Welcome to the CoinDesk Weekly Review 28th June 2013 — a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law.
The name’s Hill. Benny Hill.
Secrets ain’t what they used to be. A spook of John Law’s acquaintance used to have the James Bond theme as their ringtone; after Edward Snowden’s traipse around the world, skipping merrily out of reach of the CIA, NSA and GCHQ, it’s probably been replaced by Benny Hill.
For those who like to peer into the future of bitcoin, though, the whole episode has been a lesson in quite why cryptocurrency solves a real need – the best, although not the only, way to tell whether an invention will succeed. In this case, the problem is simple logic. Snowden’s revelations show that the security services are very capable and happy to snoop on millions of people and especially those they categorise as aiding terrorism. In return, the authorities have branded Snowden an ally of terrorism. So, if you want to give Snowden practical support and the spooks find out, what does that do to the chances of ending up in the wrong sort of database?
Best not to find out. Bitcoin doesn’t go through any financial institution, so bitcoin transactions have a much lower profile to the various monitoring schemes based on the idea that effective naughtiness needs real money. So does effective goodness, of course, but it’s a bit difficult to send cash to someone capable of hiding from the global bloodhounds. WikiLeaks knows where Snowden is. But it’s very safe to assume that WikiLeaks is most definitely on spook radar – and hard to get money to in any case.
Enter bitcoin. It’s not spook-proof, but with a little work it is hard enough to connect back to you that it fulfils the number one rule of how not to be seen – be too hard work for too little reward for anyone to bother looking. And that solves the problem, Nothing else can.
Not everyone will benefit from this revelation, though. With most people seeing Snowden as the hero of the piece, it’ll be a long time before the NSA and GCHQ can rely on voluntary bitcoin donations to fund their own Russian hotel bills.
Silence is golden
Marketing is the tax you pay for not being interesting. If you don’t believe that, look at the next ten adverts you read or see on the telly, and ask yourself whether the products themselves are anything other than a dull thing competing against other dull things.
The reverse of the coin, though, is that if people are keeping quiet but clearly up to something, it may actually be worth looking into. Such looks like the case with KnCMiner, whose first interview broke the surface this week.
A Swedish start-up, it’s producing BTC mining rigs based on custom chips – and it’s not alone in that. The difference is that it’s going for cutting-edge technologies that are a couple of generations ahead of the competition, even though this is much more expensive. The reasoning is – if you’re not going to be the best, why bother?
Laudable, exciting and risky. Even assuming that KnC achieves its goal and comes up with the most efficient, fastest mining boxes on the planet, that’s only going to be true for a short period. Moore’s Law, which will run for the next ten years at least, says that every eighteen months to two years, digital electronics get twice as powerful for a given price. The question is: can you make enough money during that short lifetime to see a profit on your expensive mining rig, before the next generation comes along and you lose your competitive advantage?
It’s the financial equivalent of fusion power: once you get more energy out of a fusion reactor than you put in, you get a self-sustaining reaction and as much power as you can eat. Before that point, you have an extremely expensive, albeit pretty impressive, flash gun. Nobody’s cracked sustainable fusion, but the rewards are so great that the governments of the world keep trying.
The dynamics of bitcoin mining are such that only the best engineering will show a profit, driving out less profitable efforts quite quickly. Those are the stakes KnC plays for – and if it pays off, they’ll no more need a marketing budget than a whale needs scuba gear.
Stash and carry
And going back to naughtiness, this week saw what looks like the first state seizure of bitcoin assets earned by contraband. The details are scarce, but as the roughly 11 BTC were nabbed by the US Drug Enforcement Agency it seems highly likely that this was all part of some action on the Silk Road anonymous entrepôt.
John Law has visited the Silk Road, a process which needs a mild amount of faffery with the Tor network and a general lack of paranoia; it is indeed filled with substances that make it harder to do complicated computer tasks while making you very paranoid indeed, so the whole thing is probably self-limiting. He didn’t feel the need to conduct any transactions, though, as he had nothing of interest to sell and tends to meddle with his neurochemistry in more traditional places.
As Let’s Talk Bitcoin! pointed out, the blockchain records of the seized BTC strongly suggest that this was part of a ‘moneypot’ operation, where the DEA sets up shop on Silk Road and proceeds to collar hapless would-be purchasers – who, after all, have to provide a physical address for the products to be sent to. It would be interesting to know just how many Silk Road traders are in fact law enforcement officers: it’s hard to believe that any government agency from any government with an interest in narcotics wouldn’t have at least a couple of active accounts. And as there are an awful lot of such agencies – the War on Drugs being such a well-funded endeavour world-wide, nothing between one and ten thousand such accounts would be surprising.
All this is irresistibly reminiscent of the 1908 novel The Man Who Was Thursday, by G K Chesterston, in which an anarchist cabal turns out to be composed almost entirely of undercover agents unaware of each other’s true status. It’s also supposedly the book that led to Irish revolutionary republican Michael Collins adopting the maxim that “If you don’t seem to be hiding, nobody will hunt you out” – another very good lesson for those who prefer not to attract the attention of the surveillance state.
Everything old is new again.
Coining it in London
John Law would like to remind readers about next Tuesday’s Bitcoin London conference. Of particular interest will be the networking cocktails (although John Law hopes for networking ale), and the post-event meetup at the Cat and Canary. Pembury Tavern: apologies, I have to take my business elsewhere for the day.
John Law is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.
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