the blockchain will get lost temporarily or permanently, and the problem is to create a method for dealing with such losses that does not give anyone incentive to cause such losses, apart from the general deflation that such losses cause.  Have been trying to design this for some time.  Not making much progress these days.

Another solution, compatible with existing bitcoin is to have account based money built on top of bitcoin, bitcoin backed banks, analogous to gold backed banks.  People are talking about this solution, but not actually implementing it, even though it seems a good deal easier than the solution that I proposed.

Silk Road 2.0 goes down

Saturday, November 8th, 2014

“This hidden site has been seized”

We are going to need a heavily decentralized solution, so that if a relatively small number of nodes get shut down or taken over by law enforcement, the network continues to function correctly, and, because no single node is central, no single node has traffic patterns that make it stand out.

The Tor hidden site system will always fail if a hidden site generates too much traffic for too long. We need a non Tor solution for publishing and curating reputations and performing transactions.

Bitcoin failure

Sunday, June 15th, 2014

For bitcoin to work politically, authority over the currency needs to be distributed over a large group of peers. If power is concentrated at a single point, the state can dominate that point, whoever controls that point can steal other people’s currency and do a variety of bad things.

Bitcoin was designed so that “voting” depended on computing power and network connection. Initially, almost everyone who had a client was a miner, there were a huge number of miners, everyone who used bitcoin had roughly equal influence because they contributed roughly equal computing power to the block chain.

Today, bitcoin is controlled by by a single miner., which was a predictable consequence of bitcoin’s scaling problems.

What we need is a crypto currency which is controlled by the top one hundred or so owners of the currency that are well connected to the net and have adequate computing power, with influence over the currency proportional to the amount of currency that they own, rather than the number of cycles that they burn.

In principle it should be possible to do this using bilinear maps, but the details are a bit tricky, because we have to make sure that manageable number of votes reflects an infinitely divisible currency whose ownership changes continually. So the shares (private and public keys in groups with a bilinear map) have to be reissued frequently, while ownership of the infinitely divisible currency is given value by the fact that if you own a lot of it, you get shares proportional to the amount you own. Since shareholders are people who own a lot of currency, they have an incentive to not misbehave, to continue to reissue shares according to currency ownership and validate transactions according to the rules, since to do otherwise would destroy the value of the currency that they own.

The number of shares remains manageably small, however many people use the currency and however many transactions take place. The shares underlie the value of the currency – and absolutely nothing underlies the value of the shares. Of course we still have other scaling problems, to which I have not figured out a solution except in alarmingly vague outline.

Technological failure of the silk road system

Friday, October 4th, 2013

Silk Road servers stored all messages in the clear forever.

The government placed malware on Tor exit nodes, located the Silk Road servers, raided servers, game over.

Private messages should have been end to end encrypted, existing in the clear only on the computers of the sender and recipient, and should have been deniable, except for messages containing money, where the sender needed to be able to prove that the recipient account had received a message with a particular hash, and thus able to prove that the recipient account received a message with particular content including payment. (more…)

On ripple

Friday, June 28th, 2013

Ripple is a scam cryptocurrency.  Pity, since the alleged design is more scalable than bitcoin.

A cryptocurrency is mainly worth its speculative value, worth the possibility it could replace the US$. Obviously Ripple is not going to replace the US$, being a wholly controlled muppet of Cathedral minions.

If Ripple was funded by Baidu rather than Google, I would be on it like a tomcat on a pussy in heat. (more…)

Bitcoin scaling problems

Friday, June 14th, 2013

When bitcoin was first proposed, I argued that the proposed algorithm failed to scale.

Well, when getting started, scaling does not matter.  Now, however, a bitcoin wallet is starting to cost substantial bandwidth and processing power.  There are plans to address this, but I am underwhelmed by those plans. The proposed plans will make bitcoin more centralized, and will still have scaling issues.

Seems to me that we need an algorithm where no one computer needs to keep a copy of all transactions, or even a complete listing of who owns what coins, so as to maintain scaling all the way to operating all of the world’s transactions, and full decentralization both. (more…)

Bitcoin as a speculative bet

Sunday, April 14th, 2013

Charting bitcoin, it looks good, if you are inclined to gamble on charts.  The recent collapse from two hundred dollars tested support at the hundred dollar mark, found plenty of support around there.  By and large, it is a good idea to buy at major support levels, since a speculative property is a lot more likely to go up than to break through the support level.   If it did not penetrate the support level for very long during the panic, likely will not do so now.

But I am an intrinsic value investor.  What is the intrinsic value of Bitcoin? (more…)