Saturday, October 22, 2011

Is Bank of America about to go bust?

Answer:  I don't know, but there are some troubling signs in the news.

First was the strong reaction to their new $5 monthly fee for using debit cards.  Many consumers are reacting by moving their payroll direct deposits to smaller regional banks and to credit unions.

And now there is the news that BofA has socked away risky derivatives representing a potential $75 TRILLION liability in their retail banking division - thereby transferring these risky instruments out of their investment banking arm (Merrill Lynch, which was absorbed by BofA during the financial crisis).

Why is this bad?  Because it means that if those derivatives go belly-up, the DEPOSITS of ordinary bank customers - you and me - will be used to pay off those obligations until there is no money left to pay depositors, at which point FDIC will be forced to pony up.  Depending on the size of the losses, FDIC's entire deposit insurance fund could be easily bankrupted, and then the US government would be forced to step in and bail out the banking system again, at taxpayer expense, to prevent depositor losses.

I personally closed my BofA accounts a long time ago (when they threatened to steal my deposits to pay off an overdue credit-card bill), but if I were still holding any demand deposit accounts there, I would GET MY MONEY OUT NOW, before BofA says "surprise!" and reveals just how rotten the toxic assets stashed in their retail banking division really are.  Because when that happens, there will truly be a major "run on the bank," and the only way that these losses could be covered is if Treasury and/or the Fed print up massive amounts of new money, enough to cause runaway inflation of the dollar supply and of prices.

And if THAT happens, and if meanwhile, similar things happen to the Euro due to the ongoing debt crisis in Europe, the only safe response to the ensuing global currency crisis will be to stash one's personal liquid wealth in a form other than traditional sovereign fiat currencies - for example, in the form of Bitcoins.  Better to do this sooner, rather than later, in my opinion...

Saturday, October 15, 2011

How to Fix Bitcoin

In recent months, the Bitcoin price has been drifting steadily downwards, as this log-scale chart shows:

Bitcoin price on Mt. Gox, in USD/BTC, over the year-long period ending Oct. 15th, 2011.
Indeed, as numerous critics of Bitcoin have pointed out, a major flaw in the system is that there is literally nothing that prevents the Bitcoin value from just drifting down and down until it is essentially zero - say as people get bored with it and lose interest.

How can this flaw be repaired?  Well, there is a simple way - if everyone who used the currency agreed, in a contractually-binding legal agreement, that they would, in perpetuity, accept 1 Bitcoin in place of a certain amount of traditional (legal tender) currency that is owed them by anyone.  This would effectively set a floor on the exchange rate.

What should the floor be?  Well, if Bitcoin is to ever become a significant part of the world economy, then it needs to be large enough so that the total value of all Bitcoins in circulation is comparable to the base money supply of traditional currencies.  The limiting number of BTC is 21,000,000, so if the floor were set at say, 1 BTC = $100,000 (i.e., 1 USD = 0.000 01 BTC), then the value of the limiting BTC supply would be $2.1 trillion, comparable to the base supply of physical US money (coins & Federal Reserve Notes).  Or, if the floor were set at 1 BTC = $1,000,000 (i.e., 1 USD = 0.000 001 BTC), then the limiting supply of BTC would be $21 trillion, an amount which is probably larger than the base supply of all existing currencies.

How can we get users to agree to such an exchange rate?  This might not be possible with the existing BTC block chain, because it might give disproportionate wealth to early adopters and others who hold a majority of the BTC today.  But if a new block chain were started from scratch, and using a new version of the software that was distributed with a licensing agreement that required users to contractually accept the new exchange rate, then it might be able to catch on - since miners of the new currency (call it BC2) would stand to gain enormous wealth, due to its much higher value.  (Although eventually, difficulty would rise to the point where mining was only just profitable again.)

For convenience and for psychological favorability, the new unit BC2 should be chosen to have a floor on its value equal to 1 US dollar, thus, 1 BC2 would be 1 hundred-thousandth or 1 millionth of 1 BTC (depending on the money supply target).

With this new price floor, mining would (at least initially) be extremely lucrative, and would attract millions of new users to join the system, and accept its user agreement.  As a result, suddenly, Bitcoin (the new version) would become very widely accepted, and at a very favorable exchange rate, and so its growth would snowball.

One way to enforce the change (which could be done with either the existing block chain, or a new one) would be to distribute a new version of the reference client that only accepts transactions to or from any given address if the owner of that address has digitally signed a contract agreeing to the new minimum exchange rate.  (If the major mining pools accepted this protocol change, it would become the de facto standard.)  However, in order for the contract to be effective, it would have to include the real-world identity of the owner, which would kill Bitcoin's anonymity.  Also, there would have to be a process for verifying that the supplied owner identities are valid.  So the idea is not free of difficulties.  But these sacrifices might be worth it to help Bitcoin grow from the small niche status it has today into a true global phenomenon.

I offer up this idea to the Bitcoin community for comment.

Saturday, September 24, 2011

Let's Get Physical

Casascius Bitcoins
As you might have noticed, things have slowed down on this blog lately.  As we all know, last month congress raised the debt ceiling at the last minute (thank goodness), thereby forestalling a default that might have triggered a catastrophic collapse of the world financial system.  Now we'll just have to wait and see what the "Super Congress" comes up with in November.

Meanwhile, the Bitcoin price has been slowly drifting downwards; it's now around $5-6.  I think the overall level of enthusiasm for Bitcoin is waning.  I am getting the feeling now that the negative press exposure, along with some real security and usability issues will keep Bitcoin from hitting the mainstream for a while.    It needs to become much easier to use securely, so that many more merchants (and consumers) will accept it.

Fortunately, some good progress is being made in this area, with a couple of convenient new forms for direct hand-to-hand physical exchange of Bitcoins becoming available (in addition to the Bitbills which I mentioned in my previous post):

  • Casascius Bitcoins (above) which are real metal (brass) coins, with the Bitcoin's private key data hidden under a tamper-resistant peel-off hologram.  These appear professionally made; of course, as with any third-party service for generating wallet data, a certain level of trust is required, that the producer didn't keep a copy of the wallet data for themselves.  But they look cool, and I'll probably order one at some point, for the "gee whiz" factor at least, and to show it off.  This is the first physical Bitcoin that actually looks like we'd imagine a Bitcoin would look!

  • Global Standard Bank's One-Bitcoin BitCard
  • Global Standard Bank has initiated a promotional distribution of its new BitCards.  I received one in the mail today (pic at right)! These cards do not store the wallet data directly, but rather a security code (hidden under a scratch-off strip) which will allow you to retrieve the actual BitCoins via an online transaction with GSB.  If the scratch-off area is intact, then the value is still there.  (And another online process can be used to positively verify the validity of the card without invalidating it.)  Therefore, these cards function more like a bank note or transferrable gold certificate than like a physical coin - they are not actual base money, but rather represent a Bitcoin that is stored by the bank somewhere, and that can be retrieved from the bank on demand.  However, unlike a simple bank note, the BitCard also has an anti-theft security feature, which is a secret passcode (known only to GSB and to the original receiver of the card, and whoever they give it to) which must be provided (along with the scratch-off code) in order to redeem the card.  Thus, a stolen BitCard is useless unless you manage to obtain its passcode as well.  In a way, you could think of it being like a transferable debit card that requires a PIN to access it, and where all the money in the account must be debited in a single transaction.
Even more interesting than the BitCard itself, IMHO, is GSB's plan to offer a real Visa-logo credit/debit card ("iCard") which will presumably be backed by a demand deposit account at GSB that is denominated in Bitcoins.  I'm guessing they are planning to automatically convert the transaction amount from dollars (or whatever) to Bitcoins based on the exchange rate at the time the card is swiped, similarly to what happens when you swipe a dollar-denominated Visa card in the Eurozone (or vice-versa).  But I don't really know for sure.

Personally, I'm still trying to decide whether to cash in my BitCard now, and transfer the 1 BTC of value to my private, multiply backed-up encrypted wallet, or to just hold onto the card in case of emergency.  No hurry to decide, though...  So, I'll probably just hold onto it for the time being.  You never know when a Bitcoin in your pocket might come in handy, say if some unexpectedly rapid global financial meltdown causes the value of all non-cryptocurrencies to collapse, and you're trying to buy gas in the middle of nowhere from a merchant who is convinced that Federal Reserve Notes are worthless.  (After all, Greece keeps edging closer and closer to the brink of default, the stock market seems chronically jittery, and you never know when the Fed might decide to crank up the presses and start a big new QE3 or something.)

Wednesday, July 27, 2011

Last Chance to Save Your Savings

Plastic stored-value BitBill cards; the money of the future?
Well, this is it, folks... It's down to the wire... There is only less than a week left for the Democrats and Republicans to hash out an agreement that will allow the U.S. to avoid going into default on at least some of its various financial obligations... And, disturbingly, we do not seem any closer to an agreement than we were several weeks ago... The Republicans seemed determined to refuse anything that the Democrats offer them (they "won't take yes for an answer")... The Tea-Party Caucus, in particular, seems determined to actually drive us into default... Some of them actually campaigned on the promise that they would never raise the debt ceiling under any circumstances!  I believe that a number of Republicans actually want to cause another major financial crisis, because more than anything else, they want the Obama administration to fail.  They would drive this country into a ditch just for the sake of seeing that uppity "boy" driven out of office...

Anyway, whatever the underlying motivations here, I have a bad feeling that there is indeed going to be a default, of one form or another.  If the debt ceiling is not raised, various people have proposed that the Treasury might just print money, either by issuing gold certificates backed by the gold in Fort Knox (assuming it's really still there), or mint just a few platinum coins stamped "ONE TRILLION DOLLARS" each (an extreme version of an ancient practice known as "coin seigniorage"), and in either case deposit the newly-created money into its account at the Federal Reserve, and use it to pay off outstanding Treasury bills as they mature, thereby directly reducing the debt. This is 100% legal!  By this means, Obama could circumvent both Congress and the Fed.  However, the financial markets would likely still consider this to be just another form of default, as it would increase the supply of, dilute, and thus debase the value of all dollar-denominated assets.

In other words, if the insane Tea Party Republicans stick to their guns, and do not raise the debt ceiling no matter what, then, come Aug. 3rd or so, there is going to be a fiscal/monetary crisis like the world has never seen.  Credit rating agencies have already said that they will lower the U.S.'s credit rating if the debt ceiling isn't raised; some have even threatened to lower it all the way to "D", the lowest "junk bond" status.  Investors will dump Treasuries like crazy, and the value of the dollar will plummet.  Of course, the US dollar is the world's reserve currency, so if the dollar falls, it will take all manner of global institutions with it - from international companies to governments, all manner of major players will find themselves increasingly insolvent as they find themselves increasingly unable to find buyers for their fast-falling dollars.  Meanwhile, as the interest rates on dollar bills skyrocket, the U.S. will have to give up all hope of lowering the deficit, except by printing more and more money, further debasing its currency.  (And this debasement will not even help with the U.S.'s long-term debt problem, since Social Security benefits are adjusted for inflation, and Medicare payouts necessarily relate to real-world health care costs.)  The end result is that hyperinflation of the U.S. dollar will occur, and all dollar-denominated assets will become virtually worthless, almost overnight.  So, too, will the stocks of companies that end up stuck holding a lot of worthless cash, and so will the bonds of all manner of domestic & foreign entities (companies, governments, trust funds) that are heavily invested in US dollar-based assets, and so forth.  It will be nothing short of global fiscal armageddon.

One wonders, facing such a massive risk, what classes of investments would still be safe.  First off, no form of paper wealth is safe, since in such a chaotic environment, how does one know that the counterparties will even be able to hold up their end of the bargain?

Consider, then, real estate.  But, this is safe only so long as there exists a stable government, law-enforcement system, and court system, with jurisdiction over said property, that can protect the owner's property rights.  In a major economic collapse scenario, any government may at any time be at risk of being overthrown, and so enforcement structures may be in flux; the rule of law may be absent for extended periods.  So one cannot count on the government to protect one's property.  You can try to protect your own real estate using your own physical defense systems, but if your government becomes desperate, or is taken over by hostile entities, than it may seize your property, and you are unlikely to be able to fight off an army of law-enforcement officers if it is determined to occupy your land.

What about physical commodities other than land?  Those tend to be heavy and difficult to transport (which could be important if you need to flee the country due to war or revolution), and they suffer from the same risks of theft and seizure that real estate does.  You can try to hide your portable items (burying gold bars under a tree in the woods, say), but someone could always surreptitiously follow you to your hiding place and still steal them.

No, as far as I can see, the only truly safe place to save one's wealth, in case of a total global economic breakdown, is in the form of Bitcoins, locked safely in secure digital wallet hidden in an encrypted shadow volume, with multiple redundant backups at numerous physical locations, and where only you (and your immediate heirs, say) know the password to reveal and unlock the hidden file.

The supply of Bitcoins can never become hyperinflated (this is guaranteed by the way they work), and if you take the above precautions, no one but you can never access your coins, so they can never be stolen from you nor seized by any government.. To prevent you from spending your backed-up, encrypted Bitcoins, a hostile party would have to lock up you and all of your associates with no communication to the outside world (no means to send a message out).

Therefore, I strongly advise that everyone in the world who cares about protecting their assets ought to take all of their paper wealth and convert it to the form of Bitcoins, as soon as possible.  The sooner you do this, the better off you'll be, since you'll get a better exchange rate if you beat the rush.

Saturday, July 23, 2011

Here Come the Bitcoin Banks

In the past few weeks, I have noticed at least two emerging organizations that claim to be "Bitcoin Banks."
I applaud this development.  Let's keep an eye on them, and see what happens.  So far, Global Standard Bank appears to be farther along in its development.

Thursday, July 7, 2011

Cryptocurrency and Sustainable Taxation

Much has been made about how Bitcoin is a supposedly untraceable, anonymous form of electronic money. Actually, this is not quite true: How untraceable Bitcoin is depends greatly on the measures individual users take to make their transactions untraceable, or not. Let me briefly explain.

All transfers of base Bitcoins (with the sender's and receiver's digital addresses) are published in the public record - specifically in Bitcoin's distributed database. So in that sense, the flow of money between Bitcoin accounts is not untraceable at all. However, users of Bitcoin can, if they wish, take measures to make it more difficult to trace their flow of transactions.

First, at the most basic level, a user can create a new receiving address for each payment they receive, which makes it more difficult to identify the recipient. Still, if the coins received are later spent together with other coins in the same wallet, this ties them together and makes it easier to identify a pattern of payments going to a single recipient. The real-world identity of that recipient might then potentially be traced by using conventional investigation methods (through contacts or computers used to distribute addresses, etc.).

Another layer of difficulty can be added by using a third-party service such as a Bitcoin "laundromat" which accepts Bitcoins from many sources, mixes them together in a single wallet and then redistributes them from random addresses to intended recipients. Such a service can make it very difficult if not impossible to show that a transaction took place between a given buyer and a given seller.

On the flip side, if a Bitcoin user wishes to prove that he/she ordered a given transfer, that can be easily accomplished by digitally signing a statement of one's identity using the private key associated with the sender's address.

Most casual users of Bitcoin will probably not resort to taking extra measures to either hide or reveal their identities, at least not until tools exist that make it easy and convenient for them to do so.

Still, in time, such tools should become more readily available as the Bitcoin economy continues to develop, and a sufficiently motivated user can find or develop such tools even now, so this raises the question: How are governments going to enforce income taxes on income that is in the form of Bitcoins?

Some crypto-anarchists might say, "They can't; that's the whole point, let the governments fall!"

But I, for one, am in favor of (sufficiently good) government, and I don't expect governments would fall anyway (since they can always just tax in other ways), so I would like to propose a different, and (IMHO) much saner answer, something that I think we need to do anyway, namely:

We should abandon the income tax, and replace it with an excise tax on the development (extraction or first processing) of raw natrual resources: fossil fuels, minerals, arable land, forests, fisheries. Such a tax is enforceable because the government can go after and inspect the (generally large-scale) physical facilities where such processing is done: oil fields, refineries, mines, new farms, newly cleared forest, large fishing vessels. Cryptocurrency can't hide such activities.

Such a tax would naturally be passed down along supply chains, and so would impact end users (consumers or companies) in proportion to the extent to which they cause consumption of raw resources, whether directly or indirectly, through the products and services that they buy.

As a result, this form of taxation would provide a very strong incentive for companies and individuals to minimize their personal level of consumption, and give them an easy price signal to help them do so, since in this system the cheapest products would be those that are produced most efficiently in terms of raw resources consumed. So by simply being a frugal shopper, one would automatically also be helping conservation efforts.

Furthermore, by tuning the tax rates on individual types of resources to match their projected ecological impact on long-term public health and safety, this new tax regime would foster the public interest, and would do wonders to make our civilization more sustainable, and help to ensure a much longer and more glorious future for humanity on this planet.

One final note: This consumption tax would not imply a tax increase, just a shift in the tax burden from less-wasteful to more-wasteful activities. An individual would not necessarily be paying any more in taxes than before - probably less, to the extent that he is able to adapt to a low-environmental-impact lifestyle. To make the transition easier, the consumption tax could be phased in (and the income tax phased out) over a number of years.

This is something we need to do anyway, to save the Earth from excessive development and spare ourselves from a severe resource crisis and ecological reckoning down the road. The difficulty of taxing Bitcoin income just makes the case for getting rid of the income tax even better. So this is yet another reason why everyone should adopt Bitcoin - to give governments an additional impetus to restructure their tax base in this way that will best serve the public interest.

Monday, July 4, 2011

Shorting the Dollar

The situation in Washington continues to fascinate one with its utter insanity.  Republicans walked out on talks to raise the debt ceiling after refusing the Democrats' generous deal to end the deficit which only closed 20% of the budget gap through increased revenue (ending tax loopholes) and accepted 80% in spending cuts.  And the Senate has refused to even debate the debt ceiling openly on the floor.

Both sides are stalling and stonewalling, and it is looking more and more like the August 2nd deadline may arrive with no deal being reached, and so the U.S. may go into at least a technical default, failing to meet some financial obligations, or (I half expect) paying some bills by just printing new currency (resurrecting the old United States Notes, for example - which are still legal tender, but are no longer backed by gold).  Of course, international investors would react to any kind of default with complete horror and shock.  Standard & Poors has said that if this happened, they would immediately lower the U.S. credit rating to "D" - their lowest score.  And certainly, investors would shed U.S. Treasuries like the plague, knowing that they were no longer a safe investment.  Yields on T-bills would skyrocket so high that we would be forced to keep printing more and more money just to keep the interest payments manageable.  The value of the dollar would plunge on the Forex, and in general across world markets.  And back in the U.S., price inflation would skyrocket, as critical imported commodities - most notably oil - suddenly became much more expensive.

One wonders, in the current environment, whether it might not be prudent to hedge against the possible loss in value of one's dollar-denominated investments (including stocks in companies that hold a lot of cash) by short-selling the dollar - which just means, taking a short (leveraged) position in dollars against some other, more inelastic commodity.  Many suggest gold, but the gold supply could always increase unexpectedly - for example, a lost cache of gold and other treasures valued at $22 billion was just discovered in India.  Further, if global investors collectively lose faith in the dollar as a reserve currency, large institutional holders of gold may be forced to open their long-sealed vaults, as they start using bullion again as their preferred medium for conducting regular international settlements.  As the "velocity" of exchange of non-dollar-denominated transactions increases, the effective supply of gold that is actively in circulation may actually increase (rather than decrease), so the price of gold may not fare as well in that environment as one might otherwise expect.

As a result, my best suggestion for hedging against a fall in the U.S. dollar is to short-sell the dollar against not gold, but the Bitcoin.  The base supply of Bitcoins is guaranteed, by the nature of its peer-to-peer protocol, to increase only at a slow and decelerating rate, until the limiting supply of 21 million is reached asymptotically over coming decades.  Bitcoins are mathematically impossible to counterfeit, and they can only be obtained by exchange or by "mining" them - which is the slang term for helping to secure the authenticity of transactions within Bitcoin's peer-to-peer network.  The important point is that the supply of Bitcoins cannot be hyperinflated by any government, or other central authority.  And unlike gold, they can be transmitted between parties very easily and at negligible cost directly over the Internet.

How does short-selling work?  It is actually very simple.  All you need is a way to borrow a substantial amount of the asset you are shorting.  For U.S. dollars, a simple cash loan (from any source) would suffice.  Depending on how confident you are that the dollar will fall, you might even be willing to take a cash advance on your credit card.  (Personally, I would, if I still had any credit cards.)  Then, you exchange the asset you're shorting for something else whose (medium- to long-term) stability you are more confident in - which (in my case) is Bitcoins.  (Why not Euros?  In part because the Euro, too, is in danger, because of the Greek debt crisis, which is not over yet, not by a long shot.)

U.S. dollars can be traded for Bitcoins on any of several exchanges, the most popular of which is Mt. Gox, which recently suffered a setback (it was taken down by hackers for a week), but no permanent harm was done in the attack, and it has come back more secure than ever.  It is still by far the most popular exchange.  The price of Bitcoins in U.S. dollars is fairly cheap right now (down about 55% from its high in early June), but it can be expected to rebound significantly if the U.S. goes into default.  Anyway, its longer-term trend has been an increase in price by more than 100x over the last 9 months.  (See logarithmic chart below - the price increased from below US$0.10/BTC to more than $10.00/BTC from Oct. 2010 to July 2011.)

Bitcoin price in US dollars over the past 10 months. (Click to enlarge.)

Let us now examine a hypothetical scenario for a short-sell play.  Suppose one borrows US$10,000 for a 1-year period at 10% interest, and immediately exchanges it for Bitcoins (BTC) - at the current price of about US$13.50/BTC, this would buy the short-seller about 741 BTC.  Now, suppose that the U.S. goes into at least a technical default, and international investors start dumping the dollar, and its value (measured in terms of a basket of currencies and/or international commodities) goes down 50% over the next year.  Then, even if the overall popularity of Bitcoins did not grow at all over that period, their value in US dollars would go up by a factor of 2x (+100%) because of the fall of the dollar.  So the 741 BTC would become worth $20,000, and you could pay off the original loan ($10K) plus the interest ($1K) and have $9K to spare.  This, then, effectively hedges the short-seller against the possibility that $9K worth of his personal savings might decline in real value by 50% over this period.

Alternatively, if the U.S. doesn't default, and the value of the dollar stays about the same, and Bitcoins retain the same popularity that they have currently, then their price in dollars stays about the same, and so at worst you can just sell the Bitcoins at the end of the year and pay off the debt, and you are just out the $1,000 in interest - which is worth it, perhaps, for the added peace of mind that you gained with the hedge.

Of course, the picture looks far better if we build into the model that the Bitcoin may continue to gain in popularity as more people learn about its benefits, as it has done in the past.  Suppose conservatively that the popularity of the Bitcoin increases just 10x over the next year (compared to its 100x increase over the past year) - this could happen either because of the widespread debt crisis in the world's leading sovereign currencies, or just because of increasing public knowledge and education about Bitcoin's security advantages.  If this happened, then the initial $10,000 investment in Bitcoins would turn into as much as $200,000 (if the value of the dollar falls by half), or at least $100,000 (if the value of the dollar stays the same).  In either case, the $1,000 interest payment on the loan becomes completely negligible, and the short-seller has gained enormously (since effectively, the value of the dollar in Bitcoins has indeed fallen greatly, by a factor of 10-20x).

As a result of the above considerations, and because of my own uncertainty about the near-term prospects for the U.S. dollar, I am hereby publicly announcing that I am willing to take a personal loan from anyone, at 10% interest (or less of course), and of any size from $1,000 up to at least $10,000, which I will personally use to short the dollar against the Bitcoin in coming months.  (I would offer to take even more, but I want to be responsible, and make sure that the loan is for an amount that I could surely afford to cover the interest payments on even in the worst case.)  

So, dear readers, put your money where your mouth is.  If you, unlike me, believe that the value of the dollar will almost certainly remain fairly steady over the next year, then you should view 10% as a pretty decent return on investment, and offer me a loan contract.  

But if, like me, you have some serious doubts about the prospects for the U.S. dollar (along with other national currencies) looking forward, then, like me, you should similarly be willing to borrow as many of those dollars as you can responsibly afford to pay back, and then use that leverage to buy up all the Bitcoins that you can.  Or, you could reasonably stock up on petroleum ETFs or something like that instead, although if the global economy tanks, demand for oil might not do so well either.  And, unless you're already a sophisticated investor, buying Bitcoins is a heck of a lot easier.

In other words, bottom line is, if you want to protect your personal savings right now, you should short-sell the dollar, one way or another.  I know that I am.  If you disagree, then please send me your loan offer at :)

Friday, July 1, 2011

Why Bitcoin Will Be the Last Refuge of the Wealthy

Things are looking grim.  It seems as if these days, practically the whole world is drowning in a deluge of debt, brought on in large part by the excessively loose monetary policy of the United States' Federal Reserve System, the manager of the world's primary reserve currency, the US dollar.

The Euro is in trouble as well.  Bond market bookmakers are giving Greece about an 80% chance of default, with the solvency of other several other nations in Europe standing all lined up and ready to topple like dominoes if Greece's debt goes bad.  Even if these countries don't default right away, the problem will just recur in another year or two.

And what is especially frightening is that the United States itself, whose sovereign currency is supposedly the last bastion of safety, seems politically paralyzed and unable to resolve differences between raising revenue vs. decreasing spending.  Congress seems determined to play chicken with the debt ceiling until the last possible moment, and perhaps longer.  As a result, there seems to be a not-insignificant possibility the United States may actually default on its debt, in some sense, when the current round of 3-month Treasury bills matures in August - either by delaying interest payments, or perhaps (I wonder?) by firing up the presses for old-fashioned greenbacks (United States Notes, still legal tender!) to retire some of this debt at the cost of directly inflating the base money supply, thus debasing the currency.  Either one of these actions would probably be considered a technical default by international investors, and so the value of the dollar will collapse as a result, as they start fleeing from Treasuries in search of safer investments.  (Standard & Poors has threatened to cut the US credit rating to "D" if Congress doesn't raise the debt ceiling.)

The underlying cause of the problem can perhaps be traced back to an excessive power held by the Fed to inflate the money supply through fractional-reserve lending practices, which are no longer (since 1971) tied down to the gold standard.  As a result, in recent decades, vast amounts of liquidity were created willy-nilly and tossed around foolishly to make all kinds of sub-prime consumer loans (and other bad investments) that greatly enriched the financial industry with fees and bonuses.  By 2008, enough of the Fed's loans into the US financial system had gone bad that it was, itself, essentially bankrupt, which is why it then had to come running to Congress for a bailout.  Of course, through the magic of fractional-reserve lending, that little $700 billion loan from the taxpayers morphed, in the Fed's hands, into 10x as much ($7 trillion worth) of ability to spin new liquidity out of thin air.  This money promptly went out, hundreds of billions of dollars of it at a time, to the Fed's best buddies, the major US banks, to enable them to soak up Treasuries and sit on them, earning interest from the US taxpayers to help the banks lick their self-inflicted wounds.  This went beautifully as far as rescuing the banks was concerned, but it arguably did dick-all to jump-start the US's real economy.

Furthermore, the real economy itself (both US and global) is arguably nearing the end of a major long-term bubble caused by the excessively rapid industrial expansion of the last 50 or 60 years (fueled, again, by loose money from the Fed).  Global rates of "production" (i.e., development and harnessing) of many basic natural resources (oil, fresh water, arable land) is leveling off and is becoming unable to meet projected demand growth.  Meanwhile, the effects of pollution are beginning to destabilize the natural order of the oceans and atmosphere, with runoff from agricultural fertilizer creating offshore dead zones, CO2-acidified surface waters bleaching corals and interfering with the marine food chain, and, of course, the climate is increasingly becoming destabilized by an excess of greenhouse gases which, by basic physics, upset the radiation balance between the Sun and Earth's surface.

Due to the combination of all these effects and more, ecologists have estimated that in terms of global rates of consumption, we are already at least 50% above Earth's sustainable carrying capacity over the medium to long term (50-100+ years).  A major correction to the size of the global economy (and possibly also population) is therefore inevitable sooner or later, and probably sooner (possibly starting in as little as the next 5-10 years, or I'd guess at most 20-30) if the recent rate of acceleration of the severity of these various problems is any indication.  When the resource crisis hits in earnest, and people start to become truly desperate, the streets will fill with angry crowds, and governments all over the world will start dropping like flies, or else will take extreme measures to hold onto power.  The so-called "Arab spring" in the Mideast and Northern Africa is a sneak preview, due in part to the fact that these countries have been affected more than most by the inflation of food prices on the world market.

What happens when a major revolution and/or government crackdown begins in the US?  Even if we will have managed to avoid default and continue propping up our currency until then, the government eventually can be expected to start taking extreme measures to redirect resource allocation in a way that will help it stay in power (i.e. towards food assistance to starving people, and/or to crowd control by force).  High taxes and/or high inflation will siphon vast amounts of money away from the nation's wealthy to pay for such programs.  As the value of the dollar falls, or as assets are seized, most individuals' personal life savings (those who have managed to avoid bankruptcy) will get largely wiped out.

Many people will naturally try to protect their assets by converting their wealth to portable forms of "hard currency," such as gold.  But this is doomed to backfire.  During the last major economic crisis, the Great Depression, the US government (in 1933) simply seized all the gold being held by private individuals, and used it to replenish the government's reserves, which were (at that time) backing the dollar on international markets.  It remained illegal for individual Americans to own any gold (apart from a few exceptions such as jewelry or dental fillings) until 1974.  You might have a plan to flee the US if it looked like this was going to happen again, but the same thing could in principle occur in any country - or your gold could just be seized at the border.

As a result of these troubling risks, one of the reasons that many people find Bitcoin to be particularly attractive is that it provides a way that personal wealth can theoretically be totally protected from hyperinflation or seizure by any central authority.  Let's discuss how this works.

First, protection from hyperinflation:  Unlike existing fiat currencies, the base supply of Bitcoins (by the very nature of its peer-to-peer protocol) can never be inflated beyond a predetermined slow and decelerating rate of growth, which approaches a limit of 21 million BTC gradually over the coming decades.  New Bitcoins in excess of this predetermined growth schedule simply cannot be created.  Therefore, Bitcoin could serve as the most stable, reliable base currency for a global monetary reserve system that the world has ever seen - better than gold even, since the gold supply could increase unpredictably if large new deposits were discovered, and plus, gold is heavy and is difficult to transport and to appraise (especially from a distance).  In contrast, Bitcoins can be instantly transmitted over the Internet, and can be easily verified by anyone, anywhere.

Second, protection from seizure:  Perhaps the most secure way to protect one's Bitcoins is to stash your digital "wallet" (which contains your Bitcoin ownership credentials) into a file that is hidden undetectably within an encrypted volume, a file that only you know the passphrase to unlock.  This can be done using any of a variety of free open-source encryption tools, such as TrueCrypt.  (Even if you were tortured for your password, you could plausibly deny that the hidden file that contains the majority of your coins even exists.)

After creating this encrypted digital "safe" to hold your wallet, you can then, to prevent your Bitcoins from being lost or kept away from you, upload numerous backup copies of your safe into the "cloud," i.e., into various online backup services and/or anonymous file-sharing networks.  You can even put a few copies of your safe onto USB thumb drives that you bury in locations in the woods that only you know about.  No matter how chaotic things may get in the world, as long as you can find your way to some copy of your digital safe, and you still remember your passphrase, and the Bitcoin network itself is still operating, then you can access and spend your coins.

Even if the Internet itself is someday shut off by a government "kill switch" or a power outage, you could have a grassroots person-to-person network of Bitcoin users who personally meet face-to-face and exchange thumb drives containing transaction data, and in this way, the free flow of information that powers the Bitcoin peer-to-peer network could continue to take place - even in the total absence of the Internet!

In contrast, no other investment is as safe.  Land can be seized by governments.  Even if you stock up on weapons and ammo to protect your property, those too can be defeated and taken away by a superior force.  But, no amount of force can make you reveal the passphrase to your largest secret personal stash of Bitcoins, tucked away in a hidden, encrypted, backed-up wallet that only you are aware that you even own.

Therefore, as a result of the above points, I think there is a very compelling argument to be made that Bitcoin is in fact the safest place to store wealth long-term, and it holds the additional promise that as more and more people come to understand and appreciate this fact, and the popularity of Bitcoin grows, Bitcoins purchased today will continue to appreciate in value.  This is why I would advise everyone (especially those who have a lot to lose) to invest a significant fraction of their total liquid wealth in the form of raw Bitcoins, or at least in Bitcoin-denominated instruments.

Thursday, June 30, 2011

We the Processors

In a recent, insightful blog post, Paul Bohm points out,
"Bitcoin isn't just a currency but an elegant universal solution to the Byzantine Generals' Problem, one of the core problems of reaching consensus in Distributed Systems."
He mentions several applications of this problem, including domain name registration, the problem solved by Namecoin.

But, after reading his article, it occurred to me that there is another, arguably even more important application of the insight that Bitcoin's underlying protocol can be used to solve a wide range of distributed consensus problems:  Specifically, the problem of secure, trustable electronic voting in public elections.

Most secret-ballot voting systems are plagued by the problem that the voter always has to trust somebody to do their job right:  The people who count the paper ballots, the designer of the touch-screen voting machine or optical-scan ballot counter, election officials who aggregate results from different districts, or the website operator in the case of online voting, and even the other voters themselves (not to vote multiple times).  It is devilishly hard to devise a voting system in which the voter doesn't have to trust any authorities, and in which the ballots remain anonymous, and no one gets more than their fair share of votes.

However, if we are willing to redefine "fair share" to mean, everyone gets to vote with a weight that is proportional to their hashing power, than a Bitcoin-based protocol can solve the electronic voting problem.

The idea is simply this:

  1. The Bitcoin protocol is extended to allow blocks to be "tagged" with a payload of auxilliary fields (in addition to the usual Merkle tree, block ID, etc.).
  2. When an election is scheduled, it is declared in advance that the winner will be decided based on which candidate's name appears most often in the tags in the block chain, within a certain predefined range of (future) block numbers.
  3. Each miner, as it is hashing block candidates, optionally extends the block being hashed with the name of their preferred candidate.  When a nonce is found that gets a winning hash, that block is submitted to the network and gets added to the longest chain.
  4. Also, a mining pool can act similarly to a political party, and pre-declare which candidates it is supporting in which races, and include their names in the blocks for all of the get_work data that the pool distributes to its miners.  The miners can then choose to mine for whichever pool's stated slate of candidates best reflects their own preferences.  (Or, of course, they can also still mine random nonce subspaces on their own, and hope to get lucky.)
When the election is over, and the chain length has moved safely beyond the end of the voting period, everyone simply counts up the names on the consensus longest chain, and sees who won each race (you could hold elections for several offices and/or ballot issues simultaneously).

Obviously, since the search process is probabilistic, the result will not reflect precisely the wishes of the electorate, but, within the bounds set by the law of large numbers, it will with high probability be very close to the ideal distribution of votes, as long as a large enough range of blocks is included within the "voting period."

Of course, this system is not a "one person, one vote" democracy, but rather a sort of meritocracy, based on the notion that the amount of computing power one commands is a measure of the strength of one's decision-making ability.  Instead of working for "we, the people," such a system would work for "we, the processors."

Such a shift in political power obviously would entail certain risks, but, at least in this framework the voting system itself can be trusted - unlike the situation in our present system, in which the average person never even knows for sure whether the election system counts votes honestly, so has diminished incentive to participate.  With "Votecoin" (a possible name for this new system), every well-informed person knows that the system works fairly (and they can inspect the source code for their miner, if they wish), and so has a strong incentive to working hard to build up their hashing power so as to best support their favored candidate.

I believe that people's confidence in the underlying integrity of the voting system is key for producing strong participation in elections, and helps to create a polity that is much more actively involved in their political system, and more invested in its success.  Therefore, I think that to make such an advance in election technology would not weaken the principles of democracy, but rather would enormously increase its effectiveness.

Oh, and by the way - since anyone in the world can participate in the Bitcoin network, this approach to holding elections implies governance with global jurisdiction.  Since we don't yet have one world government of physical nations, this could be, for now, just the virtual "government" of the Bitcoin City itself - the worldwide community of Bitcoin users.  Some of us like to say that we don't need a government, but someday, we may in fact need to make important consensus decisions as a community - such as (someday) planning an upgrade to an improved, more secure protocol - which will require having a reliable method to poll the entire community for its views.

In any event, anyone who would like to help the author develop experimental prototype "Votecoin" software is invited to email me at

Tuesday, June 28, 2011

PayPal, eBay, and Bitcoin Proof-of-Shipment

Certain e-commerce websites, such as PayPal and eBay, have prohibited the sale of Bitcoins through their services.

I suspect that the real reason for this is that Bitcoin is a potential competitor to PayPal, and eBay has a strong partnership with PayPal.

However, PayPal and eBay have given various lame excuses for their policy, such as their claim that a Bitcoin seller cannot provide a "proof of shipment" for the Bitcoins so there is no way to resolve a payment dispute.

This claim is manifestly false, as anyone with the merest understanding of how public-key cryptography and Bitcoin work should immediately be able to see.  I will explain.

The whole basis of Bitcoin is a public record of all Bitcoin transfers, which is shared with (and verifiable by) every node in the Bitcoin network.

Each Bitcoin transaction (transfer order) contained in this public record is digitally signed by the sender of the Bitcoins, using the sender's public-private key pair.  The sender's public key is openly published as part of the transaction details, and cannot be repudiated by any party.  Only the sender knows the matching private key, which is required to produce the digital signature.  This is how the Bitcoin network knows that the transaction was properly authorized by the original holder of the coins.

Each Bitcoin holder keeps, on their computer, an electronic "wallet" file that only they can access, which contains the entire set of private keys that they have used to sign their transaction orders.  These private keys can be easily extracted by the user from their wallet using freely-available tools (e.g., see here), and then used to digitally sign other documents, whenever the holder of those keys desires.

Therefore, it is quite easy for me (and only me) to prove that I was the one who initiated a particular transfer of a given number of Bitcoins to a given recipient address.

For example, I could do the following:

  • Step 1: Simply tape my driver's license to a piece of paper, and write below it something like, "I, Michael Frank, did authorize the transfer of so-and-so many Bitcoins from my address with public key so-and-so to address such-and-such (the receiver's address) on date blah-blah.  These transaction details (except my name) are publicly recorded in the transaction with ID #this-and-that which may be viewed by anyone in the public block chain."  I could even have this statement notarized.  (But the only really important part of it is my name, and the transaction ID.)
  • Step 2: Scan said document into a PDF file, and then digitally sign this document using the same private key that was used to order the original transfer, which could be accomplished using any number of free open-source public-key cryptography tools, such as PGP.
  • Step 3: Present the resulting digitally-signed document to whatever party requires a "proof of shipment."  All they have to do, to verify my proof, is run the same tool on the document, checking the digital signature against my public key (the one listed in the public transaction details).  They then have absolute proof that the person producing that document (namely me) is the same person who initiated the original transfer, because nobody else has access to my private key.  

In other words, Bitcoin transactions are only optionally anonymous.  Each and every Bitcoin transaction can be irrefutably tied to the sender's real-world identity, if the sender wishes to facilitate such a reveal, and he didn't lose the digital wallet in which those coins used to be stored.

The fact that eBay and PayPal apparently don't understand these simple facts about Bitcoin and the fundamental capabilities of public-key cryptography indicates that either:

(1) They are incompetent at the most basic lessons that they should have learned in Computer Security 101, OR...

(2) They know perfectly well that a Bitcoin "proof of shipment" is quite straightforward, and actually they are just blowing smoke in everyone's eyes, because PayPal wants to crush Bitcoin, since (if it were widely adopted) it would mean that no one need be forced to suffer PayPal's fees any more, if their service is anything less than stellar.

I personally suspect it is the latter, but I guess neither one of these possibilities would surprise me at this point.

Listen up, PayPal and eBay:  You need to quit fighting Bitcoin, or else you will make your customers increasingly hate you, for failing to provide compatibility with the world's first and only secure peer-to-peer cryptocurrency, which is a revolutionary, democratic new tool for electronic commerce, one that everyone should be free to use whenever they desire.

What I suggest to you is:  Don't be evil.  Join the good guys.  Embrace Bitcoin instead.  Provide full compatibility with it, and deploy tools which you and your customers can use to allow you to easily verify the authenticity of Bitcoin transactions, in case a dispute arises.  (You could even pass the buyer's Bitcoin receiving address through your site, so the buyer cannot deny what address he provided.) 

If you do these things, your most savvy, high-powered customers will love you for it.

Monday, June 27, 2011

Bitcoin, Banking, and the New Gold Standard

Our future, totally hyperinflation-proof milli-bitcoin note.
Many Bitcoin enthusiasts and opponents alike seem to think that, since it permits secure electronic transfers to take place over the Internet with no middleman, Bitcoin somehow will make traditional banking obsolete.  This is a misapprehension.

Banks will still have a significant role to play in the future Bitcoin-based economy.  Sure, perhaps they will have greatly reduced revenue in one particular area:  Namely, fees from long-distance monetary transactions (wire transfers, etc.), but to some degree they have lost their dominance of that market already, due to Internet-based services such as Paypal and Liberty Reserve.  But, banks should still be able to make enough profit in other areas to run a healthy business.

Here are some important value-added services that banks, in a Bitcoin-based economy, can still provide.  These are services that they already provide closely analogous forms of today:

  1. Secure storage of Bitcoin reserves in a "vault" of heavily-encrypted wallets protected by multiple layers of physical and electronic security.

  2. Interest-earning demand deposit accounts.  (Where the interest paid out is earned by the bank's making loans based on those deposits.)

  3. Loans may by made crediting the debtor with a Bitcoin-denominated loan account, from which physical bank notes denominated in Bitcoins may be withdrawn, and transferred to other parties to make payments (just like with paper money today).  In a system free of central banks, each bank could set their own reserve requirement, and the market could decide which banks offer the best combination of interest rate (on deposit accounts), reserve requirements, and trustability.  Alternatively, nations that choose to maintain a central banking system could have a uniform system of paper money (like Federal Reserve Notes), except denominated in Bitcoins and backed by Bitcoins, so that the base money supply can never be inflated.

  4. Bitcoin-denominated checking accounts, with attached ATM/debit cards - these could work just like today's cards, except with transactions denominated in Bitcoins instead of dollars, and could be used to pay merchants who already have the infrastructure needed to accept such forms of payment (printed checks and plastic swipes).  The only difference is that the unit of denomination would be Bitcoins instead of dollars/euros.  Or, even better:  The dollar itself could be redefined to just be a synonym for, say, 0.00001 BTC - this would mean the total base supply of these "new dollars" would then be 2.1 trillion, about the right amount for a major base physical currency, and almost the same as the supply of physical US dollars today.
Thus, there is no reason that the mainstream banking system has to consider Bitcoin to be an enemy.  The only thing that is really fundamentally broken about the present banking system (and that Bitcoin fixes) is that the supply of base currency in dollars is not fixed, making the monetary system vulnerable to hyperinflation in times of crisis.  This cannot happen with Bitcoin, since their base supply is limited to never be more than 21 million.  The total money supply can still be inflated by a limited amount by fractional-reserve banking practices (by creating more nominal value in accounts than exists in base currency), but never by more than a factor of (say) 100x, if the reserve requirement is limited to no less than (say) 1%.

So, if everyone who holds physical dollars now (coins and bills) simply exchanges those base dollars for Bitcoins (at the fair equilibrium exchange rate, which will be somewhere in the neighborhood of $100,000 per Bitcoin), then everyone will end up with a proportional number of Bitcoins to the number of physical dollars they are holding now, and if the dollar is then just redefined to be 0.00001 BTC, then the entire existing banking system can continue to exist and operate pretty much unmodified, except that the dollar henceforth becomes forever immune to hyperinflation of its base supply, since the base supply of Bitcoins is fixed by the very nature of its peer-to-peer protocol.

In other words, the US government should simply declare that US dollar-valued bills (Federal Reserve Notes) are henceforth an inviolable promise, by the Fed, to pay the bearer 0.00001 BTC for each dollar's worth of nominal value.  This puts a "floor" under the value of the dollar, and prevents it from ever falling below that level (i.e., prevents the base supply of dollar-denominated bills from rising above $2.1 trillion).

Of course, choosing the US government and dollar for this example was merely arbitrary; any other country could do the same with its own sovereign currency, perhaps even enshrining the Bitcoin-backing of their currency in their constitution, and thereby forever stabilize their currency against any possible threat of hyperinflation.  Think about what this would do for confidence in that country's money!

Naturally, the first time some country (or set of countries) does this, the value of the Bitcoin will quickly rise to the equilibrium level determined by the target base money supply of the given currenc(y/ies), since whenever note-bearers demand an exchange for their central bank notes in base Bitcoins, the bank in question will have to buy enough Bitcoins to actually cover the note.

It will thus be a situation very similar to the old international gold standard; however, since Bitcoins can be much more easily transferred between parties, using them will make the execution of international settlements much more fluid than it was in the old gold-standard days.  Also, a country can easily prove how many Bitcoins it controls by making a transfer (since the Bitcoin transaction ledger is public).  In contrast, letting everyone weigh all the gold in Fort Knox would be far more problematic.

In other words, what I'm proposing here is nothing less than a new international standard as to how all of the world's liquid currencies should be fundamentally backed:  Not by gold, but by Bitcoins.  One could back Bitcoins in turn by gold, buy why would you?  Really, they are even safer than gold.  Unlimited amounts of new gold might someday be synthesized in advanced nuclear reactors, or produced by mining it from asteroids, but unlimited numbers of Bitcoins never can be produced - this is guaranteed by the system's design.  And, if and when any nation becomes nervous about the value of another nation's currency, they can settle this by demanding payment of the other nation's notes, in the form of the equivalent amount of Bitcoins, which can be easily transmitted over the network, no muss, no fuss.

In conclusion, rather than fighting Bitcoins, the world's banks and governments should come together and embrace them fully, as the proper universal new basis of all money, and thereby place the entire world economy on a much more secure, stable, and streamlined foundation than it has ever had before.

Mt. Gox Back Up, Market Stablizing

Bitcoin's largest currency exchange, Mt. Gox ( resumed trading yesterday (Sunday, June 27, 2011) after having been offline for a week due to a hacker who broke in to some accounts and (temporarily) crashed the market.

The post-hack transactions having been rolled back, trading resumed at a price of US$17.51/BTC, and quickly plunged to about $14 before rebounding to as high as $18 and then settling down at a price of around $17 per Bitcoin.

<begin opinion>Let this be a lesson to all those who said the Mt. Gox hack spelled the "end of Bitcoin" and that the price would crash and never recover.  No permanent harm was done by the attack, and the Bitcoin community will only be stronger and more secure for having been tested with these shenanigans.</end opinion>

Sunday, June 26, 2011

Why you can't afford NOT to invest in Bitcoins.

Many astute observers have noted that our global civilization appears to be headed towards a major resource crisis, as peak oil, peak freshwater, peak arable land and other imminent limits combine with declining mineral resources and ocean diversity, and an increasingly chaotic climate, to mean that it will soon become difficult even to feed the world's population, let alone prevent the economy from collapsing.

As a result, increasingly many countries will become filled with hungry, angry people demanding that their government provide for them or be replaced - as is already happening today in many Arab countries. Therefore, as governments become increasingly desperate to hold onto power by raising revenue to provide demanded social services, many of them will begin to either (1) tax the wealthy and/or corporations at high levels (as happened in WW2), or (2) simply print large amounts of money, which effectively taxes the wealthy and redistributes wealth downwards, by devaluing the existing dollars which are mostly being held by wealthy individuals and corporations.

Therefore, I believe there will soon be a major flight of the world's liquid wealth away from sovereign currencies into other classes of assets. However, most other assets are not nearly as liquid as currencies. Gold is heavy and difficult to transport, or else if you just own it on paper, you have to trust some third party to hold your gold in your name (while charging you high transaction fees). And stocks have the added problem that if a company has a lot of its holdings in cash or currency-denominated derivatives, the company's value may fall along with the currency.

The one exception to this set of problems is Bitcoin, the world's only anonymous crypto-currency, whose base supply is predetermined by a peer-to-peer protocol, and can never be hyperinflated by central banks or governments under political pressure. It can be easily transmitted over the Internet with negligible transaction costs. And it can be made difficult for governments to trace through the use of online "laundromats."

Thus, I believe that, relatively soon, Bitcoins will in fact come to dominate the global economy as its preferred medium of exchange and liquid store of short-term value, while existing sovereign currencies collapse as the smart money flees from them, because the governments and central banks that are clinging desperately to those currencies will cause them to be devalued, under political pressure, via destabilizing monetary policy decisions.

We can estimate what the equilibrium value of Bitcoins will be once the transition to them is complete. It has been estimated that the total base supply of the world's sovereign currencies (physical coins and bills) is in the neighborhood of $4.4 trillion. (For our present purposes, we ignore the secondary money supply in bank accounts and other currency-denominated instruments, since that same financial infrastructure could be recreated on top of Bitcoin.) The analogous base supply of Bitcoins is only 6.6 million today, and is limited to grow to no more than 21 million over the course of a decade or so. Therefore, each Bitcoin will eventually be worth over $200,000 in today's dollars. (This is not a problem for the usability of the currency, since it is easy to exchange millionths of a Bitcoin.) In the last couple of weeks, Bitcoins have been trading for $10-20, so in other words, Bitcoins should eventually appreciate by around 100,000x or so.

How long will this take? Historically, for the last several fiscal quarters, Bitcoins' value have been increasing about 10x per quarter, so the transition of the world economy to Bitcoins may take only a year and a half, especially if the economy continues to deteriorate in the meantime. Even if Bitcoin's growth slows and it takes somewhat longer, the fact that multiple resource crises are imminent still suggests that it will not take too many years.

And meanwhile, as this is happening, the value of traditional sovereign currencies will collapse at an accelerating pace. Therefore, if you keep a lot of your assets in liquid form, I think that you simply cannot afford not to move a significant fraction of these liquid assets into Bitcoins or Bitcoin-denominated holdings. Otherwise, you may be left holding the bag when the resource crisis hits and governments start calling in their sovereign wealth to keep their populations from revolting.

Sure, Bitcoin has had its share of growing pains in recent weeks, what with a handful of high-profile thefts, a major exchange getting hacked, and senators complaining about the use of Bitcoin to buy illicit goods. However, I believe that these are just minor bumps in the road, as far as the long-term transition to Bitcoins is concerned. Theft is easy to prevent by simply encrypting one's electronic wallet with free software like Truecrypt (and a long passphrase) whenever one is not actively spending one's coins. Encrypted wallets can be backed up as many times as desired to prevent loss. And when exchanges and other Bitcoin-related sites are hacked, they will just come back stronger and more secure and resilient.

In conclusion, the fundamental rationale behind the recent Bitcoin "gold rush" is sound, and its future is bright. I believe it can only continue to grow, and that the banks and governments will be unable to stop it.  It is everyone's best hedge against a chaotic redistribution of wealth, which will surely happen as soon as the coming global resource crisis hits in earnest.