Tuesday, February 4, 2014

A Bit About Bitcoins

     P.T. Barnum, the great showman once said, "There's a sucker born every minute." No truer a statement has ever included a more willing bunch of suckers as those who currently invest in bitcoins. You may or may have not have heard about bitcoins, the pseudo-currency/commodity that are comprised of computer algorithms and are used by some in exchange for goods and services over the Internet. Many more have traded their valuable currencies and precious metals for this worthless computer code as a means of investing.
     Bitcoins, a peer-to-peer electronic payment system, was first suggested in an Internet paper in November 2008, and the first bitcoin block was "mined" in January of 2009 by an individual or group of individuals going by the pseudonym of Satoshi Nakamoto. Bitcoins are "mined" by participants developing algorithms that meet the protocol for discovering a block of bitcoins, which currently equals 25 coins. The protocol has been written to make it difficult enough to discover these blocks that only one is discoverable every ten minutes. Every four years the number of bitcoins per block is halved, requiring 100 years for all 21 million bitcoins to be discovered. The 21 million limit is imposed by the original bitcoin protocol written by Satoshi Nakamoto.
     People sign up for the bitcoin network and receive electronic wallet software in which to keep their bitcoins. "Miners" of bitcoins often work in pools because of the enormous computing power it requires to develop the algorithms to discover blocks of bitcoins. Dozens of online websites have begun to accept bitcoins for payment of goods and services. When new blocks are discovered, or transactions with bitcoins occur, they are recorded in the block chain, which is a database tracking bitcoins from discovery through every participants' account they occupy.
     The value of bitcoins since their inception has fluctuated between 0.30/USD per bitcoin to 1124/USD per bitcoin. The enormous volatility of the bitcoin is just one reason it is unsuitable to be a currency. The other is that it has an intrinsic value of zero. In other words, bitcoins are comprised of electrical impulses on a computer and have no value other than the perceived value of the participants in the network. One might make the perceived value argument about anything, i.e., something is only worth as much as someone is willing to pay for it. But currencies backed by governments, and precious metals like gold and silver actually have intrinsic value in the full faith and credit of the issuing government and in their physical properties, respectively.
     The bitcoin scam is a house of cards built on a foundation of sand in an earthquake zone. Many countries have banned their use, and the European Union has strongly admonished their people to avoid exposure to this Ponzi scheme. But, oddly enough, the United States government has sanctioned their use, which seems to me to violate laws restricting individuals from creating their own currency. The bitcoin "market" is every bit as lawless as the scheme perpetrated on investors by Bernie Madoff, who fooled his clients into thinking they had value in their accounts simply because he said so.
     The bitcoin hysteria is like a cruel game of musical chairs. When the music stops, and the blatant worthlessness of bitcoins is realized, those poor souls stuck holding the bitcoin bag will be left poorer and with no recourse against faceless and nameless computers on a network which will have dispersed their money into the ether.

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