Bitcoin: Trust in the Land of Distrust

All money is based on trust. Your grandparents trusted the value of gold. You trust the word of the Federal Reserve, which polices your bank. The design of Bitcoin and other cryptocurrencies is supposed to make trust redundant. Supplies are limited, creating new currency costs money (in the form of computing cycles), and everything is done through an open-source process that everyone, in theory, can look at.

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But, it doesn’t, really. The people running the software must be trustworthy. Some aren’t.

As the founder of Mt. Gox, a failed Bitcoin exchange, went on trial last week in Japan, a Russian national named Alexander Vinnik was being arrested in Greece on U.S. charges of using the BTC-e exchange as a money laundry.

Note, here, that government acted where Bitcoin authorities did not, because there are no Bitcoin authorities, just a collection of contracts, bound by software, created among private parties.

Seemingly Strange Behavior of Bitcoin Prices

Why, then, does the value of Bitcoin keep surging back, as it did late this week, coming off a July 19 low below $1,900 to a July 28 price of over $2,500, despite the threat of a “hard fork” called Bitcoin Cash, which threatens to make every Bitcoin owner choose what kind of coin they own?

There are two reasons.

One is what happens when Ethereum experienced a similar fork last year. The original system had proven susceptible to hacking, so a code fork was engineered, and those who took the technically-superior line were rewarded. Those who took the “politically correct” line have coins worth less than one-tenth the value of the new Ethereum.

In other words, the Bitcoin “fork” should shake out quickly, based on technical superiority, something Bitcoin holders can watch for in the market and adjust to.

The other reason Bitcoin is holding up is because some big hedge fund managers and venture capitalists, seeing the recent gains in fake cash and troubled about the prospects in real investments, are stepping into the market.

This has increased the market cap of all cryptocurrencies to over $88 billion, which sounds immense until measured against the world’s total wealth, or even the U.S. GDP, now over $18.7 trillion. Bitcoin is being used as a hedge against total financial collapse, and as a commodity that can attract more capital.

In this kind of environment, most billionaires can take care of themselves. The billionaires of 3G Capital, after all, rose to that status against the backdrop of a Brazilian financial system prone to all kinds of financial collapse. Smart people will get along.

But, what about other people? What about the small investors InvestorPlace represents? My view is that you treat cryptocurrencies the way you used to treat gold, as a global “fear index,” a distrust of lawful authority that can act as a brake against small despots, while giving the big ones a way to loot the system to their hearts content.

That is, until a lawful government intervenes. In the end, nothing protects liberty and keeps it within ordered bounds like governance, no matter what the Bitcoin evangelists may tell you.

And Finally …

Bank of America Merrill Lynch, the geniuses who helped along the 2008 financial collapse with phony mortgage insurance, now says Bitcoin will become a legitimate currency alternative once trusted authorities — like them — control the market.

Frankly, I’d rather trust Alexander Vinnik.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Saves the World, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares of companies mentioned in this story. To follow the value of crypto currencies bookmark

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