6% of Americans Think Bitcoin Is an Xbox Game

But more than 40 percent correctly identified it as a virtual currency in a new Bloomberg poll.

A new poll from Bloomberg has found that six percent of Americans think Bitcoin is an Xbox game, and another six percent believe it to be a new iPhone app. Nearly half, 46 percent, were honest and said they just weren't sure. But, despite Bitcoin's relatively niche appeal, not to mention utility, quite a large percentage of the 1,004 Americans surveyed—42—correctly identified Bitcoin as a virtual currency.

For the moment, Bitcoin primarily functions as an investment vehicle for those who believe that Bitcoin's value, currently hovering around $880 per Bitcoin, will eventually rise to ridiculous heights. As my colleague Matt O'Brien recently reported, "Researchers from the University of California-San Diego and George Mason University found that 64 percent of all bitcoins are being hoarded in accounts that have never been spent. And of the bitcoins that are being spent, a full 60 percent are on the gambling site Satoshi Dice."

For people not interested in putting their money into a novel and unproven investment, nor gambling at Satoshi Dice, Bitcoin is of little relevance. Olga Ruff, a jewelry business proprietor in Dallas (who, for her part, did correctly identify Bitcoin in the survey) told Bloomberg News, “What use would it be for me?”

Bitcoin Cyber Geeks Outraged at Paul Krugman

The New York Times columnist ticks off an obscure online community

It's quite common for liberal economist Paul Krugman to ruffle the feathers of Republicans with his Keynsian-infused biweekly columns. But today, The New York Times columnist rattled a more obscure subset of society: the reclusive cyber geeks of the Bitcoin world, who are letting their outrage be known. For the uninitiated, Bitcoin is a digital currency that can be exchanged for goods and services at participating vendors (for practical purposes, there are very few well-known organizations that accept them outside of WikiLeaks). What does Krugman think of this novel currency, which has no transaction fees and doesn't rely on a central bank? After championing it as a "good investment" (its value has "soared" in comparison with the dollar), he dismisses the currency as a workable model for society:

What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.

Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.

And because of that, there has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.

So to the extent that the experiment tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.

Heresy! The dismissal of the currency has triggered a range of emotions from the Bitcoin community and even poisoned the well with liberal vs. conservative infighting in a place first-and-foremost united behind this strange currency. Many initially reacted with euphoria that a Nobel-winning economist had acknowledged their obscure currency:

The Rise of Cryptocurrency Ponzi Schemes

Scammers are making big money off people who want in on the latest digital gold rush but don’t understand how the technology works.

Last month, the technology developer Gnosis sold $12.5 million worth of “GNO,” its in-house digital currency, in 12 minutes. The April 24 sale, intended to fund development of an advanced prediction market, got admiring coverage from Forbes and The Wall Street Journal. On the same day, in an exurb of Mumbai, a company called OneCoin was in the midst of a sales pitch for its own digital currency when financial enforcement officers raided the meeting, jailing 18 OneCoin representatives and ultimately seizing more than $2 million in investor funds. Multiple national authorities have now described OneCoin, which pitched itself as the next Bitcoin, as a Ponzi scheme; by the time of the Mumbai bust, it had already moved at least $350 million in allegedly scammed funds through a payment processor in Germany.

These two projects—one trumpeted as an innovative success, the other targeted as a criminal conspiracy—claimed to be doing essentially the same thing. In the last two months alone, more than two dozen companies building on the “blockchain” technology pioneered by Bitcoin have launched what are known as Initial Coin Offerings to raise operating capital. The hype around blockchain technology is turning ICOs into the next digital gold rush: According to the research firm Smith and Crown, ICOs raised $27.6 million in the first two weeks of May alone.

Unlike IPOs, however, ICOs are catnip for scammers. They are not formally regulated by any financial authority, and exist in an ecosystem with few checks and balances. OneCoin loudly trumpeted its use of blockchain technology, but holes in that claim were visible long before international law enforcement took notice. Whereas Gnosis had experienced engineers, endorsements from known experts, and an operational version of their software, OneCoin was led and promoted by known fraudsters waving fake credentials. According to a respected blockchain engineer who was offered a position as OneCoin’s Chief Technology Officer, OneCoin’s “blockchain” consisted of little more than a glorified Excel spreadsheet and a fugazi portal that displayed demonstrably fake transactions.

And yet, OneCoin attracted hundreds of millions of dollars more than Gnosis. The company seems to have targeted a global category of aspirational investors who noticed the breathless coverage and booming valuations of cryptocurrencies and blockchain companies, but weren’t savvy enough to understand the difference between the real thing and a sham. Left unchecked, this growing crypto-mania could be hugely destructive to one of the most promising technologies of the 21st century.

This danger exists in large part because grasping even the basics of blockchain technology remains daunting for non-specialists. In a nutshell, blockchains link together a global swarm of servers that hosts thousands of copies of the system’s transaction records. Server operators constantly monitor one another’s records, meaning that to steal money or otherwise alter the ledger, a hacker would have to compromise many machines across a vast network in one fell swoop. Even as the global banking system faces relentless cyberattacks, the more than $30 billion in value on Bitcoin’s blockchain has proven essentially immune to hacking.

That level of security has potential uses far beyond digital money. Introduced in July of 2015, a platform called Ethereum pioneered the idea of more complex and interactive applications backed by blockchain tech. Because these systems can’t be altered without the agreement of everyone involved, and maintain incorruptible records of every change, blockchains could eventually streamline sensitive, high-value networks ranging from health records to interbank transfers to remote file storage. Some have called the blockchain “Cloud Computing 3.0.”

Using most of these blockchain applications will require owning the digital currencies linked to them—the same digital currencies being sold in all these ICOs. So, for example, to upload your vacation photos to the blockchain cloud-storage service Storj will cost a few Storj tokens. In the long term, demand for services will set the price of each blockchain project’s token.

While a traditional stock is a legal claim backed up by regulators and governments, then, the tokens sold in an ICO are deeply embedded in the blockchain software their sale helps create. Knowledgeable tech investors are excited by this because, along with the open-source nature of much of the software, it means that ICO-funded projects can, like Bitcoin itself, outlast any single founder or legal entity. In a 2016 blog post, Joel Monegro, of the venture capital fund Union Square Ventures, compared owning a blockchain-based asset to owning a piece of digital infrastructure as fundamental as the internet’s TCP/IP protocol.

Almost all groups launching ICOs reiterate some version of this idea to potential buyers, in part as a kind of incantation to ward off financial regulators. The thinking is that, if they are selling part of a platform, rather than stakes in any company, they’re not subject to oversight by bodies like the U.S. Securities and Exchange Commission. But in practice, ICOs are constantly traded across a variety of online marketplaces as buyers breathlessly track their fluctuating prices. In this light, they look an awful lot like speculative investments.

Buyer expectations may matter more to regulators than technical hair-splitting. Todd Kornfeld, a securities specialist at the law firm Pepper Hamilton, finds precedent in the landmark 1946 case SEC v. W.J. Howey Co. Howey, a Florida orange-growing operation, was selling grove plots and accompanying “service contracts” that paid faraway landowners based on the orange harvest’s success. When the SEC closed in, Howey argued they were selling real estate and services, not a security. But the Supreme Court ultimately disagreed, establishing what’s known as the Howey test: In essence, if you give someone else money in the hope that their activities will generate a profit on your behalf, you’ve just bought a security, no matter what the seller calls it.

Knowledgeable observers tend to agree that some form of regulation is inevitable, and that the term ICO itself—so intentionally close to IPO—is a reckless red flag waved in the SEC’s face. The SEC declined to comment on any prospective moves to regulate ICOs, but the Ontario Securities Commission has issued an advisory that “assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity.”

According to Kornfeld, even those who believe they are conducting ICOs in complete good faith could face serious repercussions when regulators do act, especially if prosecutors think they’ve made misleading statements. “If [prosecutors] think that you’re really bad,” he says. “They can say, hey, you deserve 20 years in jail.”

While it’s easy to see the lie in OneCoin’s fictional blockchain, entirely sincere claims about such a nascent sector still can strain the limits of mere optimism. Many experts, for instance, believe that Gnosis’s use of the blockchain to aggregate data could become a widespread backbone technology for managing complex systems from traffic to financial markets. But the $12.5 million worth of GNO sold in the Gnosis ICO represented only 5 percent of the tokens created for the project, implying a total market value of nearly $300 million. Most tech startups at similar stages are valued at under $5 million.

That astronomical early valuation alone could become bait for an aggressive regulator. Many founders of legitimate blockchain projects have chosen to remain anonymous because of this fear, in turn creating more opportunities for scams.

Much of the money flowing into these offerings is smart, both in that it comes from knowledgeable insiders, and in a more literal sense: Buying into ICOs almost always requires using either Bitcoin or Ethereum tokens (OneCoin, tellingly, accepted payment in standard currency). Jeff Garzik, a longtime Bitcoin developer who now helps organize ICOs through his company Bloq, thinks their momentum is largely driven by recently minted Bitcoin millionaires looking to diversify their gains. Many of these investors are able to do their own due diligence—evaluating a project’s team, examining demo versions of their software, or scrutinizing their blockchain after launch.

Infographic: What Are Bitcoins and How Are They Taxed?

You've heard about bitcoins, the digital exchange system, if only because of a recent hack that resulted in tens of thousands of usernames, email addresses and passwords being released. But you should be paying closer attention, argues TurboTax, which recently put together this explainer on the anonymous, decentralized currency.

"In today's economy, the value of the dollar is weaker than ever and the thought of a digital currency is becoming more of a reality with the recent introduction of bitcoins," TurboTax explains in the introduction to this infographic. "Bitcoins can be compared to cash, but cash is limited to physical exchange, where as bitcoins can be sent throughout the Internet. Today there are more than 6.3 million bitcoins in existence and this number continues to grow. So, how are bitcoins used and how have they become a currency that can be used like dollars, but is tax avoidable? Let's explore."

Infographics are always a bit of a hodgepodge of statistics culled from a variety of sources. Here, we sort through the clutter and pull out some of our favorite facts and figures:

What are bitcoins? Created in 2009 by a Japanese programmer, bitcoins are the first anonymous decentralized digital currency. They are digital coins that you can send through the Internet.
As of May 2011 there are over 6.3 million bitcoins in existence. At current prices, it would cost over $49 million to buy these. The value of a bitcoin drastically changes during the course of a single day; however, they have generally hovered around $14 to $17 per unit.
Advantages to bitcoins: Bitcoins are transferred directly from person to person; fees are much lower; they can be used in any country; and accounts cannot be frozen and there are no prerequisites or arbitrary limits.
Disadvantages to bitcoins: There are privacy and security issues that arise, since bitcoins are shared publicly online; transactions are difficult and based on scripts contained inside them; bitcoins are the currency for many criminals online.
Bitcoins are generated all over the Internet by anybody running a free application called a bitcoin miner. Mining requires a certain amount of work for each coin. This amount if automatically adjusted by the network, such that the bitcoins are always created at a predictable and limited rate.
Bitcoins are produced without the involvement of governments or banks, thus avoiding taxes. Instead, they are generated by software and are stored in an online e-wallet, similar to cash.
On June 19 of this year, a security breach of the Mt. Gox Bitcoin Exchange caused the leakage of usernames, emails and passwords of over 60,000 users into the public domain. In a separate incident, an unknown criminal allegedly transferred or stole 25,000 BTC, worth approximately $500,000, out of an unsuspecting user's wallet.

This Bitcoin Business Is Entirely Out of Hand

But it's incredibly interesting

A hacker-thief has supposedly lifted $500,000 in Bitcoin currency, sending shivers through the tech community and headlines across the web. But here's the funny thing about the virtual currency: were it not for the exploding hype about Bitcoin over the past few weeks, the reported megaheist would only be worth a few dollars. Bitcoin is a two-year old virtual currency based on a theoretically fascinating economic model that guarantees anonymity of the members in the market and eschews a centralized power. With a single Bitcoin unit currently worth about $20, half a million dollars is an astounding and astoundingly misleading figure fueled by media buzz, crazy speculation and hacker fear mongering around Bitcoin. But the story of how it all happened is fascinating--and oddly revelatory as an analogy to our actual economy.

This hoax is another in a chain of stories cascading out of the recently pretty underground Bitcoin community, who were framed as the lynchpin in an anonymous, underground drug market called Silk Road in a June 1 story on Gawker--the tech blog Launch had published a warning story about Bitcoin two weeks prior. Using Bitcoin, an anonymous peer-to-peer virtual currency, internet users could log onto Silk Road, a comparably anonymous peer-to-peer marketplace, and buy practically any drug in the world. (To say Gawker is built for such salacious scoops is an understatement.) The story garnered nearly half a million pageviews, and awash in media exposure, the value of the Bitcoin skyrocketed. One thing led to another, and then the U.S. Senate launched an investigation. But before going into too much detail about the status quo, a bit more about how Bitcoin works.

Bitcoin is sort of like that fake Federal Reserve experiment you did in your high school economics class, except it's real and a bit more utopian. The bank in the experiment--in this case the pseudonymous creator of Bitcoin, Satoshi Nakamoto--offered up a limited number of currency units to be purchased by investors, who could then trade the currency with each other or use the currency for transactions. Maintaining the currency's value would require the bank to forge more units to allow for the market to expand or to take units out of the market to control inflation. Theoretically, an automated system for creation and maintenance of the money supply could handle the risk of inflation in the absence of a central bank to control the money supply. At least that's what Milton Friedman argued, when he called for the abolition of the Federal Reserve.

That basic formula with the utopian "decentralized" caveat drives the Bitcoin model. Nakamoto forged the original 50 units of Bitcoin (BTC) currency in 2009 supplying a small number of users with the money and outlining an algorithmic system through which more units could be created. Each unit bore a unique code that, instead of being printed on notes, was saved onto a hard drive. Essentially, creating more units required drafting more codes using cryptographic techniques called hashing and forced work. Nakamoto outlined a formulaic and democratic process for how this would work in such a self-policing way that relied both on users and on the predefined process that would cap the total supply of Bitcoin. Users would store their currency on their machine's hard drive in a digital wallet with a unique address. If a thief stole the wallet--or essentially, hacked the file's code--the money was gone. Just like real cash. However, in a sea of faceless, nameless, and otherwise unidentifiable proxy IP addresses, thieves would be tough to catch. (It's worth consulting an excellent, more in-depth explainer on how Bitcoin works published last week in The Economist.)


Now back to the heist. First reported by Gawker's Adrian Chen--who also reported the original Silk Road story--the story of the cyberheist resembles the would-be horrid stepchild of a Steve McQueen movie and a Lulzsec prank. Posting under the apropos handle, Allinvain, the robbed Bitcoin investor reported the incident in a forum post, which at the time of this posting garnered nearly 65,000 views:

The first reply to the original post revealed the amount: "Wow, > 25 grand in this address... Intense."

Allinvain claims in subsequent posts to be an early adopter of Bitcoin. Having joined the forum on May 18, 2010, when the currency was worth only pennies, Allinvain certainly became interested in Bitcoin early on, but it's hard to say how intense the heist had actually been. The Bitcoin community remained fairly small for the first year and a half of the currency's existence, and only around the time of the sensational story on Launch. about Bitcoin-as-dangerous did the currency really acquire any real value. Look at the first spike in the currency's value, around the mid-May coverage on Launch. When Chen published his exposée on the Silk Road drug market on June 1, the graph turns into a hockey stick:

Chen commented on the impact of his Silk Road post with the headline: "Everyone Wants Bitcoins After Learning They Can Buy Drugs With Them."

The following dip represents a flurry of bad news for Bitcoin. The U.S. government, who can legally regulate Bitcoin transactions in this country, announces on June 8 that they would crackdown on Bitcoin, prompting the upside-down hockey stick. The Economist publishes their explainer on the currency, "Bits and bob," on June 13th, and the graph spikes again. The heist news appears not to have impacted the market, perhaps because despite the hyperbolic value quoted in headlines, not that much money was stolen.

But the peripheral stories are fun. One developer, Nick Carlson, interviewed Wednesday by Beta Beat explains how he performed development work for a wage in Bitcoins. Carlson knew that when he took a 12-hour job paying 60 Bitcoins--worth a $30 per hour at the time, paltry compared to his regular rate of $75 to $150--the wage would be an investment. Over time, and with enough exposure, the currency would appreciate, and it did. Those 60 Bitcoins could have netted him $2,000 at the market's peak exchange rate of 33 USD per 1 BTC.

A few weeks ago, Beta Beat interviewed another Bitcoin believer, Bruce Wagner. Host of The Bitcoin Show, a web TV series that actually exists, Wagner compares what had previously been an experiment in virtual economics to the experiment in communications that became the internet.

Wagner argues his case for Bitcoin's legitimacy kind of poorly, but that utopian vision of a virtual currency sticks. Media exposure—more specifically Adrian Chen's Silk Road blog post—could be credited with creating millions of dollars worth of virtual wealth. Which is funny because that's sort of how the real wealth is often created. But Bitcoin's example media influence is so clear and linear, they should teach it in journalism schools or something. If enough people bet on it, Bitcoin could pay dividends, and with the right touches by influential forces, namely the media and the government, it would become somewhat of a standard. After all who else is betting big on a virtual, extra-national currency? Oh, that's right, Facebook is.

Correction: An earlier version of this post incorrectly misattributed the above quote from Bruce Wagner about the Bitcoin bubble to Dr. Larry White, an economics professor at George Mason University. While he has studied Bitcoin, White does not host a Bitcoin web show.