Tag Archives: Altcoins

Antifragile Bitcoin

Thieves love bitcoin. Why wouldn’t they? Pseudo-anonymous digital cash that can easily be laundered, and taken while being personally physically secure from any sort of immedate counter-aggression. What more could a thief ask for? Not to mention that you can make off with much more than in any typical bank robbery, like the most recent bitstamp hack, where the bandits made off with around 19,000 BTC.

At first stealing bitcoin was pretty easy–here is a list of several early hacks put together on bitcointalk. But you can see that over time it has been getting harder and harder to rob exchanges. Why is the good life of a crypto-thief going extinct?

bitcoin thief

I’m sure that bitcoin thieves dress like this.

It is because crypto-thieves are putting themselves out of work–they are helping solve the security issues of bitcoin! We can see this evolution over the course of the last few years with hacks becoming more sophisticated, detailed, and sneaky as the price of bitcoin grows, and the network expands to include more people. Now altcoins, with less savvy developers, and smaller exchanges which lack the same resources as major bitcoin exchanges are being targeted more frequently. This is occurring because the security infrastructure around smaller exchanges that cater to altcoins are less developed than bitcoin, so altcoins are being targeted more like the NXT hesit from BTER last year.

As the various altcoin ecosystems develops, they will either gain enough traction to exude the same antifragile properties of bitcoin, or drown under the weight of major attacks. Either way, the whole ecosystem evolves so that with weak coins die, and powerful ones survive. The same is true for exchanges as well; with each major attack or exploit that is carried out, a ton of money is stolen, but then the hole is then almost immediately fixed, or the exchange dies. This one-time ‘security fee’ now raises the bar for all hackers; as the post-mortium analysis of what happened is generally shared with the whole ecosystem of exchanges. The more people try to exploit exchanges or the crypto-currencies themselves, the more flaws are found and fixed, making the system strong and harder to exploit in the future.

The Antifragile Nature of Bitcoin

antifragility

From http://www.innoguru.nl/

Bitcoin is antifragile, meaning that the more you try to break it, the stronger it becomes. That is why the exchanges with horrible practices like Mt. Gox have died, or at least will be reanimated under much better security. This is not a fluke, but is how distributed networks function; as they are antifragile.

In fact, the only reason that bitcoin has even evolved to where it is today is because of its antifragle properties. No matter what has happened–the demise of the Silk Road, Mt. Gox, and almost 1/2 of major exchanges have failed–bitcoin is still here. Furthermore, bitcoin has not just remained, but security has improved dramatically both on the side of consumers, and exchanges in response to these catastrophes. Even the core protocal is getting more secure as more time and energy is spent developing bitcoin, with features like multisig not even being introduced until 2011. I am sure after the most recent bitstamp heist there will be a post-mortem amongst the major exchanges to ensure a theift like this does not happen again.

This antifragility goes beyond just learning from mistakes, as the whole bitcoin ecosystem works offensively in response to such events. Major exchanges are not sitting around waiting to respond to a heist, they are innovating and developing to make themselves more secure and more difficult to steal bitcoins with each passing day. Coinbase’s vault is a great example of this. When people started to complain that Coinbase could go the way of Gox, Coinbase responded with multisig vault, which means they couldn’t even steal bitcoins stored there if they wanted to! I’m not one for keeping coins with any service, but it’s good to know that such features are available for those who may not want to secure their own coins, or spend the extra bits on something like Trezor.

This kind of development in turn makes it easier for the average consumer or business to have confidence in bitcoin. This paired with already low economic barriers to entry to use bitcoin creates a payment system that is both more secure, and cheaper to use that any other payment system that has ever existed. Anyone with a computer can setup an webpage and sell something to people directly for bitcoin with much more ease, and less expense than any other payment system. This lower barrier to entry is also creates a greater degree of resiliency within the network, as it distributes the risk for the ecosystem among many actors, unlike centralized payment entities.

The price of bitcoin, which has taken a major hit in recent days, also works in an antifragile nature. Having made absurd gains over the last two years (for good reason), the market was overheated, and so a large sell-off started. Although this became a vomit-inducing ride for some noobs to the game, this was actually a good thing! Such an adjustment in price not only shook out speculators and capitalist of all kinds, but it allows for the price per bitcoin to become ‘reasonable’ to people who were looking to invest, but thought bitcoin was overvalued. This drop in price allowed for a whole new wave of folks to invest, which in turn distributed the network even more. As the price rises and falls, we will see this process happen over, and over again.

The Evolution of the Bitcoin Ecosystem

The advent of colored coins, multisig wallets, and properties contracts all seem like they will come to fruition in 2015, and are all going to bring forward a new boom in the bitcoin ecosystem. Again, it will be through a string of thefts, hacks, and exploits which will allow for service providers to improve themselves and allow for the network to get stronger. It is this process of creative destruction that allows for the demise of smaller weaker parts of the network which will allow for more evolved ones to take there place. I am confident that as we move into the coming years that service, security, and creative thefts will only get better, along with the security response to each event as well.

So this one is for the thieves, criminals and neer-do-wellers! Keep doing what you do best, it improves the security of the bitcoin network and ecosystem, and reward those for their unsolicited pen-testing services.

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Next: What is the intrinsic value of Bitcoin?

 

Why I’m bullish on Alt-coins

Did you know that bitcoin is not the only digital currency? There is also litecoin (LTC), Namecoin (NMC), and Peercoin (PPC) among dozens of others.  Some believe that these coins do little outside of what bitcoin has already done, so why should they have any value at all?

For the same reason that bitcoin has value:

These are all sound forms of money

Free markets and currency competition 

Despite the fact that the altcoins are much less known and much less disseminate than bitcoin they still have all of the same fundamental features that bitcoin has that makes it good money, and good storage of value. More important than any of the additional features that altcoins offer is they compete with bitcoin on a free market. This is what Austrian economist Friedrich von Hayek spoke of in his final treatise on money, “The Denationalization of Money.” He believe that in a world of free money currencies would be forced to compete with one another (similar to on the forex market) and the superior currencies would win out over less efficient currencies through free market mechanisms. What I took away from this is that there must be currency competition to compare and contrast currencies against one another, and to help mitigate against any disasters one currency could have, and also ensure that there is not a monopoly on digital currencies.

Bitcoin has the first to market advantage, which means many, many more people accept bitcoin than litecoin today, and more accept litecoin that peercoin. This is significant advantage bitcoin has over altcoins is because it is hard to convince people to use an alternative currency–particularly one that people cannot hold. But what about getting people using bitcoin to use altcoins? That seems like a much easier jump to make than from not using digital currencies to using altcoins.

So if bitcoin becomes successful (which it already is) there is little reason why altcoins would not also become successful. The biggest barrier today is simply getting more people to accept altcoins–and the more people that accept bitcoin, the more potential people there are that may accept altcoins. And because they also have fixed supplies, the more people that use altcoins, the more likely the price will increase. That seems to be what happened with the most recent spike in LTC volume when the price went over $9. This seems to have been caused by the influx of Chinese digital currency users that also caused for the recent rally on bitcoin.

Pushing Altcoins

With Altcoins being just as efficient as bitcoin in terms of their moneyness, there is a huge opportunity for someone to create a digital currency bank using one of these altcoins. The biggest advantage that one would have in do this would be market making, after purchasing a large supply of the available coins. Through offering support, and more importantly, having a sales team that shows businesses the direct advantages from using digital currencies, a company like this could do very well. The biggest question is will someone see this in any of the altcoins? Time will tell us.

Catastrophe Insurance 

Another reason that altcoins are could be successful is the possibility that the bitcoin network could somehow become compromised or enter into a full panic of confidence. If that were to happen, altcoins–being the quickest way to convert bitcoin to another currency, outside of selling directly for cash–would be the quickest alternative to flee to. One could also think of litecoin, and other altcoins as being a tool to diversify one’s digital currency holdings as well, to hedge against any sort of catastrophic disaster to bitcoin. The future is impossible to tell, and the more digital currencies there are in the world, the less likely it is that digital currencies on a whole will fail or be compromised.

In conclusion, I believe that altcoins will be successful because the technology is just as good as bitcoin, with a few significant improvements over bitcoin in some ways. Altcoins help strengthen the total digital currency network through offering competition between currencies, which helps create efficient, powerful currencies according to consumer preference.

Bitcoin, Alt-coins, and Free Money Theory

Gavin with some BitBills

Gavin Andresen wrote this piece on his blog about alt-coins and several of the issues they create. As much as his concerns are valid, there is a different perspective where digital currencies of all kinds can compete in an open market to capture the most customers bases off of the greatest advantages they offer. This was presented in “The Denationalization of Money,”  the magnum opus of Fredrick Von Hayek, Nobel laureate in economics and close friend of John Maynard Keynes. Hayek’s primary argument in this work was that through allowing the private issuance of currencies, banks would be forced to compete on the open market to have the most competitive currency. Below I am going to explore some of the concerns that alt-coins present and how they can be understood from the perspective that Hayek offers in the Denationalization of Money.

Free money theory

Bitcoin has a significant advantage over other digital currencies with that it is the first digital currency, and no other digital currency is significantly different from bitcoin. With that being said, alt-coins not only help legitimize bitcoin as THE currency of the internet, but also help create a whole new digital currency economy, in which alt-coins can specialize, or succumb to market forces.

Gavin makes an excellent point that alt-coins don’t do too great of a job differentiating themselves:

“So what?  The free market at work, right? If they’re good they’ll survive, if not, then they’ll fail. If they’re better than Bitcoin somehow then maybe someday one or more of them will usurp Bitcoin as the biggest and best!”

He then goes on one to voice his concern that:

“Creating gazillions of alt-coins seems to me to just be a way of getting back to an “inflate on demand” world. Not enough genuine Bitcoin money for you? No problem! Create a new alt-coin to produce more!

As much as this concern is valid, I think we can see that his first point seems to be the direction we are heading. The value storage of the number of alt-coins in circulation vs. their price simply does not compare to bitcoin. There are more than 20 million litecoins today, with the total supply capping out at 84 million. LTC price in recent months has gone from  $2.75 per LTC, to under $2. You can see that despite there being a total cap on the supply of LTC at 84 million, it is still is valued 30 to 40 times less than bitcoin, despite being a pretty good copy of it. This is because bitcoin has the first-mover advantage behind it, and thus has had more time to establish a market for itself.

If bitcoin is doing such a good job, than why are alt-coins valued at all?

Each one has its own reason, so I’ll just use litecoin as an example for now. Litecoin has value most because of speculation, but it is also a good bitcoin catastrophe insurance, it has second-mover advantage, and it is the most liquid way to get out of bitcoin, but not back into another fiat currency.

Insurance

Let’s face it–bitcoin does not have a lot of friends, and it has a bad reputation

Personally I’m bullish enough on digital currencies to believe there will be a $10,000 bitcoin one day, and so are others like Max Keiser. Gavin hypothesized this may be part of the reason why alt-coins are around.

Maybe altcoins will be an important safety valve in some future crypto-currency-dominated world. Maybe if there is lots of economic growth and some technical reason prevents the velocity of money from accelerating to match the increased demand for transactions people will use alt-coins to fill the gap.

And I think what Gavin is saying about the velocity of money is true. I believe this is the behavior that we are seeing with litecoin being used as a shelter during turbulent bitcoin times.

Even if alt-coins were to become a threat to bitcoin, it would most likely be for a good reason. Perhaps mining centralization could lead to some issues down the line, or pump and dumps too frequent–who knows? Other than a faster block-time, and 4x the supply of coins, I don’t see any difference of advantage of using litecoin as a storage of wealth, or a mode of exchange.

I do however see how it is useful as a short-term hold of wealth for shelter during turbulent bitcoin market periods. There are members of the /r/bitcoinmarkets is an example of a community that utilizes this technique. There is also ample evidence that this is also done on the Russian exchange btc-e.com as well in order to do ‘pump n’ dumps–where one inflates the price through rapid buying, and then dumps to collapse the price and buy back at a lower value.

Litecoin may also become valuable as a mode of exchange. We can see that the recently closed online drug market place, Atlantis, accepted litecoin, in addition to bitcoin. Litecoin could very well bootstrap its way to become more valuable, similar to how bitcoin did with The Silk Road.

Other Altcoins

Namecoin, Peercoin, and Primecoin all have there own unique features that one day may make them very valuable, but today that is not the case. As Gavin pointed out, these developers could focus more on their alt-coins unique features (which I’ll discuss in a separate post), but to simply have it be another bitcoin copy is little more than inflationary flack. There are always 51% attacks, and people simply not accepting alt-coins to solve that. I believe from seeing where we are at in this very new economic paradigm we are see exactly what we need to see: A few unique and well-differentiated alt-coins seeing limited success, along with the death of dozens of other more useless coins.

When we look at bitcoin through the eyes of Hayek, none of this is surprising. Digital currencies represent Free Money, or money that has no monetary authority other than itself. This means that the value of digital currencies can only come from their intrinsic value which is established through the market. This is one of the reasons that bitcoin’s first-mover advantage is so important–it was the first digital currency to gain a wider following and create market legitimacy, thus it has the largest market cap of all digital currencies in circulation.

This also helps explain why alt-coins do have some limited success. Because they still have the same money function that bitcoin has, which is more efficient that fiat currency, that can be used to give them value. Yet, because there are fewer people accepting alt-coins today, nor do they differentiate from bitcoin greatly, many of them are still highly-speculative prospects that have gained little traction because of this lack of differentiation.

Conclusion

Hayek’s theory on free money found in the denationalization of money helps explain why digital currencies have value. This theory also helps explain the complex market relationships that allows for some currencies to keep and hold value, while limiting the success of others. It will remain to be seen how successful alt-coins will become, but it is most likely that because of bitcoin’s first-mover advantage that it will always remain the primary digital currency. With that being said, alt-coins will always be needed in the market for bitcoin catastrophic insurance, and to act as an alternative mode of exchange.