Notes on the Bitcoin scam

1. Why call Bitcoin a scam? One could appeal to a commonsense notion like the impossibility of making money out of nothing, which is what this system looks like it’s doing. This is, of course, a very simplified picture. To argue in this way is to invite accusations of ignorance of important details.

2. Those with an investment to protect are motivated to counter claims that would undermine it. Criticism of any sort of technology can undermine its market value. Bitcoin isn’t unique in this aspect, but it exemplifies it strongly. It’s a peculiar sort of technology, because it’s useless unless it’s considered valuable.

3. Bitcoin is a simulation of money, implemented as a decentralised internet protocol. It simulates a particular kind of money, one that’s ultimately limited in supply, like gold. Bitcoin is supposed to be, in some ways, a superior sort of money, accessible to anyone with a computer and internet access, outside of the control of governments and banks.

4. Unlike gold, Bitcoin has the feature of being transferable over the Net. Those of us who are privileged to have access to modern financial institutions are accustomed to this kind of convenient feature, using ordinary money.

5. Bitcoin’s implementation is based on cryptography. Owning Bitcoins means having access (by means of a cryptographic key) to a ‘wallet’ (an identity, named or anonymous or pseudonymous) on the system, and that wallet having some amount of coins assigned to it. Each wallet’s assignment of coins is determined by the transaction history (coins sent and received) recorded in the distributed ledger called the Blockchain.

6. The Blockchain is duplicated across many entities in the Bitcoin system. No one entity controls it. It’s public information, and that’s the system’s whole transaction history (so much for privacy). People can earn Bitcoin rewards through a process called ‘mining’, which is a competition for securely adding new transaction information to the Blockchain. The mining process involves computationally-difficult calculations. This means it consumes lots of energy. This cannot be made more efficient. That’s how it was designed. It’s designed to require greater and greater sacrifice.

7. The energy/environmental implications of mining is one major target for fundamental criticism of Bitcoin. See: Charlie Stross’s arguments. He also, alongside Jamie Dimon, CEO of JP Morgan Chase, likens it to a ‘distributed Ponzi scheme’. He predicts a burst of the bubble.

8. Stross’s criticism of Bitcoin has been longstanding. Here’s a response, defending Bitcoin and attacking Stross as ignorant and unimaginative.

9. Falling confidence in government institutions seems to be correlated with rising Bitcoin value. See:

To be continued …

 

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