No central bank, no inflation, untraceable. Are they for real?
By Fang Shihan
BITCOINS are every anarchist’s fantasy. Digital, untraceable, lacking a central authority to screw things up and oh, accepted as payment for the Amazon.coms of the illicit drug industry. So you can get high and stick it to the man at the same time with low probability of getting caught. And that’s why New Nation Man loves it.
But more than just an oddity, Bitcoins have the potential to be a viable currency. Here’s why.
All currencies in the world have value only by government decree. Like bitcoins which are essentially just lines of code, paper money has no intrinsic value and are viable as a medium of exchange only when a large entity (the treasury for example) gives it credibility by ensuring the currency will never collapse.
It may be difficult to visualize how codes and coins can be utilized in the same manner – but it can be. Each dollar coin for example, comes with a unique serial number and can only be used for one transaction before it ‘belongs’ to someone else. LIkewise, each bitcoin transaction must be verified and therefore witnessed by 6 other bitcoin users before it gets approved, ensuring that each bitcoin can only be used once.
And since bitcoins have no central administration, it uses a central database spread over a peer-to-peer network to track transactions. Supply is limited to 21 million bitcoins. There are 6.5 million in existence now and three-quarters of all bitcoins would be mined by 2017. Bitcoins are also divisible down to 8 decimal places, ensuring finer granularity  of the currency.
Technicalities aside, the question is: who guarantees the viability of the bitcoin?
To quote one blogger, “bitcoin value is entirely virtual—a Bitcoin is only worth what another person thinks its worth”.
Doesn’t exactly instill tons of credibility to any would-be Bitcoin adopter. But Bitcoin bears are missing the one key comparative advantage: Bitcoins are untraceable and thus, a potential safe haven for the gangs, drug lords and the like.
There is already in fact an online store selling drugs from weed to acid pills. All payable by bitcoins and delivered to your doorstep with minimum purchase. Another bitcoin-friendly site offers assassination services.
Unfortunately, it takes more than a just a little technical expertise to get to the sites at the moment. The fun stuff is accessible only via the anonymising network TOR, which took this author a few hours to figure out.
But the potential’s still there. Drugs are recession proof – depressed, jobless people turn to drugs for relief while the nouveau riche in the emerging markets have more purchasing power for lifestyle drugs – and if traded with bitcoins, could provide some serious credibility for the longevity of the system.
Drugs, pornography, assassination services, prostitution and the like will forever exist. With constant demand comes a constant supply of supporting economies. Who’s to say bitcoins could truly replace the greenback in the illicit industries?
Think about it. If a heroin trader from Afghanistan wanted to replenish his cocaine stock from Peru, he’d have to buy a stash using cash now. But Bitcoins make business transactions so much easier and (more emphasis here) untraceable.
Obviously the bitcoin system comes with its flaws as well.
Bitcoins were much easier to mine previously, requiring no more than extra processing power from one’s CPU. But mining rigs (consisting of some hardcore computing power) are now required to generate the same amount of currency. As supply is fixed, bitcoins can only grow in smaller denominations as they’re adopted by more people, creating an unfair advantage for hoarders.
For example, geeks who donated their CPUs early in the mining game would have enjoyed the price spike from $0.40/btc to $17/btc. Hoard it until the supply maxes out and and they would enjoy an even higher purchasing power at $34/btc for instance.
Next, assuming the system is easily replicable, there’s no stopping the Chinese or even Russians from creating their equivalent of the bitcoin system. With US authorities clamping down on illicit activities in the bitcoin system, it’s only a matter of time before the very people backing up the bitcoin credibility (drug lords) would move to a similar space with friendlier governments.
The bitcoin system exists on a contradictory duality of principals – being absolutely anonymous yet absolutely transparent. So while it would be feasible for smalltime gangs to launder their money via bitcoins, “attempting major illicit transactions with Bitcoin”, in the words of Bitcoin developer Jeff Garzik, “is pretty damned dumb”. An account transferring a million dollars in bitcoins would stick out even worse than a bruised vein. In any case each account has a $1000/day withdrawal limit, hardly the cashflow volume of drug lords.
Lastly, security is an issue: a surprise hack of the largest bitcoin exchange, Mt. Gox is only the beginning of what could turn into a burgeoning security problem. Bitcoins are largely used within the more security-conscious geek community. But if Bitcoins truly become more attractive to the casual investor, or casual entrepreneur, security breaches could occur faster than a script kiddie typing “db_autopwn”. A security breach of Mt. Gox, or even the bitcoin system itself is more akin to a hijacking of the currency printing factory than a measly bank robbery.
So can the bitcoin ever replace the greenback?
Probably not, but it could potentially be a very good alternative currency for transactions deemed less-than-legal in mainstream society.
Let’s face it: drugs, pornography, assassination services, prostitution and the like will forever exist. With constant demand comes a constant supply of supporting economies. Who’s to say bitcoins could truly replace the greenback in the illicit industries? And having said that, what’s stopping the casual forex investor from riding on the illicit wave and buying some bitcoins?