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10 Jun 2013
Bill Cole had some interesting comments on my Liberty Reserve post which are worth following up.
He noted that although all of the bitcoin transactions are in the public log, the wallets aren't, so if you sell someone your wallet, that's an anonymous transaction. While that's quite true, it also breaks one of the fundamental points of bitcoin which is that users don't have to trust each other.
If I sell you my bitcoin wallet, that's approximately like me selling you my checkbook or my debit card. You have to trust me not to have a duplicate checkbook or card and that I won't use it to empty the account before you do. The only way to make sure that the wallet actually contains all the bitcoins that the seller claims it does is to transfer those coins to another wallet to which he doesn't have access, which is of course logged and rather defeats the purpose.
He also noted that even when MtGox flakes, other exchanges have been adequate to keep the price of bitcoins relatively stable, and that there are a lot of people with bitcoin wallets who could spend them. Again, those are both right, but I take an opposite meaning. According to the statistics that MtGox publishes, on a busy day people buy and sell about a million dollars worth of bitcoins. That may sound like a lot to you and me, but that's about as much as the US dollar forex market handles every 1/2 second, all day, every day. The bitcoin market is very thin, even compared to Liberty Exchange. The indictment referred to several billion dollars in cash, and a whole lot of large bank accounts. In terms of transactions, LR was clearly a lot larger than bitcoin. If you wanted to launder a lot of money through bitcoins, you'd have to trickle it out through MtGox and their competitors at a rate that wouldn't collapse the market, hope that nobody figured out they were all you, and it would take a very long time.
Lastly, the fact that there are all those people sitting on their bitcoins reinforces the fact that for most people they're not money, they're souvenirs. I have on my shelf a couple of 10 franc notes from my last trip to Switzerland. Even though they're nominally worth a lot more now than they were when I got them, it's more hassle than they're worth to use them, unless I happen to go to a place where they are widely used as currency, i.e., back to Switzerland. Failing that, they're attractive souvenirs, and they have elegant pictures of Le Corbusier on them which is more than anyone's bitcoin wallet does.
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