Mises Institute: Bitcoin and the Theory of Money

It has been a while since we last ran a bitcoin article, but we certainly haven’t forgotten about it. With the economic woes gripping the world, the precarious place of the US dollar, and a lot of uncertainty about everything, gold has risen 12.8% year to date and thoughts turn to alternative money. Here’s Robert Murphy at Mises Institute with Bitcoin and the Theory of Money.

In a modern primer on money mechanics, it is necessary to provide at least an introduction to Bitcoin.1 Consequently, in this final chapter we will first give a basic explanation of what Bitcoin is and how it works. Then we will place Bitcoin in the framework of money that we developed in chapter 2, seeking to answer the fundamental question: Is Bitcoin money?” Finally, we will relate Bitcoin to an important component in the Austrian school’s discussion of money, namely Ludwig von Mises’s “regression theorem.”

Explaining Bitcoin with an Analogy2

“Bitcoin” encompasses two related but distinct concepts. First, individual bitcoins (lowercase b) are units of (fiat)3 digital currency. Second, the Bitcoin protocol (uppercase B) governs the decentralized network through which thousands of computers across the globe maintain a “public ledger”—known as the blockchain—that keeps a fully transparent record of every authenticated transfer of bitcoins from the moment the system became operational in early 2009. In short, Bitcoin encompasses both (1) an unbacked digital currency and (2) a decentralized online payment system.

Bitcoin

According to its official website: “Bitcoin uses peer-to-peer technology to operate with no central authority; managing transactions and the issuing of bitcoins is carried out collectively by the network.”4 Anyone who wants to participate can download the Bitcoin software to his or her computer and become part of the network, engaging in “mining” operations and helping to verify the history of transactions.

To fully understand how Bitcoin operates, one needs to learn the subtleties of public-key cryptography, which we briefly discuss in a later section. For now, we focus instead on an analogy that captures the economic essence of Bitcoin, while avoiding the need for new terminology.

Imagine a community where the money is based on the integers running from 1, 2, 3, … up through 21,000,000. At any given time, one person “owns” the number 8, while somebody else “owns” the number 349, and so on.

In this setting, suppose Bill wants to buy a car from Sally, and the price sticker on the car reads “Two numbers.” Bill happens to be in possession of the numbers 3 and 12. So Bill gives the two numbers to Sally, and Sally gives Bill the car. The community recognizes two facts: first, the title to the car has been transferred from Sally to Bill, and second, Sally is now the owner of the numbers 3 and 12.

Further suppose that in this fictitious community an industry of thousands of accountants maintains the record of ownership of the 21 million integers. Each accountant keeps an enormous ledger in an Excel file. The columns run across the top, from 1 to 21 million, while the rows record every transfer of a particular number. For example, when Bill bought the car from Sally, the accountants who were within earshot of the deal entered into their respective Excel files “Now in possession of Sally” in the next available row, in the columns for 3 and 12. In these ledgers, if we looked one row above, we would see “Now in the possession of Bill” for these two numbers, because Bill owned these two numbers before he transferred them to Sally.

Bitcoin Car Sale

Besides documenting any transactions that happen to be within earshot, the accountants also periodically check their own ledgers against those of their neighbors. If an accountant ever discovers that his neighbors have recorded transactions for other numbers (i.e., for deals for which the accountant in question was not within earshot), then the accountant fills in those missing row entries in the columns for those numbers. Therefore, at any given time, there are thousands of accountants, each of whom has a virtually complete history of all transactions involving all 21 million numbers…

Click here to read the entire article at Mises Institute.

Liberty Blitzkrieg: The Times for Which Bitcoin Was Made

Michael Krieger of Liberty Blitzkrieg has an article, These Are the Times Bitcoin Was Made For, in which he discusses Bitcoin and its role in evading the techno-censorship of the 21st century.

…There are two crucial attack vectors being targeted when it comes to punishing the transgressions of American thought criminals; money and communications, and we need to understand that Alex Jones is our cultural guinea pig. The tech giants started by kneecapping his voice by simultaneously deplatforming his presence from many of today’s dominant communications platforms. Now PayPal’s moved in to make payments more difficult, thus threatening his ability to earn money. You don’t have to like anything Alex Jones does to see how dangerous this is. What’s being done to him can and will be to done to others deemed undesirable by Silicon Valley oligarchs should they get popular enough. What’s emerging is a playbook on how to exert pressure and encourage self-censorship in the digital age and you better pay attention.

Money and communication are fundamental to our experience as humans here on earth in the early 21st century. As such, these things must be as neutral and permissionless as possible. The moment you have human beings in charge of communication and money systems you introduce bias and corruption. This is particularly dangerous in our current stage of human development considering the extent to which power and wealth have become concentrated in so few hands globally. You can bet the farm this small group of people will do whatever it takes to preserve the gravy train that is our current paradigm, including using tools of communication and money to prevent those who want change from influencing the conversation. This isn’t theoretical, it’s happening right now and will surely escalate from here.

Which is precisely why the emergence and continued success of Bitcoin is so fundamentally important to understanding the best way to challenge the forces attempting to bully us into an acceptance of their worldview. Unlike PayPal, Bitcoin is permissionless. There’s no central party, management team or CEO who can decide to stop you from using Bitcoin, something completely distinct from the likes of Facebook, Twitter, YouTube, PayPal, etc. As such, we can clearly see the fundamental flaw of these platforms by comparison. Centralized money and communications platforms are ultimately not conducive to a free society, which we can clearly see now, especially with the recent suspension of James Woods from Twitter for the most trivial of reasons…

If we’re going to challenge the current way of doing things and create a more free and decentralized world, we need to create and use tools that reflect and promote those values. Bitcoin is an example in the realm of money, but we’re still sorely lacking in the realm of communications. If a government or some massive corporation can shut down conversation simply because they don’t like what’s being said, we simply are not free humans.

If we want to be free, we need to use tools that reflect and protect such values. We aren’t there yet, but the path forward is being built. These are the times Bitcoin was made for.

Related:

Fast Company: Tim Berners-Lee tells up his radical new plan to upend the World Wide Web. Berners-Lee is a “father of the web,” having invented the hypertext transfer protocol (http). He’s been working on a project to decentralize the web and put data ownership back in people’s own hands rather than in the control of internet mega-corporations.

Make Use Of: I2P vs Tor vs VPN A simple explanation of three tools which can vastly increase your internet security and privacy.

Finances Online: tope 10 Alternatives to PayPal Payments Pro

Gab – Free speech alternative to Twitter.

Ben Yu: Cryptocurrency 101

Over at Medium.com, Ben Yu has written a cryptocurrency primer called Cryptocurrency 101. It is a long read, but it has much good history and other background information to enhance your understanding of the reason for and value of cryptocurrencies.

Bitcoin was designed, essentially, as a better ‘digital gold’. It incorporates all of the best elements of gold — its inherent scarcity and decentralized nature — and then solves all the shortcomings of gold, in allowing it to be globally transactable in precise denominations extremely quickly.

How does it do this? In short, by emulating gold’s production digitally. Gold is physically mined out of the ground. Bitcoin is also ‘mined’, but digitally. The production of bitcoin is controlled by code that dictates you must find a specific answer to a given problem in order to unlock new bitcoins.

In technical terms, bitcoin utilizes the same proof-of-work system that Hashcash devised in 1997. This system dictates that one must find an input that when hashed, creates an output with a specific number of preceding zeros, among a few other specific requirements.

This is where the ‘crypto’, incidentally, in cryptocurrency comes from. Cryptographic hash functions are fundamentally necessary for the functioning of bitcoin and other cryptocurrencies, as they are one-way functions. One-way functions work such that it is easy to calculate an output given an input, but near impossible to calculate the original input given the output. Hence, cryptographic one-way hash functions enable bitcoin’s proof of work system, as it ensures that it is nigh-impossible for someone to just see the output required to unlock new bitcoins, and calculate in reverse the input that created that output.

Read the entire article by clicking here

Federal Bill Introduced Against Cash and Cryptocurrencies

Senate bill 1241 was introduced last month entitled “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” Simon Black of Sovereignman.com writes a summary.

Recently a new bill was introduced on the floor of the US Senate entitled, pleasantly,

“Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.”

You can probably already guess its contents.

Cash is evil.

Bitcoin is evil.

Now they’ve gone so far to include prepaid mobile phones, retail gift vouchers, or even electronic coupons. Evil, evil, and evil.

These people are certifiably insane.

Among the bill’s sweeping provisions, the government aims to greatly extend its authority to seize your assets through “Civil Asset Forfeiture”.

Civil Asset Forfeiture rules allow the government to take whatever they want from you, without a trial or any due process.

This new bill adds a laundry list of offenses for which they can legally seize your assets… all of which pertain to money laundering and other financial crimes.

Here’s the thing, though: they’ve also vastly expanded on the definition of such ‘financial crimes’, including failure to fill out a form if you happen to be transporting more than $10,000 worth of ‘monetary instruments’.

Have too much cash? You’d better tell the government.

If not, they’re authorizing themselves in this bill to seize not just the money you didn’t report, but ALL of your assets and bank accounts.

They even go so far as to specifically name “safety deposit boxes” among the various assets that they can seize if you don’t fill out the form…

Click here to continue reading at sovereignman.com