Scattered thoughts on bitcoin, past, present, and future.

A blog post today wherein the author purchased lunch brings back the memories. A decade ago, Paypal’s original business model was encrypted virtual money passed around via Palm Pilots. If you found the right restaurant, you could pay for lunch by pointing the infrared port on your PDA at the register. This worked ten years ago, and the user experience was smoother then than bitcoin is today. Obviously, Paypal has gotten out of that business, so the fact that there’s a cafe somewhere willing to accept bitcoins is not proof positive of a bright future.

Have also read some comments about stability and so forth. Is there any reason to buy bitcoins except to speculate? Well, there are very few outlets to actually spend them, and so I’d say the only reason to use bitcoins is for the novelty. I don’t know where the bitcoin economy is headed, but I wouldn’t predict much growth. Even if it becomes a viable platform for trade, with all the currency being held by a few early adopters, it will be very expensive for late comers to buy in (I’d say it already is). If I can’t afford to join later, I won’t, limiting the number of participants. There’s a chicken and egg problem where the hoarders need to circulate their holdings, but there’s no reason to.

I think this is at the root of many comments or complaints that the mining system is unfair. These people represent a group that is attracted to some feature of bitcoins, but feels locked out because the current exchange rate and holdings of bitcoins are unfavorable. It’s like a game of Monopoly. Nobody wants to join the game after all the properties have been bought.

The implications of a completely public transaction log are also only slowly sinking in. bitcoin is frequently touted as anonymous, but it’s anything but. Every bitcoin is like a marked bill with a GPS transceiver. You can theoretically create new addresses and bounce the money around, but the trail is in the clear for anyone to see. If an undercover FBI agent pays you a bitcoin, they can follow all the transactions and watch that money get spent at a coffee shop. (OK, not that bitcoin precisely, since the ‘coins’ themselves can be separated and recombined, but they can connect you to whoever transacted with the undercover agent.) Best of all, no need for a warrant or subpoena. Everything is public record. As a virtual currency, bitcoin may be untraceable, but anytime it interfaces with the real world it leaves some iron clad trails behind.