BusinessInsider’s Misconceptions About Bitcoin
Joining the recent outburst of new Bitcoin-related articles in mainstream media, BusinessInsider has written an article with an anti-Bitcoin view. Unfortunately, though, the article contains quite a few flaws, both blatantly incorrect and highly misleading statements and misplaced fears about potential “problems” that the Bitcoin community has had solutions to for over a year.
- “At the moment, the average Bitcoin transaction fee is .99%, while Square and PayPal’s processing apps charge 2.75% and 2.7% per swipe of your credit card.” – According to blockchain.info charts, about 150000 BTC is sent per day with transaction fees totalling 4 BTC, so the “average” transaction fee is actually 0.00267%. Transaction fees in the Bitcoin network are entirely voluntary and are only needed to make your transactions process slightly faster.
- “Unlike your credit card, Bitcoin currently provides no protection or compensation in the event of fraud” – I addressed this point in detail in my article on non-Western consumer economies here, and a solution has been available for over a year. The solution is called escrow. Basically, if party B wants to sell a product to party A but both have low trust for each other they can find an escrow provider C that they both have high trust for to mediate the transaction. Then, rather than A paying B directly, A would pay the money to C. If A receives the product, he would send a message to C saying that the transaction was successful and C would release the funds to B. If the product turns out to be defective or never comes, then C would either return the funds to A, keep them or donate them to charity (the tradeoff is that the first two solutions are cheaper for the parties involved but the third removes any perverse incentives for A or C to lie to try and claim to money). Bitcoin’s advanced transaction features actually offer improvements over this that reduce the level of involvement and trust required for the escrow provider even more, so escrow services will only get better over time as more Bitcoin-accepting merchants appear.
- “Recently, a hacker managed to raid several Bitcoin ‘bank’ accounts – the credit and debit accounts of ‘rich’ Bitcoin users – around the world and got away with $228,845.” – I also already addressed this point in detail here. Standard advice for Bitcoin users is to keep such large amounts in offline or brain wallets and even keep the wallets in multiple pieces so that releasing the funds takes considerable effort. If this is done securely, taking away someone’s life savings would be impossible at best and require breaking into someone’s house and searching through their personal possessions and hard drive or torturing them at worst. Bitcoinica only lost so much because they are a financial services business, meaning that they have to have large quantities of money available for automatic withdrawal, and even they can, and now have, improved their security to make even the Linode hacker’s attack impossible.
- The developers “have a skeleton key that gives them control of the whole machine, any time they want.” – the “skeleton key” described is the alert mechanism that the original Bitcoin developer Satoshi Nakamoto put intothe official Bitcoin client in version 0.3.11. The system allowed Satoshi (now Gavin Andresen since Satoshi left) to send a message signed with his private key which would cause clients to display an alert message and go into safe mode, not accepting or sending any transactions until the safe mode was turned off. The idea was to have a mechanism for quickly containing the damage caused by a bug or exploit before someone could empty out thousands of Bitcoin wallets with it. However, the description of this mechanism as some kind of master key to a user’s whole machine is wrong in four ways:
- It never did give them control “over the whole machine”; the extent of its power even at its height was simply to temporarily disable the Bitcoin client.
- It had an override right from the start. Running Bitcoin with the -disablesafemode switch would allow your client to run normally regardless of what Satoshi or Gavin or whatever more nefarious agency managed to take control of the key wants.
- Motivated in great part by concerns that the feature would be interpreted as a backdoor off switch, the disable mechanism was removed in version 0.3.19. Now, all the “skeleton key” can do is display alerts.
- The official Bitcoin client is not the only client in existence. There is a whole host of wallet options that users can choose from, and some are even compatible with the official client’s wallet.dat file so you can instantly migrate from one to the other.
- “In the U.S., the Federal Reserve handles the printing and regulation of the dollar. If the bitcoin is to become a widely accepted global currency, a regulating agency more complex and thorough than the Fed is required.” – the claim that central banks like the Federal Reserve are necessary at all is far more controversial than this statement implies. Opponents of central banking believe that the machinations of central banks are in fact responsible for a great part of our present financial woes, and cite the fact that most central banks were born not out of a desire to help stabilize the monetary system for the benefit of the people but rather through underhanded political maneuverings by mercantile and banking elites seeking to enshrine for themselves a legal right to profit. Describing the foundation of the Bank of England, David Graeber writes in Debt: The First 5,000 Years: “In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank-in effect, to circulate or ‘monetize’ the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back.”
- “The market price for Bitcoin has been plummeting since 2011” – False since November. In fact, since the last major fall on February 14 the price has only been about twice as volatile as gold.
Also unfortunately false, however, is the article’s claim that Bitcoins are now used in Africa as an alternative to unreliable local currency. Rudiger Koch is trying to achieve Bitcoin adoption in Africa, but it’s far too early to claim any successes. However, Bitcoin is being used in more places than just the shadow economy; it’s being used to trade game codes on Ogrr.com, there are informal experiments like Bitcoin Gone Wild and some are even using it to bypass international money transfer fees and delays. We can only expect that more legitimate uses for Bitcoin will appear in the future.