Bitcoin Was Rejected Again,This Is Why It Doesn’t Matter

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What Bitcoin Is, and Why It Matters

Can a booming “crypto-currency” really compete with conventional cash?

Unlike other currencies, Bitcoin is underwritten not by a government, but by a clever cryptographic scheme.

For now, little can be bought with bitcoins, and the new currency is still a long way from competing with the dollar. But this explainer lays out what Bitcoin is, why it matters, and what needs to happen for it to succeed.

Where does Bitcoin come from?

In 2008, a programmer known as Satoshi Nakamoto—a name believed to be an alias—posted a paper outlining Bitcoin’s design to a cryptography e-mail list. Then, in early 2009, he, she, or they released software that can be used to exchange bitcoins using the scheme. That software is now maintained by a volunteer open-source community coordinated by four core developers.

“Satoshi’s a bit of a mysterious figure,” says Jeff Garzik, a member of that core team and founder of Bitcoin Watch, which tracks the Bitcoin economy. “I and the other core developers have occasionally corresponded with him by e-mail, but it’s always a crapshoot as to whether he responds,” says Garzik. “That and the forum are the entirety of anyone’s experience with him.”

How does Bitcoin work?

Nakamoto wanted people to be able to exchange money electronically securely without the need for a third party, such as a bank or a company like PayPal. He based Bitcoin on cryptographic techniques that allow you to be sure the money you receive is genuine, even if you don’t trust the sender.

The basics

Once you download and run the Bitcoin client software, it connects over the Internet to the decentralized network of all Bitcoin users and also generates a pair of unique, mathematically linked keys, which you’ll need to exchange bitcoins with any other client. One key is private and kept hidden on your computer. The other is public, and a version of it dubbed a Bitcoin address is given to other people so they can send you bitcoins. Crucially, it is practically impossible—even with the most powerful supercomputer—to work out a private key from someone’s public key. This prevents anyone from impersonating you. Your public and private keys are stored in a file that can be transferred to another computer—for example, if you upgrade.

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A Bitcoin address looks something like this: 15VjRaDX9zpbA8LVnbrCAFzrVzN7ixHNsC. Stores that accept bitcoins—for example, this one, selling alpaca socks—provide you with their address so you can pay for goods.

Transferring bitcoins

When you perform a transaction, your Bitcoin software performs a mathematical operation to combine the other party’s public key and your own private key with the amount of bitcoins that you want to transfer. The result of that operation is then sent out across the distributed Bitcoin network so the transaction can be verified by Bitcoin software clients not involved in the transfer.

Those clients make two checks on a transaction. One uses the public key to confirm that the true owner of the pair sent the money, by exploiting the mathematical relationship between a person’s public and private keys; the second refers to a public transaction log stored on the computer of every Bitcoin user to confirm that the person has the bitcoins to spend.

When a client verifies a transaction, it forwards the details to others in the network to check for themselves. In this way a transaction quickly reaches and is verified by every Bitcoin client that is online. Some of those clients—“miners”—also try to add the new transfer to the public transaction log, by racing to solve a cryptographic puzzle. Once one of them wins, the updated log is passed throughout the Bitcoin network. When your software receives the updated log, it knows your payment was successful.

Security

The nature of the mathematics ensures that it is computationally easy to verify a transaction but practically impossible to generate fake transactions and spend bitcoins you don’t own. The existence of a public log of all transactions also provides a deterrent to money laundering, says Garzik. “You’re looking at a global public transaction register,” he says. “You can trace the history of every single Bitcoin through that log, from its creation through every transaction.”

How can you obtain bitcoins?

Exchanges like Mt. Gox provide a place for people to trade bitcoins for other types of currency. Some enthusiasts have also started doing work, such as designing websites, in exchange for bitcoins. This jobs board advertises contract work paying in bitcoins.

But bitcoins also need to be generated in the first place. Bitcoins are “mined” when you set your Bitcoin client to a mode that has it compete to update the public log of transactions. All the clients set to this mode race to solve a cryptographic puzzle by completing the next “block” of the shared transaction log. Winning the race to complete the next block wins you a 50-bitcoin prize. This feature exists as a way to distribute bitcoins in the currency’s early years. Eventually, new coins will not be issued this way; instead, mining will be rewarded with a small fee taken from some of the value of a verified transaction.

Mining is very computationally intensive, to the point that any computer without a powerful graphics card is unlikely to mine any bitcoins in less than a few years.

Where to spend your bitcoins

There aren’t a lot of places right now. Some Bitcoin enthusiasts with their own businesses have made it possible to swap bitcoins for tea, books, or Web design (see a comprehensive list here). But no major retailers accept the new currency yet.

If the Federal Reserve controls the dollar, who controls the Bitcoin economy?

No one. The economics of the currency are fixed into the underlying protocol developed by Nakamoto.

Nakamoto’s rules specify that the number of bitcoins in circulation will grow at an ever-decreasing rate toward a maximum of 21 million. Currently there are just over six million; in 2030, there will be over 20 million bitcoins.

Nakamoto’s scheme includes one loophole, however: if more than half of the Bitcoin network’s computing power comes under the control of one entity, then the rules can change. This would prevent, for example, a criminal cartel from faking a transaction log in its own favor to dupe the rest of the community.

It is unlikely that anyone will ever obtain this kind of control. “The combined power of the network is currently equal to one of the most powerful supercomputers in the world,” says Garzik. “Satoshi’s rules are probably set in stone.”

Isn’t a fixed supply of money dangerous?

It’s certainly different. “Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has,” says Russ Roberts, professor of economics at George Mason University. The consequence will likely be slow and steady deflation, as the growth in circulating bitcoins declines and their value rises.

“That is considered very destructive in today’s economies, mostly because when it occurs, it is unexpected,” says Roberts. But he thinks that won’t apply in an economy where deflation is expected. “In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now.”

Does Bitcoin threaten the dollar or other currencies?

That’s unlikely. “It might have a niche as a way to pay for certain technical services,” says Roberts, adding that even limited success could allow Bitcoin to change the fate of more established currencies. “Competition is good, even between currencies—perhaps the example of Bitcoin could influence the behavior of the Federal Reserve.”

Central banks the world over have freely increased the money supply of their currencies in response to the global downturn. Roberts suggests that Bitcoin could set a successful, if smaller-scale, example of how economies that forbid such intervention can also succeed.

The SEC Has Rejected Every Bitcoin ETF. This Firm Thinks It Has a Solution

SEC image via Shutterstock

Nikhilesh De

The SEC Has Rejected Every Bitcoin ETF. This Firm Thinks It Has a Solution

One company thinks it knows how to get a bitcoin exchange-traded fund (ETF) approved by U.S. regulators.

Wilshire Phoenix, a relatively young financial firm in New York, filed to launch the United States Bitcoin & Treasury Investment Trust ETF in May with NYSE Arca. At that point, a dozen bitcoin ETF proposals had already been swatted down by the U.S. Securities and Exchange Commission (SEC) – including nine in one day. But unlike other ETF applications, Wilshire Phoenix’s ETF will invest in both bitcoin and U.S. Treasury securities, commonly referred to as T-bills.

The SEC is currently reviewing the application.

“Our proposed bitcoin-related ETF is quite different from those that have previously been submitted to the Commission for approval,” Wilshire Phoenix founder and managing partner William Herrmann said in a phone interview. “To name just a few distinctions, the composition of the Trust is very different. Our Trust is a multi-asset trust (bitcoin and T-Bills), as opposed to just bitcoin.”

The SEC has long been hesitant to approve an ETF with exposure to digital assets, citing the market’s relatively young age and the possible risks to investors. The agency has rejected a number of proposals, while other applicants have proactively withdrawn their filings.

Herrmann says the Wilshire ETF has several mechanisms to address these concerns.

The Trust itself will automatically rebalance itself monthly to address possible concerns about bitcoin’s price volatility, Herrmann explained. Essentially, if bitcoin’s price volatility increases, the index will reduce its exposure to the cryptocurrency and instead increase its exposure to Treasury bills. As bitcoin’s volatility falls, the opposite occurs.

The weighting will be transparent, with the index being shown on Bloomberg and Thomson Reuters portals, he said.

The CME’s Bitcoin Reference Rate will provide the data for bitcoin’s price in the Trust, rather than use an in-house price method “or one from any related party,” he added.

Wilshire Phoenix is also hoping to address SEC concerns about market manipulation by using a surveillance sharing agreement, one component the regulator stressed was needed when rejecting a recent bitcoin ETF application. Herrmann said:

“The CME has surveillance sharing agreements with both the CME futures market as well as the relevant portion of the spot market that forms the basis for the Trust’s bitcoin values. This addresses the SEC concerns about the lack of surveillance sharing agreements with the relevant spot market, which is something previous applicants have not been able to address.”

Most recently, the SEC denied Bitwise Asset Management’s fund. In a whopping 112-page order published Oct. 9, the regulator said surveillance-sharing agreements were necessary and market manipulation remains a real concern.

As recently as September, SEC Chairman Jay Clayton said that while progress has been made in the space, the market manipulation question had not been resolved.

For Wilshire Phoenix’s proposal, the SEC began accepting comments on the proposal in June, though a final decision is still months away. The agency is currently accepting comments on the proposal through Nov. 12, 2020.

Herrmann is optimistic about the ETF proposal’s chances, saying “we developed the ETF consistent with investor protection as well as fair, orderly and efficient markets.”

SEC image via Shutterstock

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Bitcoin Cash Is More Widely Accepted Than Bitcoin In Japan, Why It Doesn’t Matter

Roger Ver has re-ignited the BTC vs. BCH debate by claiming that significantly more physical shops now accept Bitcoin Cash than Bitcoin, in Japan. Which, he believes, is further evidence of Bitcoin Cash’s superiority. However, such instances of one-upmanship only serve to fuel division amongst the wider crypto-community. Which is especially problematic during times that call for unity to move forward.

Japan now has more Bitcoin Cash accepting physical shops than BTC.https://t.co/nVHwj1EogG

Bitcoin Cash Is Big In Japan

Japan’s booming crypto industry comes in part from an acceptance of cryptocurrency. Both from the general public, who stereotypically embrace technological innovation, and from lawmakers, who cultivate an open-minded attitude towards digital money. This has fostered a progressive regulatory environment, as evidenced by recognition of Bitcoin, and other digital currencies, as legal property under the Payment Services Act. In effect, green-lighting cryptocurrencies as legitimate instruments, in Japan at least.

For these reasons, goings-on in Japan are significant for the entire industry, and may well reflect up and coming trends across the rest of the world. Unfortunately, news that Bitcoin Cash is proving itself a more popular transactional currency in Japan will be disappointing for some. Nonetheless, it has to be said; this is what both sides wanted. Therefore, as the crypto industry awaits defining regulatory news that will shape its future direction, it makes sense to acknowledge that toxicity within the crypto-community achieves nothing, especially so when both BTC and BCH are on track with their development.

Jokes aside, I think you are doing a good job at reporting on both sides of the debate. It’s just that the cryptocurrency community is a very unforgiving audience,and easily angered, which doesn’t really work with the subtle and nuanced arguments needed to fully explain the topic

Bitcoin vs. Bitcoin Cash

No other rivalry in crypto is as intense as BTC vs. BCH. It started because members of the BTC community, led by Roger Ver, saw BTC as a transactional currency. They were unhappy with its scalability and thought the 1MB block size was insufficient to cope with large scale throughput. Whereas others believe BTC should be a store of value, rather than a transactional currency. And they felt that larger block sizes would prevent individuals from running their own full nodes. Meaning, in the future, transaction verification could only happen via large scale mining pools, resulting in network centralization – a critical violation of the concept of alternative money.

Taking into account the entirety of Bitcoin Cash’s philosophy, many developers see BCH as closer to Satoshi Nakamoto’s white paper. But this belief is not based on one being a truer Bitcoin than the other. Instead, it comes from a place that takes into account variables that could not have been predicted, such as the rise in ASIC mining, and the (so far) limited success of layer 2 scaling solutions for Bitcoin.

It’s easy to understand why Bitcoin Cash supporters say their coin is the “original vision”, because it probably *is* closer to the original vision. Bitcoin was obviously meant to be used for commerce and not just as a store of value. But the original vision is wrong and flawed.

Does It Matter?

Often in human psychology, the need to be number one precedes all else. Even common sense and reasoning, but there comes a time when we must put aside our differences to move forward. After all, there is room enough to have a quick, cheap global currency as well as one that offers a store of value. Vinny Lingham, CEO of Civic, believes there is scope for different projects to fulfill different criteria, he said:

“If Bitcoin is being built to be a Store of Value, then something else needs to fill the gap of a Medium of Exchange/currency.”

And with that mind, Roger Ver, and his team at Bitcoin Cash deserve congratulations for taking cryptocurrency further into the mainstream.

Samuel Wan

Samuel Wan is passionate about different cultures and eating good food. He has years of experience working in business and finance — a burgeoning interest in Bitcoin and cryptocurrencies since 2020. UK based.

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