for dollars or euros) and conduct financial blockades, such as how U.S.
credit cards cannot be used for online
gambling, could not be used to buy ads
on Backpage (when this now-admitted
criminal enterprise was first blocked
from accepting credit cards due to local pressure), or transfer money directly to WikiLeaks.
However, unless censorship resistance in an electronic transaction is a
requirement (such as for drug deals,
ransom payments, money launderers,
and those seeking to evade currency
control), irreversibility combined with
the volatile price means Bitcoin is significantly inferior to alternatives such
as credit cards or PayPal.
Most sensible recipients of a Bitcoin
payment immediately convert their
payment into dollars, to avoid the substantial risk that currency swings may
prove costly. Thus, most legal sites that
accept Bitcoin payments are not actually taking Bitcoin, but instead using
a service that both adjusts the Bitcoin
price dynamically (so the merchant is
actually pricing in U.S. dollars) and immediately sells the Bitcoin.
This also means that unless the
buyer is a believer in Bitcoin, the buyer
ought to buy Bitcoin only immediately
before they initiate the transaction, to
avoid volatility (and will have had to
mine or buy the Bitcoin in any case).
This is the point where Bitcoin’s irreversibility results in substantial costs.
The Bitcoin exchange either ef-
fectively has to take cash only, must
wait several days after a bank transfer
completes before allowing the cus-
tomer to buy Bitcoin, or is implicitly
extending credit to the customer. Any
exchange that does not follow these
rules faces the fate of Tradehill, a Bit-
coin exchange that went defunct when
faced with chargebacks on Dwolla-
based bank transfers. Steve Wozniak re-
cently experienced the same fate when
he sold $75,000 in Bitcoin to an indi-
vidual who paid with a credit card, only
to find the transaction canceled since
the thief used a stolen credit card (see
Bitcoin payments are thus significantly more expensive for legal purposes when including the mandatory two
currency conversion steps, the first one
of which must be either slow, involve
cash, or an implicit extension of credit. Even eliminating the irreversibility
(which goes contrary to a fundamental explicit Bitcoin design goal stated
by Nakamoto) would still result in two
currency conversion steps. It is impossible to eliminate these two steps from
a volatile cryptocurrency.
Yet, for those who do believe in Bitcoin it still is not usable as a currency.
The monetary policy for Bitcoin is fixed
with a limited and prescheduled creation rate designed to be deflationary.
The only rational behavior for someone holding a deflationary currency is
to never actually spend it. Otherwise
the person risks eternal regret for buying a 10,000 BTC pizza (in 2010) and
later realizing the pizza’s payment is
now worth a notional $100M.
Individual Technical Risks
Since cryptocurrencies are controlled
by private keys, anyone who gains access to the private key can move the
currency. This makes cryptocurrencies
incredibly vulnerable to theft. If someone holds their cryptocurrency using a
third-party service, they run the continual risk that the service gets robbed—
an almost routine occurrence throughout the short history of Bitcoin. Thus,
users instead need to store their money
on their own systems.
But even this is difficult. During early research into Bitcoin when attackers
installed Bitcoin miners on compromised systems, we hypothesized that
malcode might also start to include
Bitcoin theft amongst the automatic
functionality. So we created a small Bitcoin wallet, placed it on images in our
honeyfarm, and set up monitoring routines to check for theft. Two months
later our monitor program triggered
when someone stole our coins.
recipients of a Bitcoin
payment into dollars.
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