The Bitcoin Hype Has Been Spent, So What’s Next?

It’s been a rough year for the bitcoin. Going forward, it may turn out that the cryptocurrency’s greatest value lies in what it reveals about the flaws in the cryptocurrency model. Addressing these flaws could ultimately revolutionize the ways we think about and handle data.
By @FrederickReese |
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    The U.S. Marshals Service announced last Monday that it will be auctioning off 50,000 of the bitcoins it seized from the accounts of Ross William Ulbricht. Ulbricht, who operated under the pseudonym the Dread Pirate Roberts, allegedly operated the first iteration of Silk Road, the online marketplace accessible only through Tor that sold drugs, weapons and other illicit paraphernalia.

    The 50,000 bitcoins are part of the total 114,000 bitcoins the Marshals seized from Ulbricht’s computers. The first auction of 30,000 bitcoins was held in June.

    This announcement marked the end of a tumultuous year for the bitcoin, which saw its value fall by more than two-thirds of its December 2013 high and the arrest of the alleged head of Silk Road 2.0 by federal authorities.


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    This year also saw the cryptocurrency’s largest exchange close, with nearly half a billion dollars worth of bitcoins vanishing; the bitcoin’s underlying technology — the blockchain — attacked with a foreseeable exploit; several world governments decertifying or even banning the use of cryptocurrencies; and the U.S government ruling cryptocurrencies as commodities, subject to capital gains taxes.

    As the hype and craze over the new value model starts to wear off, the future of the bitcoin is murky. With some noted economists suggesting that the bitcoin’s stable value may be in the double or single digits, and with the programmed difficulty for mining bitcoins continuing to rise, there is a sense that the market may grow exhausted of the bitcoin.

    “I don’t believe that the bitcoin has a chance to be a viable currency,” said Josh Garza, chief executive of GAW Miners, a cryptocurrency mining equipment retailer and consultancy. “One of the big confusions behind the bitcoin is that the great thing about the bitcoin is not the brand or the coin itself, but the technology behind it. It’s the blockchain that makes bitcoins great.

    “There will never be a time that a normal consumer will be okay logging into their bank account and seeing a different amount in their account than the day before without spending any money. The viability of the bitcoin will never make the virtual currency palatable to the average American, when other platforms, such as PayPal, offers what bitcoins offer without the value fluctuations. Once the hype dissipates, the impracticality of the bitcoin will doom the cryptocurrency. But the blockchain will remain; it’s the future of how value will be recorded and shared.”

     

    Understanding the blockchain

    A blockchain is the sequential database that records transactions for a cryptocurrency. As it is distributed openly through a peer-to-peer network, with no single entity controlling or owning it, it is a truly public record of assets and debts. All mined cryptocurrencies are recorded to their respective blockchains, as are all transfers and sales. Fraud, in theory, can be easily rooted out by comparing one version of the blockchain to others.

    This type of system makes it considerably easier to create a trackable, easily-accountable virtual currency system. With bank-based systems, such as PayPal, transaction logs are not publicly-accessible, forcing the consumer to rely on the bank’s word to ensure that his or her funds are safe and transactions will be honored. In a blockchain system, however, a chain of cryptographic proofs ensures the integrity of the blockchain’s data, which can be reviewed publicly. The proof chain reflects the amount of computational work needed to construct it; all the cryptocurrency’s network has to do to verify a blockchain is to find the blockchain with the longest proof chain. This would be the chain that was worked on the most and is therefore the most accurate.

    The blockchain technology potentially offers a new way to authenticate not only financial transactions, but all types of data- and record-keeping. Last Monday, Factom, a cryptocurrency manufacturer, released a whitepaper suggesting a methodology for creating a new architecture that would both secure and make trackable large record databases without the drain on processing power that occurs from processing an overaccumulation of data.

    The proposed system would assign a Merkle root — a unique hashcode which represents the processing needed to verify the record — that would then be added to a blockchain. According to the authors of the whitepaper, this approach limits the searchable item in a major database to a single token, making it easier and less resource-intensive than a typical database search. Additionally, the blockchain’s peer-to-peer cumulative processing power simplifies the archival processes needed to manage large accumulations of data.

    Capture

    Bitcoin Market Price (source: blockchain.info). Since the cryptocurrency’s December 2013 market high, the bitcoin has faced high volatility and suffered a major decrease in value.

     

    Rethinking how data is handled

    An example cited by the whitepaper is the mortgage claim crisis of 2008. In the aftermath of the banking collapse of 2007, paper-based titles were mishandled or lost, causing a number of incorrect foreclosures. Additionally, because the mishandling of the paperwork effectively broke the chain of title, many homeowners are still coping with legal ambiguity.

    During a Reddit Ask Me Anything session last week, Factom President Peter Kirby explained:

    “Making exchanges honest is one of the first projects that’s being done on Factom. You can run a proof-of-audit on steroids – letting you produce a true audit trail of every transaction at every moment. That’ll really get businesses to sit up and notice.

    The other application that will pop up right away is title records – because they secure such a large portion of a country’s wealth. …

    Big companies like Bank of America and BP have been fined $10’s of billions for losing track of their systems of record. So you’ll see a lot of fast movement in the opportunity to move mortgage and energy systems onto Factom.

    Lots of interesting things being built on Factom – my guess is the first ones will be the simple options that solve a lot of pain.”

    The Factom model would create “sidechains” or “entry chains” that would anchor themselves into the bitcoin blockchain. Each of these “entry chains” would be composed of “entry blocks” — directories linked to the metadata for the records or data they are meant to archive. As these “entry blocks” and “entry chains” would be cryptographically signed, they would inherit the security of the bitcoin blockchain itself.

    Such a system would be immediately auditable and traceable, which would, theoretically, create a fully transparent data structure. Such a system could create, for example, a voting system in which every vote can be accounted for, a government accountability system that can track all monies spent, or a unified accounting system that can allow for departments and independent systems to join or leave with ease.

    “The dream of many is to extend the honesty inherent to an immutable ledger validated by math to chaotic, real-­world interactions,” the whitepaper reads. “By allowing the construction of unbounded ledgers backed by the blockchain, Factom extends the benefits of the blockchain to the real world.”

     

    The viability of the bitcoin

    Many developers and technologists believe that the future of the bitcoin lies in serving as a development platform for other products, not necessarily as a viable commodity on its own. A large part of this speculation is bolstered by recent news regarding major bitcoin seizures.

    Marcus Asner is a partner with the law firm Arnold & Porter LLP. He is also the former chief of the Major Crimes Unit (now known as the Complex Fraud Unit) for the U.S. Attorney’s Office for the Southern District of New York. Speaking with MintPress, Asner pointed out that one of the bitcoin’s major selling points — its anonymity in use, which made it attractive to libertarian- and anti-government intervention-minded individuals — has been proven to be a fallacy.

    “My take on the situation is that law enforcement is getting better and better at tracking bitcoin use,” Asner said. “It’s to the point that, if I was a criminal, I would seriously reconsider using bitcoins for my crimes. The bitcoin has become so traceable; the one thing that was particularly compelling about the recent arrests that they were able to figure out who the criminals were, even though they used Tumblr.”

    Asner pointed out that, similar to emails — which, at one time, were also thought to be anonymous — the myth of anonymity for the bitcoin was broken by a need to investigate and prosecute computer crimes. While this newly-discovered transparency is applauded by the mainstream bitcoin community as a needed assurance of the cryptocurrency’s legitimacy, it is also an engine for the deflation of the bitcoin’s hype.

    With the volatility of the bitcoin market, the capital gains tax imposed on the shift in values, the cumbersome recording requirements imposed by the Internal Revenue Service, the lack of full international support of the virtual currency, and the fact that there are nearly 550 other cryptocurrencies competing with the bitcoin, it’s difficult to say whether the bitcoin can survive or even forecast what form it may take in the future.

    Capture

    Bitcoin Market Price (source: blockchain.info). Since the cryptocurrency’s December 2013 market high, the bitcoin has faced high volatility and suffered a major decrease in value.

    “It wouldn’t be the least bit surprising to see the best bits of Bitcoin be grafted into new products and services (like facilitating international transfers),” said David Yermack, professor of finance at New York University Stern School of Business, to CNN.

    “A lot of the breakthrough products tend to get taken over pretty quickly by improved versions and I think that’s likely going to be the fate of Bitcoin. It’s certainly played a role in raising issues and opening possibilities that people were only dimly aware of before. But if I owned Bitcoins, I would be a seller at the current market price as I think a year from now they may be all but worthless.”

    While most analysts believe that bitcoin’s risk will eventually be factored into the cryptocurrency’s selling price — which would reduce the volatility — it may be that the true worth of the bitcoin is to show the flaws in the cryptocurrency model toward the development of a more secure, more stable product. While bitcoin’s existence in the near-future is secure, as the cryptocurrency’s blockchain is the first of its class and sets the industry standard for stability, the future of cryptocurrencies and cryptographically-signed data archiving suggests that the way the world deals with and understands data is bound to change in interesting and revolutionary ways.

    “With any financial system, you are going to have these hiccups and flaws, regardless of the mechanism you use to transfer money,” Asner pointed out. “But these flaws are not necessarily fatal to the blockchain, as the idea is fundamentally sound.”

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      • Anybody that invests in Bitcoin is a asking for failure. This is a currency with absolutely nothing backing it.

      • So if I understand correctly, the main advantage of bitcoin is that you avoid transaction fees. Also, I guess, there is (or was) the possibility your “investment” will grow, but there is also a chance that it will be worth nothing, so I don’t really call that an advantage; I call it gambling or making sure you aren’t the last sucker in. Like all gambling, you shouldn’t put in anything you can’t afford to lose as bitcoin users have now discovered!

      • Pingback: How To Donate Bitcoin To Charity And Get A Big Tax Deduction Bitcoin Today()

      • inpips

        “There will NEVER be a time that a normal consumer will be okay logging
        into their bank account and seeing a different amount in their account
        than the day before without spending any money. The viability of the
        bitcoin will NEVER make the virtual currency palatable to the average
        American”

        Obviously NEVER heard of Coinapult locks?

      • FreeJack

        Josh Garza has built his GAWMiners empire on Bitcoin’s shoulders…and the #1 and ONLY reason he is now proclaiming that it has no chance as a currency is because of GAWMiner launching its own “Paycoin.” I don’t know how he could possibly be more transparent. Nobody should ever use this guy for legitimate quotes on analyzing these markets.

        Crypto-currency price will be volatile until it is in widespread use. It’s a baby, right now…with a very tiny user base, compared to world currencies. When it achieves critical mass, there will be so much in circulation that the price will stabilize…and the nice thing about it will be that we know exactly what the new supply rate is. There won’t be any guesswork involved with some shady central bank issuing more at will.

        • inpips

          paycoin? LMAO

        • ParsnipCommand

          lol

      • votingmachine

        I think this blog misses the central flaw of the blockchain. It looks nice when you look at the blockchain as a de-centralized, immutable database. And when you think of that as a FREE system. The problem is that the blockchain is not maintained for free. It is currently paid with the creation of new bitcoins as the reward. And despite the fee for the processing transactions being a 3rd party payment, it is not free.

        This blog stresses the positive features: “Such a system would be immediately auditable and traceable, which would, theoretically, create a fully transparent data structure.” and: “A blockchain is the sequential database that records transactions for a cryptocurrency. As it is distributed openly through a peer-to-peer network, with no single entity controlling or owning it, it is a truly public record …” But these features have a cost. That cost is currently not separable from the bitcoin which pays for them.

        The data structure is quite expensive. And while I am a little uncertain, it would seem that if it gets larger and larger, the cost may grow larger (hashing more bits should take more time). And I have seen estimates that the download of the blockchain could grow to be a 5-day download. How do you search thru those to determine the most recent blockchain? In 2014, the blockchain doubled in size. And that is just with the bitcoin data within it. Now you want to add all the title records. And others want to add contracts. And others want to add music. And others want to add ID’s. And so on.

        There is some expectation that finding the most recent blockchain will be a matter of downloading the header information. But the current blockchain is 25 GB. If you can download at 50 MB per sec, you can download it in 500 seconds, about 8 minutes. Again, that is RIGHT NOW. Add in all the stuff people wan to add to a “free” database, and the size will quite quickly grow beyond any ordinary value.

        I see many people quite excited about shoehorning things into the free database. But that stuff will just collapse the database. The comment that the bitcoin will likely be worthless in a year should double the skepticism on this … the bitcoin is the payment process for the blockchain processing.

        • FreeJack

          There are solutions to not requiring end users to download the blockchain, at all. There are already wallets like Electrum that refer to a copy of the blockchain maintained on third party servers, and that’s just the first step. It’ll get figured out.

          • votingmachine

            The main point is that there is a cost. I think you are right that there are answers to the question of containing the bloat of the blockchain. But even a small blockchain has to be handled and processed. Which will have costs.

            I think this blog makes the mistake of treating the blockchain as limitless in capacity, as well as free. Neither is true.

            • lukeh23

              The costs are so minor, its not a concern. Most major service providers within the bitcoin world all run blockchain nodes, because its of course in their interest.

              We are talking around 2-3gb of disc space and very little bandwidth required.

              • votingmachine

                I just learned some things in another thread …

                Nodes are not miners. They do verify the miner’s work. If the blockchain has all the right stuff in it, including the new date, and the new bitcoins delivered to the miner’s address, then the nodes vote yes on the freshly updated blockchain.

                Miners are the transaction processors and it takes ALL of the global mine hashing to determine the cryptographic solution. Every miner starts with the last blockchain, a stack of transactions, and a timestamp that they can move (say they are hashing at midnight, they can set the time as 11:59 and 1 second, or 2 seconds, etc). That miner, and every other miner is hashing from slightly different conditions to determine the new cryptographic time stamp solution. When the world mining computers come up with a solution, the nodes verify it, which is an easier process. The winning miner, of course, has added the new bitcoins in a transaction paying themselves.

                The degree of difficulty is adjusted to keep the blockchain to about a 10 minute update cycle. And every cycle, the current payment is 25 new bitcoins, plus any fees. Call it $10,000 for the successful miner. That has to cover the cost of the computers and electricity. And remember, other computers are competing, and getting faster.

                Moore’s law does not apply. Global hashing is the thing that matters. And the degree of difficulty. The degree of difficulty will ALWAYS be adjusted to force a 10-minute cycle, and a mining payment every 10 minutes. The blockchain processors (miners) compete for that regular 10 minute reward. They have large costs. Since the difficulty can be adjusted, I think my size objection doesn’t apply to the miner. It would apply to the nodes, which run a simpler verification program.

                I think the costs are not minor at all. They can be found:
                google: blockchain info blockchain charts
                then on that website scroll down to the:
                Cost % of Transaction Volume

                • FreeJack

                  The cost for a node is in bandwidth and storage. Bandwidth is not a HUGE issue, because it’s not a gigantic amount of data (especially in comparison to the real hogs, like Netflix). Storage space, likewise, is not a huge hurdle…in just the last 10 years I’ve seen the standard go from somewhere in the neighborhood of 250MB hard drives to 2TB, and it’s always growing. So that isn’t a major penalty, either.

                  • votingmachine

                    Right. But again, I am talking about the cost of mining not node hosting. Mining is the computationally intense part. That is the part that has a high fee. There is no bitcoin fee associated with node hosting, which people do for free.

        • inpips

          Personally I think the whole article sucks. You are correct bitcoin transactions arent free but are increbibly competitive and incredibly secure