Tag: inflation

The European Union (EU) Parliament, on the advice of Pablo Zalba, will vote on Tuesday, March 17, on whether credit card transaction fees should be arbitrarily capped at 0.2 %. The legislation, which

Would switching from the euro to bitcoin be a bad move for Greece? Techcrunch recently posed this question, and while the writer makes some valid arguments, it’s quite possible that

The post Is Bitcoin Bad for Greece? appeared first on NEWSBTC.

Between the efforts of Jason King and Andreas Antonopoulos, Coins in the Kingdom might secure it’s place as the most charitable Bitcoin conference of the year. At the end of the first day of the conference, Andreas Antonopoulos was approached by Chris DeRose for a signature on a unique piece of numismatic history: a Ten Trillion Dollar Zimbabwe Reserve Note.

After the bill signing, Andreas was asked what charity he would most like to see a donation be given to. To this, Andreas responded “RAINN.” A few weeks thereafter, a charity auction commenced and is currently live at cryptothrift.com.

The auction is available to all members of the general public, and at the time of writing is currently selling at an approximate price of 500mBTC (half a Bitcoin). The details of the event, are clearly denoted in the item description alongside a note that all proceeds from the auction (and any funds sent to the custodian address) will be converted to fiat and donated to RAINN. Though dogecoiners are typically the ones credited for new and wacky twists on the charity scene, Bitcoiners aren’t without their own sense of creativity and civic duty.

In the bill being auctioned, alongside his signature, Andreas added the comment “Inflation Matters” to the bill. Certainly this quote neatly sums up the story of Zimbabwe’s ill-fated national currency. The story of the ten trillion dollar Zimbawe note, though incredulous, is nonetheless true. In the first decade of our millenium, the Republic of Zimbabwe was experiencing inflation at rates unparalleled by any other economy in recent years. During this period, inflation rose sharply between the early years of the 2000’s, up until the printing of the ten trillion dollar note, the last denomination that was printed, in April of 2009. Despite making inflation illegal in 2007 (yes, politicians really signed this decree into law), the government was unable to curb the runaway devaluation of its currency, and informally switched to using the US Dollar as its primary currency in 2009. As of today, an ‘unsigned’ Ten Trillion dollar bill is worth nothing past its novelty factor, and cannot be converted into any other currency.

As for RAINN, “Chelsea Bowers,” an official spokesperson of the organization suggested we re-iterate the organizations mission statement in our write-up of the auction. Their noble mission is as follows:

RAINN (Rape, Abuse & Incest National Network) is the nation’s largest anti-sexual violence organization and was named one of “America’s 100 Best Charities” by Worth magazine. RAINN created and operates the National Sexual Assault Hotline (800.656.HOPE and online.rainn.org) in partnership with more than 1,100 local rape crisis centers across the country and operates the DoD Safe Helpline for the Department of Defense. RAINN also carries out programs to prevent sexual violence, help victims and ensure that rapists are brought to justice.

When asked whether the organization intends to receive the funds in Bitcoin or fiat, Chelsea replied “At this time, we don’t have a [way] to accept Bitcoin (although it sounds like it’s something we should implement!).” Let’s hope our charity efforts leave a positive impression on RAINN, and shows the world that Bitcoiners are commited to leaving a positive impact on the world around them.

For more information on the auction, click here for the item listing.

Permalink: http://bitcoinmagazine.com/17757/andreas-auction-of-ten-trillion-dollars-for-charity/

You’ve probably heard it many times if you frequently spread the good word about crypto. “Isn’t Bitcoin volatile? What if the price crashes?” By now, many POS systems offer free fiat conversion, alleviating some concern, but until the volatility of cryptocurrencies is addressed, most people will be unwilling to hold any. We need to find a way to fight the volatility that is inherent in Bitcoin.

This doesn’t necessarily mean Bitcoin has to change; many people prefer to use a deflationary currency, especially those who like to save. Despite the skepticism of many altcoin critics, a currency can be better suited for some applications than others. Financial privacy, for example, is great for political activists, but more problematic when it comes to political campaign finance. We need a stable cryptocurrency designed for use in commerce; unless you’re living paycheck to paycheck, this would be held as only a fraction of your wealth, the rest reserved as other coins like bitcoins.

Backing Cryptocurrency

Some of these methods require a little trust. Using smart contracts on blockchain 2.0 platforms, developers can now build cryptocurrencies backed by items of “real” value. The trusted third party promises to redeem cryptocoins for those items at an ongoing fixed rate; assets like .bit domain names would be simple to do this with, while backing with things like commodities, real estate or other property requires interaction with third parties like the traditional legal system.

Rather than fluctuating wildly with the free market, the values of of these cryptocoins are proportional to that of their underlying assets. You just have to pick the right one: commodities like oil which fluctuate in value throughout the year would not make for a stable currency. GENERcoin is working on a cryptocurrency backed by biofuel pellets–10,000 BTUs of energy-worth per coin. Its value would be related to the value of that much electricity, minus the cost of the energy generation process.

People will surely think of more stable assets in the future. For now, the dollar may still be one of the most stable options. Interestingly enough, cryptocurrencies can be backed by dollars, too, an idea proposed by Realcoin (soon to be called Tether). They will keep a publicly-auditable reserve of USD not less than the value of all Realcoins in existence, which the company will exchange for one another at any time.

This is particularly useful for FOREX traders, who previously had to rely on centralized currency exchanges in order to speculate on currency exchange markets; even if the dollar is destined to crash, there’s profit to be made in shorting it, which will be cheaper and more efficient as smart contracts on the blockchain. Realcoin effectively allows you to do that by mimicking the value of a dollar.

Conversely, when Bitcoin experiences periodic sell-offs, you can exit and re-enter the market without any direct interaction with the traditional banking system. Realcoin could also be used transactionally in times of extreme Bitcoin volatility. In the long term, though, Realcoin will go down in value as surely as Bitcoin will go up, and when the dollar inevitably collapses, we’re going to need a new form of stable currency that doesn’t rely on state control.

Basket Case

Before returning to the question of how to automate the authorities in our lives, it’s worth talking a little bit about the idea of basket coins. Essentially, basket coins are the same as value-backed cryptocurrencies, except that they are backed by more than one item. They can be traded as normal on the blockchain via a 2.0 platform; choosing the right combination of items to represent a basket coin can give it interesting properties.

The basic reason critics are skeptical of altcoins is that they fear the dilution of the cryptocurrency market: altcoins currently get most of their capital from previous Bitcoiners, not by converting new people to crypto. This is the unfortunate result of technology advancing faster than mainstream culture, and our common drive to be first at everything. As convenient as it is for branding reasons, however, a new flagship cryptocurrency must emerge.

The only good way to test the dilution theory–and more importantly, avoid the consequences if it’s correct–is a basket currency consisting of all the major cryptocurrencies, tied together via smart contracts on a 2.0 platform. A smart entity known as a DApp would have addresses for all of these, where it holds enough coins to reimburse those wanting to exchange for their basket coins. A basket coin would be worth a number of each cryptocurrency proportional to its total market share, and inversely proportional to its total number of coins–basically, the (weighted) average of every significant cryptocurrency on the market.

This is great for those who want to invest in crypto with less speculation, especially once we include things like equity in decentralized autonomous corporations. However, if cryptocurrency as a whole fluctuates for whatever reason, adoption for use in commerce will still suffer. What we’d need in that case is a coin backed by a perfect, continuously-adjusted combination of deflationary and inflationary cryptocurrencies that evens out to 0% inflation in total.

Even with general cryptocurrency baskets, the DApps will have to operate on fractional basket reserves to a small extent, investing with some of the funds saved for basket coin holders in order to recoup costs like data storage and trade fees. Programming DApps to intentionally invest in less profitable coins to maintain 0% inflation will force them to run on even flimsier fractional reserves, which could lead to the equivalent of a bank run if the conditions were just wrong.

In Math We Trust

All of these complications arise because we cannot find just one currency that can maintain stability without inflation. Without some manipulation of the Bitcoin supply, market forces will always cause it to fluctuate wildly in value. History has shown that humans cannot be trusted to manipulate a money supply responsibly, but maybe using the principles of decentralization and the blockchain, we can engineer a smart currency capable of regulating itself autonomously.

The primary means by which we can do this is by adjusting the mining difficulty or reward. Dollars dilute in value because they can be arbitrarily printed; if a currency is diminishing in value, a logical solution would be to reduce the number of coins generated with each block mined. Conversely, increasing the reward could help limit an unstable surge in value, helping to reduce the momentum and reach of price swings.

A major limitation comes to mind: what if the block reward hits 0, and the coins are still inflating in value? This scheme might work better in a proof-of-stake system, where control of the money supply is relative to how many coins one has on reserve. If the reward hits 0, those minting coins will have to rely on transaction fees, which twice-incentivizes hoarding by giving coins to those who stockpile them while taxing those who conduct transactions.

Like any currency, insufficient market demand could render such a system unstable. If enough people want to sell, the price will have to fall. It might be ideal to program the currency to maintain slight deflation, to make for a safer alternative investment to other cryptocurrencies.

No matter what, it will always be a better alternative to fiat in the bank. The executive power governing the currency would be a non-profit decentralized autonomous organization, and the blockchain will never need to raise money for anything from public education to wars abroad. Programmed correctly, it will simply do its job, quite unlike the central banks we have to deal with today.

What bitcoin means as a real-world technology solution probably depends on where users are specifically located.

Part of this article appears in Issue 20

In his pocket, Joe has an old leather wallet. It contains enough banknotes to buy him a brand new wallet of a better model he saw in a magazine. This buying power is exclusive to him, who alone can use those bills to buy something. Likewise, if he transfers them to another person, then instead of him, only this other person will own their buying power.

However, although Joe’s transferring away his banknotes can always transfer along their control, it could never transfer along their whole property, which is not only his. The bills, as possibly distinct from their purchasing power, do not belong to him alone. For example, he has no right to create or destroy them: they are public. What belongs to either him or whoever else controls any such notes is rather their buying power, which hence is privately owned.

Indeed, by always just privately owning his banknotes, Joe could sell them independently of their purchasing power, which they could not represent. However, selling them in this way would prevent him at least temporarily from using the same bills to buy anything. Then, by recognizing their lost purchasing power as a monetary value, for keeping which they must remain its representations, one can conclude:

1. All monetary value must be private.
2. All its representations must be public, or unsellable.

Still, if not Joe, then who else can sell, buy, create, or destroy his or any equivalent banknotes? This question should be negligible if what he owns is their monetary value rather than the bills themselves. However, since the purchasing power of each bill can change once people sell, buy, create, or destroy other such bills, the same question becomes critical. Indeed, part of its answer is that now commercial banks create most of the money supply by selling it, in a process called fractional-reserve banking.

Commercial Banking

According to the Federal Reserve Bank of Chicago,¹ this is how fractional-reserve banking originated:

Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money.

Bankers also needed, however—and still need—to keep, at any given time, enough money to provide for expected withdrawals: “Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.”

Hence the name “fractional-reserve banking”: commercial banks must hold a fraction of all deposit money as reserves—which legally (since 1971) need no longer be “metallic money” but only a public debt—to meet withdrawal expectations: “Under current regulations, the reserve requirement against most transaction accounts is 10 percent.”

In a fractional-reserve banking system, on which most of today’s international economy relies, commercial banks create money by loaning it, hence as a private debt.

Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could “spend” by writing checks, thereby “printing” their own money.

For example, once a commercial bank receives a new deposit of $10,000.00, 10% of this new deposit becomes the bank’s reserves for loaning up to $9,000.00 (the 90% in excess of reserves), with interest yet without withdrawing the loaned money from the source account. Likewise, if that maximum loan of $9,000.00 does occur and the borrower deposits it into another account, whether in the same bank or not, then again 10% of it becomes the latter bank’s reserves for loaning now up to $8,100.00 (the 90% now in excess reserves). As always, the bank charges interest on the loaned money despite not withdrawing it from the source account. This process could proceed indefinitely, adding $90,000.00 to the money supply, valuable only as their borrowers’ resulting debt: after countless loans of recursive 90% fractions from the original deposit of $10,000.00, that same deposit would have eventually become the 10% reserves for itself as a total of $100,000.00.²

Thus through stage after stage of expansion, “money” can grow to a total of 10 times the new reserves supplied to the banking system, as the new deposits created by loans at each stage are added to those created at all earlier stages and those supplied by the initial reserve-creating action.

Yet how can credit alone create new money? How can a debt retroactively create its owed money? Something else must be happening here, in addition to mere loans. What is it? What else happens in the whole process of commercial banking? First, there is a deposit. Then, there is a loan of up to a fraction (of 90%) of this deposit, at interest yet which the bank never withdraws from the source account. Finally, the borrower can credit that loan to another account, in the same or any other bank. Suddenly, the trillion-dollar question emerges: are these two accounts sharing the same value?

• Regarding deposit money the answer is yes: the loan can still belong to the balance of the source account, consequently being that same deposit money.
• Regarding account balances the answer is no: the loan can also belong to the balance of the target account, consequently being additional deposit money.

However, if the partial balances of both accounts must represent the same deposit money, then how can they duplicate it?

Privately Public Money

Distinguishing the letter “a” from its verbal sound would prevent this visual representation of that word. Likewise, distinguishing a banknote from its exchange value as money would prevent this concrete representation of that value.

The resulting indiscrimination between a representing entity and what it represents must happen to all representations of something dependent on them by something independent from them. Indeed, the letter “a” does not depend on its dependent word, or a banknote on its dependent trade value as money. Likewise, bank accounts do not depend on their dependent balance, nor precious metals on their dependent buying power. Anything that depends on being represented by something independent from representing it becomes indistinguishable from that representing entity.

Additionally, only by being concrete can objects remain independent from what they represent, which they always do. Hence, each alphabet letter, banknote, precious metal, bank account, or other self-independent representation, even if just imagined, must be concretely objective. While conversely, because money depends on its own representation, all its concrete representations must remain indistinguishable from their monetary value, despite this value and those representations being always respectively private and public.

So letting money concretely represent its own exchange value is inherently problematic: the resulting indistinction between this concrete money and that privately owned value must privatize its otherwise public representation of the same value. Consequently, all such purely objective representations of money will require an impossibly privatized control of their still necessarily public, unsellable selves, whether by their private owners publicly selling, buying, creating, or destroying them.

Even so, Joe still privately controls the exchange value of his always public banknotes. Indeed, people have long expressed that value concretely, with not only banknotes but also countless other objects, including precious metals and bank accounts. Yet how could they do it? How did they solve the ownership conflict inherent in any such privately public representations of money? How could each concrete representation of money be both private and public? The solution was to delegate its privatized ownership to a public monetary authority.

People had no other choice: any privatized ownership of a still necessarily public entity can only consist in the privatizing delegation of its public ownership. Then, all resulting delegates will constitute one same body administering or governing this public entity: the state or government, part of which must privately control any object that concretely represents money.

However, the private and public ownerships of one same thing are still mutually exclusive. Hence, the public authority that results from privately controlling all concrete representations of money must rather be private. Eventually, this conflict will segregate all administration of money by governments into a privatized part of their public selves: a central bank. Indeed, any privatized power could only remain public as long as just part of it became private. So the same governments will become private by delegating all their control over money to that private part of themselves, which conversely will remain public just by belonging to them.

Finally, regardless of government structure, concrete objects can only represent money by remaining privately public, hence while still privately owned by the public part of governments, even if also by their central banks. For which to be possible, any government already privatized into its own central bank must create this always privately public money by borrowing it from that bank. Then, this government not only buys the created money from its privatized inner self, as which it reciprocally sells it to its public whole, but also destroys that money by paying it back to its lender bank, if ever. While conversely, that central bank becomes the original creditor of all this privately created, publicly loaned money, of which it must create ever more to enable paying its interest. As thus, with the resulting inflation and recursive interest payments, the same bank owns an ever-increasing fraction of the exchange value of all its issued money.

Still, even in the absence of any central bank, once commercial banks create money by loaning it to people who then use that money to buy public debt, or even just pay taxes, governments already borrow their money from the banking system, despite indirectly. Then, the partial privatization of those governments only lacks a formal, institutional expression.

Central Banking

So bank accounts must be as indistinguishable from their deposited money as any such concrete representations are indistinguishable from the money they represent. Hence two deposits in different accounts being always different money, even if one is just a loan of money from the other: when depositing money borrowed from one account into another, people must duplicate that money, by mistaking it for both accounts.

Additionally, since all money created by commercial banks remains as just balance fractions borrowed from their client accounts, that money must be worth only as credit, or as the corresponding debt principal. This way, except for money neither in reserves nor loans—and possibly not even in bank accounts, thus not being excess reserves—but not from loans, bank loans are the only money supply left for paying their own interest. Consequently, such an interest-paying, self-indebted money supply must grow at least at its own interest rate less any other money also excluded from bank reserves: eventually, whether as loans or not, the total money supply must increase exponentially.

However, who does then create all needed new money? Before central banks, governments would have done it. Later, each new central bank has created ever-increasing amounts of that money on behalf of its government. Indeed, since the source account of any bank loan could have been the target account of other such loans, from which it would be then indistinguishable, banks can always replace that source account by debt instruments, including some representing a public debt. So by becoming central banks, they can create new account money in exchange for promises from their governments of paying it back with interest, essentially the same way they replicate part of that money in exchange for promises from their commercial clients of paying it back with interest. However, paying the additional interest on this new money, now created as a public debt will demand still more money. Then, the same banks will—as they always did—create ever more money from new public debt for paying interest on both private and old public such self-indebted money.³ This way, all new money created as a private or public, interest-paying debt must recursively amplify any lack of itself initially solved by central banks creating still more of it.

The result is an exponential growth both of the money supply and the debt it represents, then a proportional, ever larger transfer of exchange value to the banks through inflation and interest payments, respectively, which must collide with social-resource limits. Constructively delaying this collision depends on a corresponding increase in the social production of wealth, which must rather collide with natural-resource limits.

Are there any alternatives to such an unsustainable economic system?

Abstractly Represented Money

Unlike the symbol for a verbal sound, its audible self cannot become indistinguishable from what it means. For example, the sound of the word “everything” cannot already be everything and still mean it. Unlike its visual representation, that sound is not recognizable independently of meaning something else, from which it hence must always be distinguishable.

Still, verbal sounds are not the only meaningful entities always necessarily distinguishable from their meaning. There are also public representations of a privately known entity. For example, the number three could represent a single, just possible number to every person while representing the actual number five only to Joe.

Then, people could publicize a number (like five) as referencing another, private one (like three) without ever publicizing this private (the five-like) number as conversely referencing that public (the three-like) one. Public-key cryptography does precisely that: it uses two numbers or keys of which, although either number means the other, only the private key can reveal its corresponding public key. This way:

1. Any content encrypted using the public key can only be decrypted by someone who also knows the private key.
2. Any content signed using the private key can still be authenticated by someone who only knows the public key.

Using public-key cryptography, people can finally avoid privatizing their public representations of money, by representing any exchange value as a private key then representing this private key, or metarepresenting its represented value as the corresponding public key. For example, the Bitcoin decentralized network uses public-key cryptography to build signature chains, each link of which represents a balance transfer, or transaction. In Bitcoin, transferring the balance of one public key to another consists in combining the target key with the transfer that resulted in that balance, then signing this combination with the source private key. After which, any holder of the source public key can authenticate this new transfer as originating from whoever could sign it—necessarily by holding the source private key.

Then, money becomes a privately-signed yet public transaction chain despite never becoming itself public. For the first time in history, representing an exchange value (as a private key) does not require privatizing its publicly representing object (the corresponding public key). With such a metarepresented money, or metamoney, a public abstraction (a public key) can represent an exchange value (that of a private key) without ever becoming itself private—which makes its privatized control by any public authority not only unnecessary, but also impossible.

Indeed, publicly expropriating money, whether by selling, buying, creating, or destroying it, requires privately controlling its publicly representing object, which then must be concrete. On the contrary, abstractly representing that money prevents all privately public authorities from having any control of its representing object, then from necessarily expropriating an increasing fraction of its exchange value. While conversely, to avoid this privately public, hence increasingly expropriating control, each object representing money must be abstract—like a public key.

Finally, to be centralized—in a government or central bank—a public monetary authority must privately control what represents money, which then must be a concrete object. While conversely, to control an abstract representation of that money, this public authority must become decentralized—in a metamonetary system, like Bitcoin.

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1. Dorothy M. Nichols. Modern Money Mechanics. 1994. Written in 1961. Revised in 1968, 1975 and 1992.
2. After twelve recursive loans of 0.9 excess in reserves each, a $10,000.00 deposit would have already become $10,000.00 × (1 − 0.9¹²) ÷ (1 − 0.9) = $71,757.0463519.
3. For a unified explanation of why money becomes a both private and public debt, please read the book Representational Monetary Identity.

The post Abstractly Represented Money: Introducing Metamoney appeared first on Bitcoin Magazine.

I hope to set a Bitcoin Magazine record for most succinct argument here, as my profession has an uncomfortable obsession with efficiency. I study economics because I like teaching at the University level, and because I want to improve the field. Here’s how the community can help.

Coin enthusiasts often struggle at convincing economists and academics that Bitcoin is interesting, and that’s largely because the community is misusing many economic ideas.

At the forefront of this is the misuse of the notion of a deflationary currency. Deflation is a decrease in the prices of goods, and yes as prices fall each unit of money is worth more in terms of how much it buys. This is not something that is unique to Bitcoin, it’s a property of any type of money.

When we refer to changes in the price of one currency (or an aspiring one like Bitcoin) in terms of another ($), we should be referring to either depreciation or appreciation:  Bitcoin has been strongly appreciating (gaining relative value) against the dollar since its birth. So coinheads have been eager to hold on to their Bitcoin not because of deflation, a change in the price of goods, but because of its eager history of appreciation against the almighty dollar.

Second off, let’s all remind ourselves that Satoshi’s paper only mentions the word currency once in regards to physical currency like fiat. He refers to the protocol as a payment system, which is of course different from a currency. A currency is a store of value (among other purposes), and we all need to be honest with ourselves that Bitcoin, while striving to achieve this, still has much to prove in this area.

Economists love the idea of comparative advantage: the skill that you are relatively better at than your neighbor. Bitcoin’s comparative advantage largely lies in its low transaction costs making it a severe threat to traditional payment networks. For the time being, fiat’s comparative advantage is still stability: that’s why we see coin quoted in world currencies in the first place.

Not all economists dismiss this topic; young professionals like my collaborators and I recognize that the system is perhaps the greatest monetary/social experiment of our time, and much of the empirical analysis is on its way to peer review.

The post Vocabulary Context Is The Reason Bitcoin Isn’t Deflationary appeared first on Bitcoin Magazine.

The payments processor examined bitcoin and weighed its potential impact on the world’s payment network.

This article is intended as an introduction to the concepts of bitcoin that might be of interest to those people that are retired. The reader is expected to have only basic internet web browsing and email knowledge.  The questions and answers are given in “layman” terms.

What is Bitcoin ?

Bitcoin is a new kind of payment and currency system. It’s a new way to pay for things with using pre-paid credits. It’s different from credit cards because it’s not based on debt. It’s the next generation of transferring money that replaces past inventions of using checking accounts and credit cards. It allows you to pay with cash-like money over the internet, even when they are standing next to you. With this new invention, credits of value that are stored on a ledger shared and verified by everyone, everywhere, at once, all around the world. It’s the first verifiable accounting systems that doesn’t belong to any government, bank, or king. Therefore it’s the first accounting system that belongs to nobody, so it can be verified and trusted by everybody. It’s the first time in history this has been possible.

The term is bitcoin – but it’s not really a coin – it’s just a block of pieces of value now being called bits. The term of the currency called a ”bitcoin”, is just another name for one million bits: just like a dollar can be called one hundred pennies.  They have a lot of unique qualities that make them like no other currency that has come before.  One of the biggest benefits is that it acts like money and has value. To be valuable  it must remain scarce and desirable.  Bitcoin is also a money payment system maintained by a world wide community. One of the main rules of the system is that only a limited quantity can ever be created, and that law can never change. A limited supply with exploding demand makes it become valuable.

People and companies all over the world have started to accept bitcoin as an equal to cash or credit cards. Merchants are helped by companies who will convert the bitcoin payments right back to cash at the time of sale.  This is very good for the merchant because they don’t have to pay credit card fees or worry about getting stuck the bill because credit card fraud.

But what about the government…and banks?

The US government wants desperately to maintain the nation’s technology lead in creating new businesses that the world uses. Google, Facebook, and Apple are a few examples.  They are excited to see all the new businesses that are starting up and the hundreds of millions of dollars being invested.  This is new growth and jobs that the US needs.

Even the Federal Reserve Bank recently showed excitement about the new possibilities despite that fact that it can remove some of the functions that banks do.  Electronic payments and checks can be done by bitcoin automatically and almost free without a lot of banks getting in the way. One world-wide ledger that everybody can trust will handle that.  Than banks themselves will benefit because their old ways of sending money to each other hasn’t improved since the 70s. It still takes them up to five business days just to wire funds across the street. Bitcoin can transfer money all over the world in less than 10 minutes for almost free.   Understandably, some banks are nervous about change, but the need for banks won’t be going away; people will still need to get loans to start new businesses, buy cars and houses. Banks are going to have to adapt and find new ways of being useful.

Many other countries don’t understand bitcoin yet. Just like most people, some governments are a little afraid of technologies they don’t understand. A lot of countries are a little slower to catch on but tend to follow the USA’s lead when it comes to world-changing technologies. The US didn’t invent bitcoin (that we know of) but seems to be out in front of other governments right now in the race to the future.  Other countries seem to be slowly coming around. They have a duty to remind their citizens that there aren’t laws on the books yet for bitcoin technology because it never existed before.  Some have told their citizens watch out for bad businesses and criminals trying to trick people out of their bitcoin. They remind their population that bitcoin isn’t legal tender – just like all the currencies of every other country outside its borders. Just try to pay your parking fine using Mexican Pesos and you’ll see how that works.

What about bad guys – aren’t they using bitcoin?

Yes, they have. They were some of  the first to realize the benefits of  using bitcoin for transferring money.  They were one step ahead of the police and courts who didn’t know about it or understand it yet. It would be a few years before they would figure out how to stop crime with it. Some authorities around the world also continue to fear twitter and email because “bad people” can communicate.  As we have learned, not all police around the world are the good guys. These days, the police have been using it to stop thieves because bitcoin can leave a trail of breadcrumbs forever recorded on the ledger.

The US government said bitcoin hasn’t been used much for crime at all compared to regular cash because not everybody accepts bitcoin yet. Bad guys still need cash to  pay for bribes, and guns and other bad guy stuff. But big online bitcoin exchanges have gone down and taken a lot of customer’s money with them. Governments don’t have laws on the books yet to make sure big exchanges are insured and audited like regular money exchanges.  Partners in crime will likely be afraid that the money trail that might lead back to them as well. Some of the authorities have said they would rather the crooks use bitcoin because it’s easier to follow than cash.  The US officials don’t believe terrorist will be much interested.

Somebody told me it’s a scam. Is it a ponzi scheme or something?

No. Ponzi schemes wouldn’t be considered legitimate by the Federal Reserve Bank, governments around the world, or big investment companies spending hundreds of millions getting new companies formed.  The bitcoin system isn’t owned by anybody yest everybody in the world can use it. There is no “pyramid” because there is not center or middle – it is decentralized. If one studies closely, they would likely find that the only people saying that today are the same people who understand it the least. Nobody should be promising that you’ll make money with bitcoin. It is very new and that can become valuable, but it can also be risky. If this technology really is changing the paradigm of the world, it might be fair to ask…wouldn’t that to be expected?

Like any investment in a new technology or company, the people that invest early are better off than those who invest late. Just ask early Google investors, or Microsoft and Apple, or railroad companies.  That’s the nature of investing. As things become more popular, more people want to use them which creates more interest and it builds on itself. Just like the telephone wasn’t worth much when only five people in the world used it. But now how much are cellphone companies worth? We see this happen all the time with new technologies that change the world. Only this time it’s the nature and abilities of money itself that is changing.

Where do you buy bitcoin?

You can buy bitcoins from several companies on the internet. Some of them will even connect right to your regular banking account so you can trade back and forth between bitcoin and dollars whenever you want in the United States. The two easiest places right now are coinbase.com and circle.com. They will allow you to connect your bank right to their banking system to transfer dollars to bitcoins and back when you want.

They will also store it and protect it there so you don’t have to worry about people trying to steal it from you. Many companies have gone out of business and the people lost their money that trusted them. Coinbase.com has proven to be very respectable. Circle.com is brand new but is backed by very important people with good track records and reputations.

Things to know first:

The price of bitcoin goes up and down by huge amounts that make it unpredictable right now. This is common for new world-changing technologies at first. But when you take a step back and look at the price over a year’s time at every point, it has always gone up. That doesn’t mean it always will, but there are reasons to believe it will. People are learning new ways to use them and it’s creating more excitement. Sometimes the excitement gets ahead of itself and when calmer heads prevail the price adjusts downwards very quickly as people see a price drop and panic. A lot of people are still skittish about new technology but trust is growing and the price swings are getting smaller. Now big Wall Street companies are starting to invest, the huge price swings may calm down.

It’s also a good idea for seniors to leave bitcoin with these bank-like companies (Currently coinbase.com and circle.com) because they are the kind that are audited and insured. This verifies they are protecting your bitcoin and still have it in their possession and can send it back to you, or convert it back into regular dollars if you want. They protect it by storing most of it disconnected from any networks and use several secure storage locations around the world with security guards. There are also other good honest companies for more technical people. And there have been a lot of companies that have gone out of business or have been raided by thieves. For now, coinbase.com has proven to be excellent and easy. Circle.com may also be good to look into as they open for business

I Don’t plan on spending bitcoins. Why would I want any?

The technology has a way to go to become friendly and easy enough for many people that haven’t grown up using new technology all their lives. Some of the retirement population might consider buying a little as a small investment. They should be reminded that it’s still considered risky investment still because the technology is still very young. It’s possible that there could be something that breaks that nobody has thought of yet. But a lot of people have realized that if it continues to work, it could be extremely valuable over time. The price has gone up thousands of percent. If seniors think about putting a little money into bitcoin, it should be money they wouldn’t lose sleep over if the price went to zero. You can buy as little as $5.00 so there’s no need to make a big investment.

Some people consider it an investment in the future of a new kind of money system. They believe that putting a little money aside here is a bet on the prediction that the rest of the world will eventually catch on to this new invention. It has dozens of benefits over older kinds of money that have been around for centuries that couldn’t have existed until this time and place inf the world. People living on fixed incomes see that the price of what they need is going up faster and each dollar they own buys less. Owning a little bitcoin might help protect some of the value of their money. If the price and value continue to increase as many experts predict, some people may considering buying a little as an insurance policy for their money.

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Sources:

https://bitcoin.org/en/development

http://www.bloomberg.com/news/2014-05-29/u-s-economy-shrank-early-this-year-for-first-time-since-2011.html

http://www.coindesk.com/federal-reserve-bitcoin-potential-boon-global-commerce/

http://www.americanbanker.com/magazine/124_02/why-bitcoin-matters-for-bankers-1065590-1.html

http://en.wikipedia.org/wiki/Legality_of_Bitcoins_by_country

http://www.coindesk.com/argentine-central-bank-issues-warning-burgeoning-bitcoin-ecosystem/

http://www.nytimes.com/2014/02/27/opinion/27iht-edlebedev27.html?_r=1

http://www.usatoday.com/story/news/nation/2013/10/21/fbi-cracks-silk-road/2984921/

http://www.bloomberg.com/news/2014-03-18/treasury-s-cohen-says-regulation-helps-virtual-currencies.html

http://www.nhregister.com/general-news/20140319/us-officials-dont-expect-terrorists-to-embrace-bitcoin-heres-why

https://coinbase.com/

https://www.circle.com/

http://www.investopedia.com/articles/investing/052014/why-bitcoins-value-so-volatile.asp

http://fortune.com/2014/04/02/secondmarket-ceo-barry-silbert-banks-cant-ignore-bitcoin-anymore/

http://support.coinbase.com/customer/portal/articles/628970-how-does-coinbase-handle-security-

http://www.marketwatch.com/story/my-risky-retirement-bet-in-bitcoins-2014-05-27

http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/

http://bitcoinmagazine.com/12846/you-say-bitcoin-has-no-intrinsic-value-twenty-two-reasons-to-think-again/

 

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People in high-inflation countries with sufficient Internet access are increasingly seeking refuge in bitcoin.

As most people have now heard, the IRS just granted itself the power to tax the gains realized when individuals sell or spend their bitcoins — much like stocks. That means you are also responsible for knowing exactly how much your Bitcoin holdings have increased in dollar terms since you bought them. If you are a miner, it even means all those 1’s and 0s sitting idly on your cold storage hard drive are now considered gross income. Naturally, this has produced some trepidation among Bitcoin lovers, who now are obliged to keep incredibly onerous tax records if they want to stay on the right side of the law.

Compliance will almost assuredly be an ongoing issue, given the private nature of the technology. “While users with sizeable Bitcoin wallets might be motivated to comply with the new policy, those with smaller wallets might not find the hassle worth their time,” noted the Tax Foundation in a recent blog post on the ruling. But there may be some unforeseen issues for the IRS — and benefits for Bitcoin users. Given the inherent difficulty with enforcement, the IRS ruling could backfire if more people self-report their Bitcoin holdings as capital losses (in order to gain tax benefits) than capital gains.

If that happened, Bitcoin could essentially become a tax loophole. With the reliance on self-reported Bitcoin holdings and the anonymity of private wallets, the government may need an army of cryptographers and a substantial increase in audits to ensure compliance from small-time Bitcoiners. As with pirated movies and software, enforcement would need to be so draconian it is likely infeasible.

Better yet: if the Bitcoin community managed to change the protocol to increase the rate that miners can “unlock” new coins… Bitcoin might have a built-in incentive to both adopt the currency and report taxable earnings. Let’s say that we accepted an inflationary Bitcoin, much like we have an inflationary dollar, around 2 or 3% annualized. At the end of the year, a consistently inflating bitcoin would trigger no capital gains liability, only capital losses, reducing the tax liability of the filer.

If this held, then Bitcoin could actually trigger regular refunds of varying quantities for both hoarders and spenders alike. Businesses large and small, as well as ordinary consumers could essentially earn a reduced tax burden every time they used Bitcoin, as long as its value kept falling.

Of course, proceeds from Bitcoin sales would still have to be reported, but that is less of a problem than reporting every single capital gain throughout the year. So inflation could mitigate the worries that many Bitcoin businesses and investors have about the new IRS rules.

A perpetually inflating Bitcoin would also be great for miners, in that it would both reduce the cost and increase the incentive to continue mining. It would also be great for law enforcement, since it would encourage voluntary tax compliance. This would also reduce the reporting burden for bitcoin users and add a little extra incentive to use the cryptocurrency. Everybody wins!

If the Bitcoin protocol doesn’t change in this respect, some other cryptocurrency might realize a potential competitive advantage here and take its place as the electronic money of choice. Many economists have already pointed out that a deflating Bitcoin is going to stifle adoption. The IRS ruling will likely only make that worse, forcing the Bitcoin community to improvise.

At the end of the day, Bitcoin is a very unique tool with properties of both an asset and a currency. In that sense, it remains malleable, and with sufficient momentum, may continue to outwit attempts to control or stamp it out. “While the IRS has finally provided an answer,” said the Tax Foundation, “there are good reasons to believe that they got it wrong. Virtual currencies are tricky assets to categorize.”

As Princess Leia said to Governor Tarkin in Episode IV: “The more you tighten your grip, Tarkin, the more star systems will slip through your fingers.”

If the IRS starts to tighten that grip too much, expect Bitcoiners to start syncing up those wallets.

Author’s Note: Matt McKibbin of Liberty Panacea contributed to this post

The post Did the IRS Just Make Bitcoin a New Tax Loophole? appeared first on Bitcoin Magazine.

I know I’m not the only one who is sick and tired of hearing that Bitcoin is dead, damaged, destroyed, ad nauseum.  It isn’t.  And everyone within the community already...

The post Bitcoin: Choosing the Path Forward. Wall Street or Main Street? appeared first on CoinChomp.

The Congressional Research Service, aka “Congress’ Think Tank,” recently made public their report on Bitcoin, Bitcoin: Questions, Answers, and Analysis of Legal Issues. The fascinating report details in sparkling prose the history, uses, threats and regulatory implications of the world’s best-known cryptocurrency.

The report’s most interesting part deals with the impact Bitcoin might have on the Federal Reserve. According to these experts, widespread adoption of Bitcoin could severely curtail the effectiveness of the Fed’s monetary policy.

The report describes the Federal Reserve’s mission as aimed at achieving “stable prices, maximum employment, and financial market stability.” It’s impossible to know the counterfactual. But many are entirely unsatisfied with both the nation’s employment rate and the continuing financial crises which led to its most recent rise.

For some of these people, Bitcoin is a personal escape hatch from wealth-destroying inflation. As the report dryly notes, “Some may find the removal of government from a monetary system attractive…Unlike the dollar, a Bitcoin is not legal tender nor is it backed by any government or any other legal entity, nor is its supply determined by a central bank. The supply of Bitcoins does not depend on the monetary policy of a virtual central bank.”

However, as more people choose to escape inflationary monetary policy to cryptocurrency, the Fed becomes less and less able to easily artificially inflate the money supply.

At Bitcoin’s current scale of use, it is likely too small to significantly affect the Fed’s ability to conduct monetary policy. However, if the scale of use were to grow substantially larger, there could be reason for some concern.

The main threats posed to the Fed by widespread Bitcoin use are Bitcoin substantially affecting how much money is in circulation and/or substantially reducing demand for dollars.

Basically, if everyone is exchanging Bitcoins instead of dollars, dollars are just hanging out. The Fed would then need to tighten monetary policy to be able to have any impact on their value.

Also, a substantial decrease in the use of dollars would also tend to reduce the size of the Fed’s balance sheet and introduce another factor into its consideration of how to affect short-term interest rates (the instrument for implementing monetary policy). However, the Fed’s ability to conduct monetary policy rests on its ability to increase or decrease the reserves of the banking system through open market operations. So long as there is a sizable demand by banks for liquid dollar-denominated reserves, the Fed would likely continue to be able to influence interest rates and conduct monetary policy.

There are many impediments to wide-enough adoption of Bitcoin to threaten US monetary policy. The two biggest ones, according to the report, are the fact that it’s not yet widely adopted, and its potential for deflation.

But, if Bitcoin does get big enough to potentially threaten US monetary policy, or the Federal Reserve gets worried enough that it might, we may see a surge in regulation and selective law enforcement for Bitcoin businesses. New regulations and prosecutions will likely continue to be justified under the guise of preventing other crimes and protecting consumers.

Hopefully, however, instead of the federal government checking Bitcoin, the very real possibility that people will leave the dollar en masse for Bitcoin will be an effective check on the federal government. We’ll see.

The post New Report Details Bitcoin’s Potential Threat to the Federal Reserve appeared first on Bitcoin Magazine.