Every time I bring up Bitcoin, it tends to draw ire for how dismissive I am of it. So I thought I’d take a moment to explain why Bitcoin is a fad. And it is a fad.
Here is what will happen, and sooner rather than later, to Bitcoin:
- Law enforcement will figure out a way to track it.
- And, more importantly, somebody will breach the program in some fashion.
And this will completely destroy Bitcoin’s value.
Anybody who thinks otherwise needs to consider the economics of the situation. There is the potential to make a lot of money, or at least steal a lot of drugs. So there are a lot of people working on compromising Bitcoin and eventually somebody’s going to pull it off.
I should note here I’m not questioning the basic principles or technology behind Bitcoin. In fact I think it’ll be pretty useful and even more common as time goes on. You’ll never get a paycheck in Bitcoins, but there’s simply too much market incentive for a semi-anonymous digital currency to not exist. That said, Bitcoin won’t be it. This future currency, whatever it is, is going to thrive on a total lack of publicity. It might even be centrally administrated by someone. But Bitcoin itself is a target.
Most governments, even nominally free ones, don’t want an untraceable digital currency. It’s not because of drugs, it’s because of taxes. Tax enforcement is going to start getting weird over the next few decades, with GPS trackers in your car to enforce road taxes, more taxes shifting over to physical property, and God only knows what else. They don’t want to make it worse.
So there’s a powerful incentive to figure out who has these Bitcoins, where they’re spending them, and why while this is still a minor trend than absolutely everywhere. The FBI has already filed a concerned memo over who might be using Bitcoin and this is just what we see publicly.
The main problem is that the assumption that Bitcoins are anonymous is just that — an assumption. And it turns out not to be the truth: All law enforcement has to do is figure out what addresses are generated by your wallet and they know all of your transactions. Is that hard? Sure. Then again, these tend to be highly motivated people. There’s a reason Silk Road is built around Tor. And it’s not like they can’t just simply monitor sites that exchange Bitcoins for other currencies and see who gets cash for what.
This is the first way Bitcoin will suddenly be worthless. Once some drug dealer trading it in Bitcoins is tracked down, it’s going to make other drug dealers skittish. Demand will drop… and Bitcoins, already pretty volatile, will drop with it. It may not kill Bitcoin entirely but it will kill a large part of the appeal.
The second one is really pretty obvious. Bitcoin is built on cryptography, and there is no infallible cryptographic system. Add to that that there’s the potential to make a lot of money before anybody catches on. And on top of that, there’s a human involved. There’s a way in. It may have even been found already. It might involve a program that just sits and records your wallet addresses, it might be something that grabs your key, hell, it might even be a brute-force attack.
Don’t think there aren’t organized crime networks and governments, forget black hats, working on this. But once it happens, Bitcoin advocates are going to discover there’s something a government backed currency has that Bitcoins don’t. If you commit wire fraud in the US, the FBI goes after you. If you forge currency, the Secret Service is coming for your ass. You forge or steal Bitcoins and… uh… a few Redditors will start a Scumbag Bitcoin Counterfeiter meme.
That’s the problem. Legally speaking, Bitcoin are the same thing as a stack of gift certificates to governments. It’s technically theft, but if somebody steals your Bitcoins, you have no liability protection, you have no FDIC protecting your deposit, there is literally nothing in place to protect the consumer. All the self-proclaimed libertarians who whine about this stuff will change their tune pretty fast once they’re out a few hundred bucks.
All it will take for Bitcoin to be worthless is one breach. Once the community realizes that it could lose all their coins in an instant, the value will drop like a rock. And make no mistake. It may not happen tomorrow, it may not happen next week, but it will happen. And once it happens, that’s the end of Bitcoin.
Not the end of digital currency, or even the software itself: I’m pretty sure some sort of digital currency will evolve out of Bitcoin. But in order to learn the problems, they first have to be found, and they have to be found the hard way.
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It is absolutely terrifying to see how much anonymity can be achieved through different softwares. For all the potential vulnerabilities that bitcoin has, it seems like you have chosen a couple of the least likely.
Tor is the real driver of bitcoin’s ‘dark net’ success. I believe Tor is much more vulnerable than bitcoin since those nodes providing anonymity can be setup en mass by government agencies looking to peel back the layers of the onion and find out what’s going on.
At the end of the day, its important to differentiate between illicit BTC transactions and all other BTC transactions not requiring tor to make bitcoin successful.
The underlying economic principles are still sound whether or not TOR is used.
Interesting stuff.
Bitcoin is based on the same kind of cryptography that protects SSL and banking. So by the same logic, since the economics of breaking SSL are that someone’s going to be able to make a lot of money doing so, SSL is soon going to be broken. Hahahahah. A lot of things could go wrong, but breaking the cryptography isn’t going to be one of them anytime soon.
That’s generally a matter of the product keeping up with the hackers. If it were static, they’d overrun it. But people with money interest in SSL do their best to keep advancing things.
Still, I’m amazed at how many times you have a massive corp running a footrace with an anonymous guy in a basement… and losing.
Bitcoin is actually based on a stronger encryption regime than SSL. And by the way, SSL is broken already, its major weakness being the centralized control of certificate authorities. See [www.youtube.com]
As far as the authorities tracking down a dealer through bitcoin.. this is nigh impossible. First of all, the only way to associate a potential dealer with an address is to get hold of their wallet. This wallet can be encrypted, hidden, stored offline, even memorized (google brainwallet), so the only way they could catch someone that way would be if they had enough evidence on someone to search their home, find the wallet, and make them give up their encryption keys. Second, the authorities can’t just “watch the bitcoin exchanges” to determine who purchased what. Bitcoin exchanges are set up in many different countries, and don’t publish the addresses *they* use except for throwaway ones used one time only by the person wanting to deposit bitcoin in order to obtain cash. So, “watching the exchanges” would require global cooperation between all the countries in which exchanges are run. Likely? No.
Even if all the countries of the world agreed to do this, tracking a dealers transactions would still would be evadable. All the dealer would have to do is wash his bitcoin using a fly-by-night bitcoin gambling operation, and now he has a perfect alibi.. “Drugs, officer? I don’t know what you’re talking about, I won this bitcoin playing bitpoker.” Could the authorities then go after the gambling site to find who deposited the bitcoin their? Very unlikey, considering again it is probably in a different country than they and the dealer are located. Even finding out where its located would be a challenge. Alternatively, he could use an off-the-grid exchange, or simply hold most of his profits in bitcoin for years (or trade it to someone else who could do this for a discount cash price)
As you can see, there are so many obstacles that policing illegal activity by tracing it through bitcoin would be incredible difficult.
This article has a lot of opinions and speculation based on very little – it’s almost the definition of FUD-spreading. The SHA-256 algorithm could be broken in the far future by quantum computers that don’t exist yet. You can bet the people running bitcoin will be watching the scientific journals for developments on that front, and will be ready with something even more secure when a breach becomes possible. TOR and the silk road are not necessary for bitcoin to work, and they’re going to get busted eventually, which will only increase our credibility.
“It’s technically theft, but if somebody steals your Bitcoins, you have no liability protection, you have no FDIC protecting your deposit, there is literally nothing in place to protect the consumer.”
A) Liability protection can and will be provided by private companies (this is how most insurance is handled in the normal world anyway) and B) the police can and will go after thefts of Bitcoin, because it is real property (there is already a high-profile case entering California courts regarding a large bitcoin theft).
But tell me… how does one get liability protection from the continual theft which occurs via inflation in USD? I lose a couple percent every year because of currency debasement. To whom do I complain?
Seriously, this post says Bitcoin security will fall.. and then says it will be replaced by something backed by a central authority. Here is how security experts call a central authority : a Single Point Of Failure.
As said previously, if Bitcoin cryptographic system was to fail one day, the same would happen to any online security. Banks transactions, even in physical stores, would stop the same day. As it is clearly explained in this post, what makes our current system work despite it being easy to break, is law enforcement. Noone can assume that Bitcoin will never gain this level of protection. But the only fact that it can work and survive without it is a great indication of how serious this invention is.
It should also be noted that no matter if any encryption algorythm get hacked in the long term, this will never let any way to anyone to “make false Bitcoins out of thin air”. The transaction logs of Bitcoin is like an history in time that is used to track and validate each transaction. So nothing that is not mathematically valid can go in there without being rejected by the entire network like a cancer.
Also it should be noted that Bitcoin itself is not anonymous at all. It is pseudoanonymous, and perhaps easier to track by authorities than physical cash. Black market are protected by tor, not by Bitcoin. In fact, Bitcoin could allow authorities to identify people each time a Bitcoin transaction is done by a member of the black market outside of the black market. People that receive Bitcoins for drugs needs to buy things, sometime.
BTW SSL is not flawed and it is less secure than sha256 (bitcoin). What is flawed is SSL CA certificate (for SSL authenticity). And what is the reason they’re unsecure today? Because they’ve always been, they’re based on central authorities like Comodo, also known as Single Points Of Failures. Exactly the same single point of failures Bitcoin just.. don’t have.
I wonder if Dan ever considers potential future employers will look back at write ups like this and see the low level of research and comprehension.
The author too readily assumes that merely if the law enforcement find out how to deal with Bitcoin, they will actually be able to do this. They can’t keep mobile phones or drugs of of the prisons, why should they be able to enforce anything on a global distributed system? If they are so efficient, why is there still the war on drugs, war on piracy or war of terrorism? Why haven’t they been won yet?
The author also misses the economics of prohibition. Prohibition does not necessarily decrease the price of prohibited goods, that depends on the elasticity of demand. And elasticity of demand for drugs is pretty low. Assuming Bitcoin still has the lowest transaction costs even after being targeted by law enforcement, there is no reason why demand for it should drop.
Regarding cryptography, good algorithms are typically broken in multiple steps (like it happened with MD5, for example). Even if there is some risk here, there is plenty of time to replace the algorithms or implement other methods to increase security.
Bitcoin is demanded because it decreases transaction costs. Using it to pay for drugs might be one of the more obvious examples where it can do this, but in general this affects all payments happening in the whole world. The only way to get rid of it is to provide a system that has even lower transaction costs. And that won’t be the encumbent financial system, becasue that would require the people in power to relinquish it. So this actually creates a contradiction in the requirements for the law enforcement: they want to combat drugs, but they increase the transaction costs of the encumbent financial system by anti-money-laundering laws and other regulations. So this increases a demand for an alternative payment mechanism. You can’t win two contradictory wars, you’ll end up losing at least one of them. But you could also end up losing both.
Wow… it’s one thing to opine that bitcoin is a fad, but it’s another to proclaim such opinions being so poorly informed and self-contradictory. The commentors are correct –
large, slow, dumb organizations like governments haven’t found any way to regulate or control massively distributed systems like the internet itself – bitcoin has the same resilient architecture.
The only ‘choke point’ for regulation has been to shut down exchanges, which has happened to several already, to try to halt flow of funds into bitcoin. But anyone can set up an exchange, in any country. it takes just one. So ALL countries, including small island fiefdoms who might profit from hosting an exchange – would have to have laws and resources to enforce exchanges, and have laws against trading currency for virtual commodities.
>>Once some drug dealer trading it in Bitcoins is tracked down, it’s going to make other drug dealers skittish
Well gosh, this has already happened, by interception of package deliveries to a home.
It didn’t cause Silk Road to miss a beat.
>>All it will take for Bitcoin to be worthless is one breach. Once the community realizes that it could lose all their coins ..
Are you completely ignorant of the history here? Wallets have been compromised, and there have been major breaches of sites like bitcoinica, thefts of tens of thousands of bitcoin…
in each case the technology and know-how around it has evolved in response to patch the vulnerability… that’s what happens with new technologies.
And despite these break-ins and thefts, look at the bitcoin chart:
[bitcoincharts.com]
It’s gone from 2.5 to 12 during the time of all these breakins since last fall, with tx volume through the roof, and only 20% of transactions on SIlkRoad.
>>It’s a fad.
>>I think it’ll be pretty useful and even more common as time goes on.
Oh. Really? So it’s a fad that is so useful it will be more common? I see.
>You’ll never get a paycheck in Bitcoins,
Plenty of people already do earn bitcoins, aside from those on silk road and cam-girls… its use is spreading for contracting. And if corporations were already paying people with bitcoin – gee, we wouldn’t know, now, would we?
Bitcoin may not be the final virtual currency. However.. as its flaws are found and fixed, new competing currency commodities may arise which are better. In that case, the first thing those new virtual currencies will do — is to provide a way to sell them for bitcoins!
What’s a bitcoin?
*leaps out the window giggling and runs away*
So you say Government currencies have something that Bitcoin doesn’t?
You’re right! The dollar has a monopolistic institution printing new currency at a rate of around a trillion per year that is stealing value from the entire dollar economy along with an increase in dollar-denominated debt the likes of which would make the Roman Empire jealous. Bitcoin has a predictable and controlled rate of inflation that will forever decrease into the future.
So what happens to Bitcoin when the dollar goes the way of the German mark, the Confederate dollar, the French livres, and so on? Lol, FDIC insurance will only ensure the severity of the hyperinflation, because banks aren’t responsible for their depositors money. That’s precisely what makes it so easy for them to go into debt a hundred times over their reserves. The average person doesn’t care about bank practices cuz the government has their back, lol. Unbeknownst to them, everyone is gonna get screwed… HARD.
When the German mark when through its worst inflationary period, a man left his life savings of 50,000 marks in the bank. After 3 years of massive price inflation and the government printing to pay debts, and going deeper into debt, the bank sent him a check for the full amount when they finally closed their doors. But the price increases were so terrible that the stamp on the envelope they sent the check in cost 60,000 marks… the man’s life savings had lost so much value, he couldn’t even afford to send a letter back telling them to “go to hell.”
I’ll hold on to my bitcoin and see what happens. Feel free to keep as many dollars as you like in your savings account. : )
Rarely have I seen such a poorly informed opinion passed off as educated fact. With regard to anonymity, Bitcoin is as anonymous as your use practices. If I go buy something illicit with funds held in the addresses/wallet I have publicly posted on the bitcointalk.org forums then yes, they’re going to be traceable transactions (on my end anyway, the payee may still remain anonymous) but if you handle your wallet(s) properly, there’s no anonymity breakdown – and no one has more incentive to handle their wallet(s) properly than the criminal element.
With regard to the “counterfeit Bitcoins” part, you just obviously have no idea how neither accounting systems nor encryption works. First, you can’t counterfeit a Bitcoin because technically, there is no such thing as an individual Bitcoin, merely a list of transactions that combine to make up your current balance. These transactions are secured via ECDSA encryption that is extraordinarily hard, to the point of effectively being impossible, to break. Bitcoins are brought into existence via special “generated” transactions which are themselves secured by two layers of SHA256 returning a result beneath a specified threshold, which is similarly difficult, to the point of being impossible, to break or falsify.
So Bitcoin, in short, is protected by some of the strongest encryption we’ve got and is as anonymous as your practices are. OP is an idiot who is poorly educated on the topics and felt the need to spout his foolish and uneducated opinions as fact and he should l2research before he posts.
Guy does not know what he is talking about.
Most of the real problems with Bitcoin have nothing to do with these poorly-informed objections. They concern payment convenience or ease of use, scalability/storage, the size of the blockchain. . .
Yes, to the extent that there is a market, with companies and services involved surrounding Bitcon, then those can, have been, and will be targeted and compromised, and maybe the value of Bitcoin will even suffer as a result.
But a collapse will not be due to any inherent flaw in the software, it will be blamed on that human element. Bitcoin itself will still be solid, and blocks will go on being created. There is a major difference between the Bitcoin software/source code and its use cases or market community, which this author fails to distinguish, foolishly thinking they are one and the same.
P2P networks are extremely difficult for any authority to shut down. The Bitcoin developers spend a lot of time anticipating and patching security flaws and contemplating possible attacks. The opinions of security and cryptographic experts can’t be discounted.
The author of this article is not an expert, he appears to know very little about Bitcoin, but somehow thinks he is in a place to opine on it. I toss it out like the utter trash it is.
Oh what do you know I made a ton of money with bitcoin while reading this. Think I’ll make some more while watching TV, even though color TV is just a fad.
Dan, you really don’t know what you’re talking about. You’re so poorly informed, and it’s almost like you’re paid to make a negative commentary on Bitcoin. Me myself, I’m not much of an expert in this field, but reading through numerous blogs and threads I concluded Tor is safe and anonymous and Bitcoin is safe and anonymous, and they are opensource too which is very important, so I only see a bright future to Bitcoin because people are really in a need for honest and anonymous currency not controlled by any authority but by the networked people themselves.
Well I love your general pessimism. It fascinates; however, while you were penning your epic document on why bitcoin will prove to be a fad people across the world were using the h*ll out of it. Some people (over 8 billion and counting) found out that you could sell x to y person and did not have to pay huge credit card fees. Deliver funds to relatives without paying western union fees. That with (gasp), bitcoin you could (oh my gosh) spend your cash on-line like you spend cash in person – without fee and just be exchanging it for what you needed. Britain, Germany, Istanbul, Pakistan, Brazil, Canada and hundreds of other countries have found this out – and people even put it on their Androids and iphones. Yes, the world is coming to an end – Bitcoin is our global currency.
Just dropping by to say good Call on your article! Trololol!