Real-time self-government in the cryptocurrency frontier: Set and setting
By Daniel M. Ryan
The Rise Of A New Frontier
If you're one of the majority who's heard about Bitcoin, what you've heard has probably left you wary. From the popular press, Bitcoin is some sort of crossbreed between the rarefied branch of mathematics called cryptography and the sideline world of peer-to-peer networking. There's something called "mining," which seems to involve keeping the network running. You've probably encountered that term from reading those stories about the huge mining operations with industrial-park-sized rooms filled with specialized chips called "ASICs." They're big business and they're controversial. Had you pursued further to find out why they're big businesses and why they're controversial, you bumped into a world where high-tech jargon terms mix freely with populist rhetoric.
You've probably also read about how far Bitcoin has come, price-wise, and how quickly. When Bitcoin first traded on an exchange as of four years ago, you could buy all you wanted for less than ten cents each. As of Sunday, July 20th, one Bitcoin was about $620.
Let's stop a moment to look at the wildest and woolliest part of the stock market: the penny stock universe. Assume you threw $10,000 into a thinly-traded penny stock trading listlessly around 10 cents per share. Four years later, the same stock is trading in huge volume; it topped $12 several months ago, but it's recently been drifting along between $5 and $6. You see it poke its head above $6, decide to take your money and run, and sell your $10,000 worth for a cool $620,000 before taxes.
You add the obligatory happy dance when settlement day arrives, and set up a bar meeting with your penny stock friends to tell them about your great victory. All of them, including you, know full well that a 62-bagger – just one – is enough to make you a penny-stock hero once the word goes viral. In fact, only one singleton 62-bagger is enough of a kernel for you to make a nice living thenceforth as a penny-stock advisor: all you have to do is master the patter, tropes and escape hatches that keep a clientele subscribed.
All of your friends, but one, get excited for you and festoon you with "Congrats!" "Way to go!" and so on. The odd man out, though, is looking at you with a smile that a shoplifter would get from a cop.
"All right, ‘fess up. What was the deal? How'd you and the rest of the backstage boys pull it off?"
This fellow's being the downer at your celebration party because of his common sense. His "horse sense" tells him that there's no way anyone can score a 62-bagger in a mere four years without something funny going on underneath the hood.
So you explain your new whiz-bang desktop app that deserves the credit for finding the stock that exploded. Since you're familiar with your tech, and deeply swear by it, your spiel is laced with technical jargon terms that you're so familiar with, you use them like your friends use "Budweiser." You explain with honest enthusiasm, and with metaphors that you and the rest of your echo-chamber tech friends consider incisive. Your capsule history of your whiz-bang tech makes your program sound like a crossbreed between a branch of rarefied and tricky mathematics and a sideline of the Internet most known for digital-rights violations. All your friends are intrigued, if a little bewildered, but your skeptic friend is completely unmoved. You're perplexed to find that your "evangelization" has only hardened his grin.
Yes, that's precisely what you did. All you succeeded in doing was tutoring and fleshing out his suspicions. You thought you were debunking his impression that there was some sort of scam. But, at the end of your spiel, you're shocked to find out that all your words – the way he interpreted them - merely explained to him how the scam works.
That's what you'd go through if you struck it lucky with a "mere" 62-bagger. Had you been impossibly lucky enough to score a 620,000% profit in those four years – ten cents to a full $640 - the ratio of scam-sniffing skeptics to believers would definitely have been reversed. A 6200-bagger is just too outside of the known penny-stock universe to be credible. Unless, of course, there were some backstage operations involved…
Welcome To The Jungle…
Actually, if you're like those Bitcoin "instant millionaires," you're likely to keep very quiet about it – even in your usual haunts. Since you either had a straight job or were down on your luck when you started with Bitcoin, and because those early days were the happiest days of your Bitcoin life, you have enough feeling for people of ordinary means to be almost inhibited about discussing your newfound wealth. Especially since, as a techie, you were happily sucked into the nuts and bolts of the Bitcoin system: that tech-centered cognitive bliss is precisely why you treasure the days when you were more-or-less breaking even.
Plus, you remember them as the days before the Bitcoin world was plagued by a rash of outright thefts. A torrential crime wave, one which makes the meme-word "unregulated" only scratch the surface of the anarchic state of the cryptocurrency frontier. You remember 2011 as the year of lost innocence, where a serious cluster of crime actually drove several hot Bitcoin firms into ignominious bankruptcy. You're well-versed in Rule 1 of basic Bitcoin security: encrypt your wallet file and use a strong password made up of random characters. A minimum of sixteen or twenty random characters, to be safe. You also know a lot about various kinds of spyware. So, you – with tongue in cheek – wipe your password from your computer's memory once generated. Instead of storing it, you take old-tech pen in hand and write it down on a piece of paper. You never, never, never let it even touch your hard drive. Instead, whenever you want in to your wallet, you look over at the sheet of paper where you wrote your password and peck it into the password box after reading your neat-as-you-can-make it hand-printed transcription.
You also know how to make a "cold wallet." In its strongest form, a cold wallet means moving your wallet file to a newly-formatted or new-off-the-shelf secondary hard drive, getting a screwdriver, opening up your rig, and physically removing said hard drive from your trusty old rig. You then walk over to a completely different computer, a cheapo one that you bought without a hard drive. Right after formatting or receiving that secondary drive, you added an operating system and the Bitcoin client software: nothing else! Then, you added your full wallet to the appropriate directory. If you're especially techy and scrupulous, you'll run a full diagnostic check to make sure that the secondary drive has your operating system, your Bitcoin client, your soon-to-be-cold wallet, and not a single byte more. And you'll ensure this cleanliness by using a disk-overwrite program like Eraser to securely overwrite every 512-byte sector that isn't explicitly accounted for by the OS, the client and your wallet. It may take a week for the free-space sweep, but you're sure that the cold-wallet security is worth the wait. Viruses and malware can hide anywhere these days.
Once your secondary drive is sanitized and ready, you wire it in as the primary hard drive for your cheapo backup computer – one destined to remain forever virgin to the Internet. After making sure it works, and that your wallet is both in the right place and accessible to your client, you go back and perform the absolutely necessary second stage. It would be a fatal mistake to send the original copy of your wallet file to the Recycle Bin or just plain delete it. Files that are merely deleted are so easy to recover, it'd be like locking your bike with kite string and a granny knot. Instead, you run it through the best file-eliminator program you can find, like the aforementioned Eraser, after which you breathe easy. The program has overwritten the original copy of your wallet file to digital oblivion.
Then, you can relax. And remind yourself, for the thousandth time, to warn Bitcoin newbies against the fatal mistake of confusing cold-walleting with backing up files.
But you're not relaxed all the way. Being a logical fellow, you realize that there's a catch-22 in even the most elaborate security protocols. Since your Bitcoins can't be spent until your client hooks up with the Internet-shared public ledger – the blockchain – you do have to make your cold wallet "hot" again. If a malicious hacker has snuck wallet-copying spyware behind your defenses at that point, all your best-laid preparedness will be for naught.
You know that cold-walleting is a little different, and a little riskier, in the world of Internet businesses. There, cold-wallets are automatically opened and closed after being housed in completely different severs. Since servers by definition have 24/7 access to the Internet, a cold wallet is a lot like an old-West armoury fort some distance away from the arms depot that services the soldiers. The depot itself only has a small portion of the arms sent over from the central repository; the fort safeguards the rest. So, every now and then, a soldier from the depot sneaks over to the fort, shows up at an agreed-upon side door instead of at the main gate, gives the secret signal, and then warily sneaks back. Sometime later, a posse cautiously emerges from the fort - after making sure that there are no unfriendlies waiting to pounce on them and steal their cache of guns. Then, in double time, they hurriedly speed the replenishing cache of arms over to the depot. If the logistics officer planned correctly, the now-flush depot will soon be mostly emptied by the regulars waiting in line for their arms.
Then, the posse double-times their way back to the fort, the interior guards securely lock and block the main door and inspect all the other entry point with nuclear-submarine rigour, then then the denizens of the fort go back to nursing their cases of cabin fever.
Being an old adopter and a thoroughly-grounded tech hipster, you know exactly why. Since stealing digital goods amount to little more than a file-copy and transfer operation, it's ridiculously easy to steal "digital cash." In fact, the invention of the public-ledger blockchain was intended to prevent someone from making a copy of their wallet and spending the same Bitcoins twice. But in order to work, the ledger network has to follow a first-sent, first-spent rule and adhere to that rule rigorously. A less-than-careful Bitcoin holder could blithely hold on to his Bitcoins for a year, open up his wallet, try to spend his holdings, and then find out to his shock that the underlying digital tokens had been stolen months ago. If he got in because an evangelist had assured him that Bitcoin was a revolutionary kind of digital cash, he'd have cause to wonder why his "cash" is both long vanished and still there in his wallet.
Like many people, you know about Mt. Gox's bankruptcy. But unlike most people, you know that Mt. Gox was an accident waiting to happen.
It opened its doors four years ago, about the time when you got in. As a convenience, it offered to credit its users' accounts with funds sent via PayPal. It did, that is, until the Gox guys discovered that PayPal regards digital goods as dodgy, so dodgy that it honours refund requests from disgruntled buyers with more than its usual considerateness. So, the Gox guys also discovered that some malicious buyers made off with a lot of Bitcoin by sending funds in via PayPal, buying some sub-dollar Bitcoin on the exchange, withdrawing the bought Bitcoin to their personal wallet, sending the Bitcoin in seemingly random chunks to a suite of newly-created wallets that can be made quick as a flash – and then raising a stink at PayPal about the credits they received from Gox being a case of "item not significantly as described." To their delight, PayPal "refunded" their money without question. They walked away with free Bitcoin, and Mt Gox walked away with another hole in its books.
Needless to say, the Paypal option didn't last long. Soon, the only way to deposit funds into Gox was good old-fashioned, snail-mail-speed, irreversible wire transfer.
Of course, Gox was victimized by the malicious-hacker crime wave in 2011. In fact, it was the biggest victim and the one most publicized. Like so many others, your humble author first heard of Bitcoin at a time when there was well-publicized trouble. I saw it via the news of the Gox hack, which had driven the price of a Bitcoin from briefly above $30 to $13 on its way to $2. I got interested in large part because I'm naturally attracted to beaten-down assets when the primary bull trend seems intact, but I got scared off by the apparently insurmountable catch-22 in the form of keylogger spyware. The underlying nuts-and-bolts were incomprehensible to me, and I didn't know about security programs that fend off keylogger and sniffer malware. And, I didn't stop around to ask.
Had I made the step from sympathizer to joiner in that late spring day of 2011, I really don't know what my finances would be like right now. Given my inclinations, I would have legged in to Bitcoin by averaging down as it continued to sink. By the end, I probably would have bought more than 10,000 while gamely trying to self-educate about the program-level nuts and bolts.
It's really an open question – an unanswerable one – as to what my finances would have been had I girded myself and took the plunge. Whether I'd be a multi-millionaire, yet another victim of a hacker robbery, a multimillionaire "in digits" whose "riches" were in the limbo of the Mt. Gox bankruptcy hearing, or whether I was one of a great many early adopters who grabbed a sure profit long before Bitcoin hit three figures, is impossible to say. To be honest, my best chance would have been to buy all the Bitcoin I could, cold-walleted my stash once I bought it, lost interest, chased after another hobby, and completely I forgot I had any Bitcoin until that magic day near last year's Christmas when it hit $1000. Not only would I have relieved myself of the temptation to grab onto the bird in the hand, a miniscule bird in retrospect but still sizable by even penny-stock standards, but I also would have left no "breadcrumb" Internet footprint that would have tied me in any way to the Bitcoin world once I had given it up. Even if I had not encrypted my wallet at all, I would have been all-but safe. Bitcoin's anonymizing technology assures that it would be very difficult for anyone to tie my account to me, and the lack of any tie to any part of the Bitcoin world after I lost interest would have blended me in perfectly with the large majority who have had nothing to do with Bitcoin. That strategy - and only that one – would have made me a multimillionaire right now. The only alternative would have been to become a Bitcoin fanatic, a kind of Charlie McCoy belting out "I'll never sell!"
As for that completely fabricated picture of the Bitcoin early adopter, his reaction to the Mt. Gox bankruptcy – apart from a secret feeling of inevitability – is most likely embarrassment. The same embarrassment now felt about the Silk Road after it went from underground to notorious. Yet another spate of bad press for his beloved Bitcoin. Yet more MSM-level "fear, uncertainty and doubt" spread all over the world. Yet more grist for those people, whose common sense was shorted out by the huge gains made by Bitcoin in the last four years, who keep insisting that Bitcoin is some sophisticated Ponzi scheme or scam. Yet more reputation management needed before that happy 2020ish day when Bitcoin in 2014 turns out to be like the Internet as of 1993 or so.
Yet more socializing with his good Bitcoin buddies who agree, in an unbreakable circle of echoes, that Joe Skeptic just doesn't understand cryptocurrencies. As of this year, of course!
Yet another month of being haunted by a vision of his engineer grandfather, long gone to the final rest in the real world, pointing his finger and stating: "Are you seriously telling me that the biggest exchange in your Bitcoin world was a damn pilot plant!?"
Yet another month of the somewhat embarrassedly relying on the standard disclaimer that says Bitcoin is aught but experimental software…even though he knows full well that this disclaimer as of now is as boilerplatey as "Any resemblance of any character in this film to any real person, whether living or dead, is entirely coincidental."
And, of course, yet another month of using the meme-word "unregulated" to describe the Bitcoin ecosystem, along with "Security Top Tips" that come across as something put together by a martinet nursing a case of high-functioning clinical paranoia. (When was the last time you carried around your wallet in a combo-locked lockbox, took a counterfeit detector along with you to the store to check your change, and faithfully withdrew your balances from your bank and brokerage firm because you can only trust yourself to guard your wealth?)
Another month of more-or-less sliding around the elephant in the room: Anonymizing technologies, not only in the Bitcoin world but also in the Internet world as a whole, are so slick that the old, even ancient, laws against plain theft are very difficult to enforce. Once your crypto's gone, it's gone bye-bye. In the crypto world, something that would be effected by a simple lawsuit is as complex and risky as an all-out first-responder operation after an all-out terrorist attack. The secret in the word "unregulated" is the fact that the cryptocurrency system is well-nigh unregulatable. The only way to "regulate" it is through a heavy-handed "for your own good" regime of pre-emptive and essentially preventative laws that would gut the whole mission statement and rationale for cryptos.
If Crypto Land is like the Wild West, it's like a Wild West set in an alternate universe or Firefly-type future where the builders, the doers and the good guys are confined to horse and buggy – and the bad guys make their getaways in spacecraft.
And that's your inside guide as to why the wildest part of the crypto "Wild West" – Bitcointalk's Alternate Cryptocurrency board - is so full of turmoil. Now that you know what the set and setting are really like, the otherwise inexplicable suspicion, wild surmise, recurrent lynch-mob mentality, and the eternally recurring volatility of that part of the crypto world makes sense.
So far, I haven't even begun to discuss what life is like in the sub-frontier of alternate cryptocurrencies: "altcoin" land. At this point, you may be nursing a suspicion that things are even hairier in this part of the cryptocurrency frontier.
You're absolutely right.
Daniel M. Ryan is a long-time contributor to Enter Stage Right and has returned to the fold. © 2014 Daniel M. Ryan.