If you keep on top of bitcoin news you've probably stumbled across stories from one of its most vocal followers - Joe Wiesenthal. Joe regularly makes posts about bitcoin's development and progress, for example:
- (Up) Nov 5th - Bitcoin is Going Totally Ballistic
- (Up) Nov 6th - Bitcoin Is Going On An Astronomical Tear
- (Up) Nov 7th - Bitcoin Goes On An Overnight Nuclear Melt-Up
- (Up) Nov 8th - Bitcoin Is Going Crazy Again
- (Up) Nov 9th - Bitcoin Is Having Another Preposterously Huge Day
- (Down) Nov 10th - Bitcoin Crashes Nearly 25%
- (Up) Nov - 11th - Although bitcoin has regained its pre-weekend value we have as yet no headline about it going on an Astronomically Huge Preposterous Nuclear Melt so far... perhaps Joe has decided that the early-stage and growing bitcoin is simply more volatile than the assets he is used to? Then again the night is young...
Bitcoin's Design looks to be one of the greats
Bitcoin is such a new phenomenon that before investing time, money or effort into it, it makes sense to assess it as clearly and in as much depth as possible.
As a computer scientist the elegance and power of certain algorithms is immediately apparent. Binary Chop always springs to my mind for example but probably an even better example of this, more understandable to a non-programmer is Diffie Hellman key exchange, described in this excellent video by Khan Academy.
As Seymour Papert described some time ago in his book Mindstorms, people regularly exposed to algorithms come to think not just formally in terms of them but concretely, understanding them at a more intuitive level and naturally applying them to other situations. When faced with a new algorithm it is absorbed far more easily and the consequences, strengths and weaknesses are much more readily apparent.
Algorithms like these do not need to be complicated, but they elegantly solve a very difficult problem which can then have very far reaching consequences.
As Tim Lee has described bitcoin falls into this category. It is fundamentally different to centralised systems with trusted entities like PayPal, Amazon Coins, or even US Dollars. It isn't different because someone says it will be and the 21 million coin limit isn't there because someone says they won't create more, any more than Diffie Hellman key exchange allows exchange of a secret key simply by virtue of someone saying they will keep it hidden. It is the fundamental operation of the algorithm and its properties which gives it its strength.
If you want to decrypt a document encrypted with AES without first obtaining the secret key then you will have to break AES. What this means is you will have to spot something in the algorithm that everyone else has missed, or run calculations for longer than the death of many universes to discover it by random chance. This is why cracking AES is hard, its not just a function of spending money or the speed of computers.
These algorithms open up possibilities that simply weren't there before. As Richard Brown, IBM's executive director points out: like many others, until Bitcoin existed he simply didn't think it was possible.
As a computer scientist the elegance and power of certain algorithms is immediately apparent. Binary Chop always springs to my mind for example but probably an even better example of this, more understandable to a non-programmer is Diffie Hellman key exchange, described in this excellent video by Khan Academy.
As Seymour Papert described some time ago in his book Mindstorms, people regularly exposed to algorithms come to think not just formally in terms of them but concretely, understanding them at a more intuitive level and naturally applying them to other situations. When faced with a new algorithm it is absorbed far more easily and the consequences, strengths and weaknesses are much more readily apparent.
Algorithms like these do not need to be complicated, but they elegantly solve a very difficult problem which can then have very far reaching consequences.
As Tim Lee has described bitcoin falls into this category. It is fundamentally different to centralised systems with trusted entities like PayPal, Amazon Coins, or even US Dollars. It isn't different because someone says it will be and the 21 million coin limit isn't there because someone says they won't create more, any more than Diffie Hellman key exchange allows exchange of a secret key simply by virtue of someone saying they will keep it hidden. It is the fundamental operation of the algorithm and its properties which gives it its strength.
If you want to decrypt a document encrypted with AES without first obtaining the secret key then you will have to break AES. What this means is you will have to spot something in the algorithm that everyone else has missed, or run calculations for longer than the death of many universes to discover it by random chance. This is why cracking AES is hard, its not just a function of spending money or the speed of computers.
These algorithms open up possibilities that simply weren't there before. As Richard Brown, IBM's executive director points out: like many others, until Bitcoin existed he simply didn't think it was possible.
Pros, Cons... and nonsense
Bitcoin then, is a very exciting idea. To understand bitcoin is to understand the doors that have been opened by its invention in the same way that Diffie Hellman and RSA opened doors.
To understand bitcoin in the context of recent issues such as the Cyprus Bail-ins is to see these doors opened at perhaps the perfect time both to protect a lot of average people and for bitcoin to flourish as a result. Further, anyone experiencing the actually poor security, high barriers and high fees of the existing payments infrastructure has even more reason to get excited about it.
However, metacognition warning bells begin to ring. Exciting, but this sounds too good to be true? What are the flaws? What are the arguments against? Where are the holes? As Harvard Business Review wisely recommends the best way to not get caught up in the hype is to appoint or play devil's advocate and try to look for flaws, holes, reasons why this isn't what it appears to be, reasons why it will fail.
This approach can lead to some valid concerns about bitcoin, particularly in its earlier days - 51% attacks, effects of regulation, knowledge of the NSA's hand in weakening cryptography standards and the security of its implementation. These are valid criticisms and concerns which come from an understanding of the benefits and risks of bitcoin.
Unfortunately Joe appears to be leading the charge of the majority of vocal bitcoin critics who fall into the other type of criticism for bitcoin - that based on a hollywood level understanding of it.
To understand bitcoin in the context of recent issues such as the Cyprus Bail-ins is to see these doors opened at perhaps the perfect time both to protect a lot of average people and for bitcoin to flourish as a result. Further, anyone experiencing the actually poor security, high barriers and high fees of the existing payments infrastructure has even more reason to get excited about it.
However, metacognition warning bells begin to ring. Exciting, but this sounds too good to be true? What are the flaws? What are the arguments against? Where are the holes? As Harvard Business Review wisely recommends the best way to not get caught up in the hype is to appoint or play devil's advocate and try to look for flaws, holes, reasons why this isn't what it appears to be, reasons why it will fail.
This approach can lead to some valid concerns about bitcoin, particularly in its earlier days - 51% attacks, effects of regulation, knowledge of the NSA's hand in weakening cryptography standards and the security of its implementation. These are valid criticisms and concerns which come from an understanding of the benefits and risks of bitcoin.
Unfortunately Joe appears to be leading the charge of the majority of vocal bitcoin critics who fall into the other type of criticism for bitcoin - that based on a hollywood level understanding of it.
It'll take me a while to crack this encryption...
Without understanding the doors that bitcoin has created and opened and the fundamental strengths and weaknesses of its design its not possible to distinguish between it and existing technologies which are superficially similar and it therefore becomes easy to laugh at it and dismiss it. Why is it any different to PayPal? Who says there will only be 21 million bitcoins? Everything is cracked (and therefore destroyed?) at some point / at some price.
Joe's arguments are more economic but still appear to stem from a lack of in depth understanding or maybe just a lack of critical thinking.
Joe writes that "If you believe in bitcoin then you should never buy anything in bitcoin" making the case that a deflationary asset (one that increases in value) means that you will continually hoard it and never spend its value. Unfortunately Joe misses the point that supply-limited deflationary assets already exist - in fact in his profile he states that he owns gold - but he fails to see the parallel. Similarly Joe must realise that people can and do invest in the stock market with the expectation of making returns (their money invested will become a larger amount of money next year - the fundamental quality of a deflationary asset). Given the existence of the stock market and the opportunity to make returns his argument would suggest that we must all be putting every penny we have into Amazon stocks and hoarding all our cash because we see it increase in value. What he misses is that people are making a value and risk judgement. I can invest in Amazon stock and be happy to watch it go up without operating purely on the black and white case of either investing and keeping all my money in it or not.
Joe also claims that "Bitcoin is a joke" because it lacks "intrinsic value" and is "mostly just a speculative vehicle" with other activity predominantly limited to "PR stunts about bars and other shops accepting bitcoins". Joe apparently sees the current gold price of $41,000 per kilogram as being entirely a function of its ability to conduct electricity, resist corrosion and look attractive. I can only assume he is investing heavily in clearly undervalued aluminium, copper and plastic beads. We will no doubt all look like fools when one day in the not too distant future Joe sits atop his mountain of fake plastic pearls and sells them to us at $40,000 per kilo.
Similarly Joe's criticisms that bitcoin hasn't already built all its possible infrastructure and saturated its market to greatly reduce volatility remind me of Clifford Stoll's now legendary criticism of the internet back in a 1995 Newsweek article, helpfully describing the future in very accurate detail while at the same time claiming none of it will come to pass.
Whether we are missing something fundamental in our understanding of bitcoin is open to debate and to that debate I am very open. Whether the doors it has opened and the strengths and weaknesses of its design are as they appear or not is an interesting and valid discussion, as with any groundbreaking new algorithm or technology. Unfortunately bitcoin's potential to have such a profound effect on the often non-technical and very vocal world of finance appears to mean arguments like these are by far the most common within the discussion yet don't add a lot to it.
Joe's arguments are more economic but still appear to stem from a lack of in depth understanding or maybe just a lack of critical thinking.
Joe writes that "If you believe in bitcoin then you should never buy anything in bitcoin" making the case that a deflationary asset (one that increases in value) means that you will continually hoard it and never spend its value. Unfortunately Joe misses the point that supply-limited deflationary assets already exist - in fact in his profile he states that he owns gold - but he fails to see the parallel. Similarly Joe must realise that people can and do invest in the stock market with the expectation of making returns (their money invested will become a larger amount of money next year - the fundamental quality of a deflationary asset). Given the existence of the stock market and the opportunity to make returns his argument would suggest that we must all be putting every penny we have into Amazon stocks and hoarding all our cash because we see it increase in value. What he misses is that people are making a value and risk judgement. I can invest in Amazon stock and be happy to watch it go up without operating purely on the black and white case of either investing and keeping all my money in it or not.
Joe also claims that "Bitcoin is a joke" because it lacks "intrinsic value" and is "mostly just a speculative vehicle" with other activity predominantly limited to "PR stunts about bars and other shops accepting bitcoins". Joe apparently sees the current gold price of $41,000 per kilogram as being entirely a function of its ability to conduct electricity, resist corrosion and look attractive. I can only assume he is investing heavily in clearly undervalued aluminium, copper and plastic beads. We will no doubt all look like fools when one day in the not too distant future Joe sits atop his mountain of fake plastic pearls and sells them to us at $40,000 per kilo.
Similarly Joe's criticisms that bitcoin hasn't already built all its possible infrastructure and saturated its market to greatly reduce volatility remind me of Clifford Stoll's now legendary criticism of the internet back in a 1995 Newsweek article, helpfully describing the future in very accurate detail while at the same time claiming none of it will come to pass.
Whether we are missing something fundamental in our understanding of bitcoin is open to debate and to that debate I am very open. Whether the doors it has opened and the strengths and weaknesses of its design are as they appear or not is an interesting and valid discussion, as with any groundbreaking new algorithm or technology. Unfortunately bitcoin's potential to have such a profound effect on the often non-technical and very vocal world of finance appears to mean arguments like these are by far the most common within the discussion yet don't add a lot to it.
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