Rarely has there been a topic in the offices of John Lothian News that has raised debate, argument and conversation the way that Bitcoin has. What was once thought of as an internet-generated joke is now a topic covered by every mainstream media outlet around the world.
Coverage has intensified of late due to Bitcoin’s value, topping $1,200 earlier this month on the open market. So big has the issue become that the French and Chinese central banks have issued warnings this week against the use of Bitcoin and other virtual currencies by financial institutions and others. Fed Chairman Ben Bernanke even weighed in on this virtual currency in November while former Fed chair Alan Greenspan called it a bubble on Wednesday.
But even that description – virtual currency, cryptocurrency, cyber currency – has been questioned and debated. Some argue its not a currency at all, but rather a payment transfer system which in and of itself holds some value.
The strange thing is – Bitcoin is a bit of both – a currency and transfer mechanism. Bernanke wrote in a November letter to the US Senate stating, while such “innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”
Which brings us back to the question that many are grappling with: What is it? And if you can determine that, how should it be regulated, taxed, or even traded? Is this the next asset class? Some may find potential there, while others still find it a joke or worse.
Today’s special report features a column from JLN publisher John Lothian about his thoughts on Bitcoin, a short primer on the aspects of Bitcoin, as well as some of the best articles we have found in recent weeks. This special report is designed to inform and perhaps, raise the debate and dialog further.
We hope you find value in this report.
John Lothian News
The Marginal Utility of Bitcoin is a Wash
By John J. Lothian
To call Bitcoin a currency is an insult to national and multi-national currencies everywhere. Bitcoin is not a currency. That is my opinion, though not shared by all even in my office.
So You Think You Know Bitcoin?
By Jeff Bergstrom
This article is an attempt to clarify some of the information out there…much of which is anywhere from misleading to flat-out wrong. It is difficult to have a meaningful conversation about the value (or lack of value) something has if misinformation is muddying the waters.
How it Works
How does Bitcoin work?
Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”.
**Short and sweet
Bitcoin Survival Guide: Everything You Need to Know About the Future of Money
Bitcoin is a digital currency, meaning it’s money controlled and stored entirely by computers spread across the internet, and this money is finding its way to more and more people and businesses around the world. But it’s much more than that, and many people — including the sharpest of internet pioneers as well as seasoned economists — are still struggling to come to terms with its many identities.
**An exhaustive guide
Current US Regulatory Developments
In recent months Bitcoin has become a hot topic in the financial, regulatory and legal community and has received widespread attention from newspapers such as The Wall Street Journal and The New York Times. Katten Muchin Rosenman LLP has been actively working on Bitcoin-related matters for the past year and has become a legal thought-leader in the area. As such, we would like to update our clients and friends on the current US regulatory developments regarding Bitcoin.
**Includes a straightforward introduction to Bitcoin. For an academic perspective, also see: The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries – http://jlne.ws/1hyr57N (PDF)
21 Things I Learned About Bitcoin From Living On It For A Week
Forbes – by Kashmir Hill
I lived on Bitcoin for a week. This is what I learned.
**Subpoint 4 on Point 16 isn’t bad for those international travelers – “you don’t have to worry about converting your money to the local currency, and the conversion fees that go along with that.”
Central Banks Warn of Bitcoin Risks
Wall Street Journal
While the Chinese government doesn’t officially recognize Bitcoin, buyers there are nonetheless helping to fuel a boom in the four-year-old virtual currency. Bobby Lee of BTC China, the country’s largest Bitcoin exchange, tells Jake Lee what is fueling the high demand. China and France on Thursday issued warnings about the use of bitcoin, saying the virtual currency didn’t offer the assurances of payment that a legal currency does and flagging the risk of speculation in something with no underlying assets.
Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value
Former Federal Reserve Chairman Alan Greenspan said Bitcoin prices are unsustainably high after surging 89-fold in a year and that the virtual money isn’t currency. “It’s a bubble,” Greenspan, 87, said today in a Bloomberg Television interview from Washington. “It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.”
**Related: Intrinsic value and other unicorns http://jlne.ws/1eSkvEU
BERNANKE: Bitcoin ‘May Hold Long-Term Promise’
The beautiful thing about Bitcoin, digital currency enthusiasts will tell you, is that it doesn’t have a central bank.
Here’s how Bitcoin charmed Washington
WashingtonPost.com – The Switch
The pair of Bitcoin hearings held this week by Senate committees could have been a disaster for the Bitcoin community. After all, Bitcoin first came to mainstream attention in 2011 when Gawker reported on Silk Road, an anonymous online marketplace that allowed users to purchase a wide variety of illegal drugs with Bitcoin. Sen. Chuck Schumer (D-N.Y.) denounced the site and suggested that Bitcoin was “an online form of money laundering.” A few months ago, it would have been easy to imagine the first congressional hearings on Bitcoin being a prelude to a federal crackdown on the decentralized financial network.
**The feel good story for Bitcoin. See testimony below.
Statement of Jennifer Shasky Calvery, Director Financial Crimes Enforcement Network United States Department of the Treasury
Before the United States Senate Committee on Homeland Security and Government Affairs
In the case of Bitcoin, it has been publicly reported that its users processed transactions worth approximately $8 billion over the twelve-month period preceding October 2013; however, this measure may be artificially high due to the extensive use of automated layering in many Bitcoin transactions. By way of comparison, according to information reported publicly, in 2012 Bank of America processed $244.4 trillion in wire transfers, PayPal processed approximately $145 billion in online payments, Western Union made remittances totaling approximately $81 billion, the Automated Clearing House (ACH) Network processed more than 21 billion transactions with a total dollar value of $36.9 trillion, and Fedwire, which handles large-scale wholesale transfers, processed 132 million transactions for a total of $599 trillion.
**Virtual currencies are subject to the Banking Secrecy Act: ”FinCEN’s guidance explains that administrators or exchangers of virtual currencies must register with FinCEN, and institute certain recordkeeping, reporting and AML program control measures, unless an exception to these requirements applies.”
Ron Paul: Bitcoin could ‘destroy the dollar’
Imagine a world in which you can buy anything in secret. No banks. No fees. No worries inflation will make today’s money worth less tomorrow. The digital currency Bitcoin promises all these things. And while it’s far from achieving any of them — its value is unstable and it’s rarely used — some have high hopes.
Fraud in Bitcoin, Unchecked
New York Times – William Alden
Pump-and-dump schemes are shut down in the financial markets all the time. But such frauds involving digital money like Bitcoin have gone unchecked, Nathaniel Popper reports in DealBook. Government authorities do not agree on which laws apply to Bitcoin, the popular virtual currency — or even on what Bitcoin is.
Baffled by a siphon
Jon Matte – John Lothian News
Watching US Senators grapple with Bitcoin’s existence is disturbing. There’s a legitimate discussion to be had, of course, with regard to regulation and how to find ways to keep watch over transactions that use it. Since Bitcoin is a currency – a means of transferring things and wealth in a symbolic way – it’s absolutely natural to expect that both honorable and criminal enterprises should find it useful. Regulation and oversight are reasonable to deploy as a way to hopefully slow the criminal side of things, or at the very least to catch criminals and make them pay a lot of fines. And it’s far better to regulate it than to stick our collective heads in the sand, ban it and then pretend that proxy servers and international banking don’t exist.
Web Money Gets Laundering Rule
The U.S. is applying money-laundering rules to “virtual currencies,” amid growing concern that new forms of cash bought on the Internet are being used to fund illicit activities. The move means that firms that issue or exchange the increasingly popular online cash will now be regulated in a similar manner as traditional money-order providers such as Western Union Co. They would have new bookkeeping requirements and mandatory reporting for transactions of more than $10,000.
Homeland Security cuts off Dwolla bitcoin transfers
Immigration and Customs Enforcement confirms an “ongoing investigation” that led to Dwolla cutting off bitcoin transfers to Mt. Gox.
** “The underlying crime that’s alleged by a DHS agent is operating an ‘unlicensed money transmitting business.’ A DHS affidavit accompanying the warrant accuses Mt. Gox of opening a money-transmitting account without registering with the federal government, which makes the funds available for seizure.” — Dwolla shut down its Bitcoin services in October.
Don’t laugh – Bitcoin is making a serious point
The Telegraph – Liam Halligan
Several events happened last week that made me suspect that Bitcoin – and the idea of “stateless” currencies more generally – will soon catch the zeitgeist.
**Story sources a Federal Reserve Bank of Chicago report called: “Bitcoin: A Primer.” – http://jlne.ws/18mcDKR
I’m Changing My Mind About Bitcoin
Business Insider – Joe Weisenthal
I’m changing my mind about Bitcoin. I used to think it was a joke or at best a currency for clowns. Now, I no longer think that. Now, I don’t know what its future is. Here, let me explain.
Render Unto Caesar, but Who Backs Bitcoin?
NYTimes.com – DealBook
Everyone’s talking about it. Richard Branson just began accepting bitcoin as a form of payment for flights on Virgin Galactic, which offers commercial spaceflights. The Chinese website Baidu endorsed the currency, and lawmakers in Washington are holding hearings about it. Even Ben S. Bernanke, the Federal Reserve chairman, told senators in a letter that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”
Bitcoin vs. Traditional Banking [Cartoon]
The Joy of Tech
Bitcoin Is the Segway of Currency
The Atlantic – Matthew O’Brien
So why has Bitcoin gone parabolic? And what does this have to do with Segway? Well, the short answer is we don’t know why the virtual currency has exploded. Part of it might be demand from China (which you can see in this realtime chart of who’s buying Bitcoins). Part of it might be the reduced supply after the FBI shut down and seized the drug website Silk Road’s substantial Bitcoin holdings. And part of it might be pure mania. But all of these are just another way of saying that Bitcoin’s design makes it prone to these boom-bust cycles.
**Retort from the Washington Post’s Timothy B. Lee: No, Bitcoin isn’t the Segway of currencies: http://jlne.ws/1eutBbm
The Bitcoin bubble
BITCOIN is booming. Investors are piling into the digital currency, which is not issued by a central bank but is conjured into being by cryptographic software running on a network of volunteers’ computers. This week the price of a Bitcoin soared to above $1,000, from less than $15 in January.
Bitcoin: The opportunity costs of mining for money
But even with the rise of paper and digital money, hard money that takes effort to mine has not completely gone away. Cryptographic currencies like Bitcoin are mined in a very resource-intensive way, using huge amounts of computing power to solve complex cryptographic puzzles. Earlier this year, Bitcoin became the world’s largest distributed computing project, eight times more powerful than the world’s top 500 supercomputers combined. That is a huge amount of computing power that could be used for other projects like research into genetics, or searching for extraterrestrial life, or modeling weather and the climate, or a huge number of other endeavors. Mining digital currency entails a huge opportunity cost, just as mining gold and silver for money did.
How The Man Nicknamed ‘Bitcoin Jesus’ Became A Virtual Currency Millionaire
The astronomical rise in the value of bitcoin—which has surged more than 8,000 percent over the course of 2013—has created a new breed of digital currency multimillionaires. The 34-year-old Roger Ver began investing in bitcoins in early 2011—and made his first million from the virtual currency that same year—which saw prices skyrocket from around $0.30 to $32 before settling at $2. He bought his first bitcoins at around $1.
The secret Hong Kong facility that uses boiling goo to mine Bitcoins
A single bitcoin is now worth over $1,000, but the process of mining for the digital currency — in which people devote computing power to facilitate global Bitcoin transactions and secure the currency’s network — is growing increasingly expensive. Serious miners have started to build dedicated facilities for the sole purpose of Bitcoin mining. Journalist Xiaogang Cao visited one such center in Hong Kong, the “secret mining facility” of ASICMINER, reportedly located in a Kwai Chung industrial building.
This Princeton professor is building a Bitcoin-inspired prediction market
Computer scientist Ed Felten has done a lot of work on Bitcoin over the years, but his latest project looks to step beyond mere currency, applying the principles of Bitcoin to the broader spread of information through the world. In a blog post today, the Princeton professor announced a project to build a prediction market based on the anonymous and self-arbitrating principles of Bitcoin. Similar to Intrade, the market will trade shares in possible event outcomes (a particular candidate winning an election, for instance) that only pay off if the outcome comes to pass. Felten says the contract-signing and consensus mechanisms that power Bitcoin are ideal for establishing a prediction market free of centralized authority.
**See Felten’s paper, “The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries” – http://jlne.ws/1hyr57N (PDF)
In Bitcoin’s Orbit: Rival Virtual Currencies Vie for Acceptance
For many people, bitcoin seems like something from the day after tomorrow. For Lawrence Blankenship, it’s already a thing of the past. A software engineer from Springfield, Mo., Mr. Blankenship is putting his money on PeerCoin, one of the biggest of the virtual currencies that are being promoted as alternatives to bitcoin.
Silk Road Competitor Shuts Down And Another Plans To Go Offline After Claimed $6 Million Theft
Forbes – Andy Greenberg
When a black market calls itself “Sheep,” it’s no surprise when someone gets fleeced. But the effects of a purported theft of thousands of bitcoins from the drug-selling site Sheep Marketplace have rippled across the dark web, and may lead to the shutdown of its biggest drug-selling site.
Texas Hacker Debunks Link Between Bitcoin Founder and Online Drug Market
Israeli academics Dorit Ron and Adi Shamir thought they may have uncovered an intriguing link between the anonymous creator of the bitcoin digital currency and the illicit online drug marketplace the Silk Road. But it turns out the idea was bunk.
Here’s who (probably) did that massive $150,000,000 Bitcoin transaction
One of the unique things about Bitcoin is that every transaction on its network is publicly available for anyone to examine. Any time a user sends a payment to another user, that transaction is reflected in the “blockchain,” a global, permanent ledger of Bitcoin transactions.
Cyberattack Leads to $1 Million Bitcoin Heist
Another Bitcoin company has fallen victim of a massive cyberheist. BIPS, one of the largest European Bitcoin payment processors, lost 1,295 Bitcoin (currently worth $1 million) after a cyberattack. As the price of Bitcoin continues to rise, cybercriminals are targeting companies with large holdings of Bitcoins in their servers. The attack on BIPS happened just a few weeks after inputs.io, which allegedly lost 4,100 BTC, worth more than $1 million at the time.