Icarus: Plight of the Bitcoin Investor

BY ARI MOSES

One Saturday afternoon in 2009, a group of tech-savvy friends and colleagues were talking about how they could revolutionize the technology world. After much debate, they finally decided on creating a crypto currency with layered encryption, untraceable e-addresses, and open sources, all the while being unregulated by any monetary regulatory institution. It would become the people’s currency, free from manipulation by bankers and governments. It is the generic story of all of the Silicon Valley firms, a traditional rags to riches story. While this story may be what some people believe about Bitcoin’s origin, it is far from the truth. In 2009, an author operating under the pseudonym Satoshi Nakamoto published a white paper, “Bitcoin: A Peer-to Peer Electronic Cash System.” To this day, the author of the paper remains unknown; in short, the origins of Bitcoin are as shadowy as its main function in e-commerce today.

Bitcoin and its Uses

Users generate the encrypted currency by running advanced computer protocols and algorithms to search for blocks that contain 25 bitcoins and surface approximately every 10 minutes. Certain users “mine” bitcoins, by running scripted mining programs that deliver bitcoins to the user over time. In exchange, the program consumes CPU power and electricity to process Bitcoin transactions into the main transaction log. Essentially, the user is performing all of the work for the Bitcoin service. Since obtaining a Bitcoin block is difficult, users form into guilds to find the blocks and then split the reward evenly among all members.

Because Bitcoin transactions are anonymous and cannot be tracked, a majority of Bitcoin transactions occur for illicit activities on encrypted websites on the Deep Web. The only services with which to pay with bitcoins remain largely illegal sites for drugs, weapons, hacks, assassinations, and services catering to all other desires. These sites are accessed through the encrypted Tor network that houses no central servers and is open sourced to users. Essentially, the Tor network bounces your IP address through proxy servers across continents so that no company or organization can locate your geographic location. Other services from deep web sites include counterfeiting, including fake IDs, passports, and money. In October 2013, the FBI arrested the founder of the Silk Road, the largest anonymous marketplace for illegal activities. During criminal processing, the FBI provided evidence that 9.5 million bitcoins, at a valuation of $1.2 billion, passed through the Silk Road’s servers over a two and a half year period, out of the 11.75 million bitcoins in circulation at the time.

Historical Value and Regulation

The value of a Bitcoin has risen from $0.01 in 2009 to over $1,000 in October of 2013, with periods of high volatility in between. The only way to transfer your bitcoins (BTC) into cash is through a monetary exchange such as BitStamp, Bitfinex, or Mt. Gox, which function in the same way as the NYSE. As of March 3, 2014, the price of a Bitcoin is $570 on most exchanges, but that price can shift from as little as 1 percent to as much as 20 percent in a day. This is the core problem with Bitcoin. It is unregulated, so no commercial or investment bank will accept bitcoins and no government regulatory committee controls the generation or monitoring of transactions.

With no monitoring policies, the value of bitcoins are extremely volatile. This volatility is due mainly to the nature of Bitcoin trading, which is highly speculative. Some investors looking for ways on how to invest $500 view Bitcoin as a currency rapidly increasing in value, and do not realize that they are currently purchasing into and fueling a monetary bubble. Since Bitcoin retains no intrinsic value, its value is determined solely by what other investors are willing to pay for the currency. While the U.S. dollar and many other currencies have been taken off the gold standard over the past 50 years, the governments of those nations still back each monetary unit generated and in circulation. The U.S. dollar provides a utility to the consumer as it is accepted in virtually every nation across the globe, while bitcoins are not accepted as legal tender by any major or minor company, delivering no utility for the consumer.

Legal and Investor Relations

The recent collapse of Mt. Gox, the largest Bitcoin exchange, has served to illustrate the insolvency of this currency. Hackers, for the first time, manipulated the source code to steal bitcoins. The exchange was unable to combat these cyber-thieves, eventually resulting in its collapse. The CEO of Mt. Gox has recently appeared and stated that the bitcoins on the exchange were lost, the total value of which is close to $500 million . Many of the consumers lost all of their bitcoins on the exchange. Because there is no regulatory body governing Bitcoin, the investors have no legal recourse to reclaim lost monetary investments. The speculation over this currency has reached dangerous levels. It is not a question of if this unregulated crypto currency will fail, but when.