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For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including Australia, the US and Canada despite their country’s currency restrictions.

china flag flying in front of bank building image www.acbocallcentre (2)

Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China, the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.

Offered by some banks in the southern province of Guangdong, across the border from Hong Kong, the trial program was introduced in 2011 for overseas property purchases and emigration and doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said.

“What it shows is the government has been trying to internationalise the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities said, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”

Currency Controls

China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 ($53,400) each year and ban them from transferring the currency abroad directly. Policy makers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.

“There’s a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way,” said Zhou Hao, a Shanghai-based economist at ANZ. “This is an irreversible trend.”

The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means “superior foreign-exchange channel.”

Positives, Negatives

The program is another sign that China is testing methods to allow outward yuan flows before full convertibility, May Yan, a Hong Kong-based analyst at Barclays Plc, said by phone. The goal has been announced by policy makers since the 1990s, and is a step toward stated plans to make Shanghai a global financial capital by 2020.

“For an experiment, you want to see if there’s any positives or negatives,” Yan said. “When the bank or the regulators can accumulate that experience, then they will decide if they want to move forward, or broaden it or shut it down.”

The central bank in February unveiled rules to make it easier for companies with operations in Shanghai’s free-trade zone to move yuan in and out of the country, a further loosening of controls on currency flows. The yuan surpassed the euro as the world’s second most-popular currency in trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication.

The Guangdong branch of China’s currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.

$3.4 Billion Estimate

While Bank of China didn’t provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.4 billion) abroad through Youhuitong, citing people with knowledge of the trial program. “Many commercial banks” in Guangdong offer a similar service, Bank of China said in its statement, without naming them.

Today, a link on CCTV’s website for the report on Bank of China led only to advertisements. A spokeswoman for CCTV’s international relations department, which handles foreign media inquiries, didn’t immediately respond to an e-mailed request for comment on why the story appeared to no longer be available.

The People’s Bank of China and SAFE didn’t reply to requests for comment. The central bank is “verifying” facts related to media reports of bank money-laundering, the official Xinhua News Agency reported July 10, citing a PBOC spokesman.

Youhuitong Suspended

Youhuitong has been suspended while the PBOC and its anti-money laundering bureau request records of all previous transactions, according to a person familiar with the product, who asked not to be identified because he wasn’t authorised to speak publicly.

Transfer approval for Youhuitong customers usually takes several weeks to a month, the person said. They need to provide documents showing how the money to be transferred was obtained, such as tax-payment receipts and proof of income, as well as a property-purchase agreement or proof of emigration, he said.

Youhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller’s account to ensure the cash won’t be misused, he said.

A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China  and China Construction Bank, the nation’s two largest banks, declined to comment on whether they offer similar products.

Another Way

HSBC, which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorisation to speak publicly.

Customers deposit yuan with HSBC’s mainland unit or purchase its wealth-management products, and the bank’s overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.

“We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate,” said Gareth Hewett, a Hong Kong-based HSBC spokesman.

Affluent Chinese have been moving money overseas in search of greater investment returns. China’s benchmark stock index has tumbled 66 per cent from its 2007 record, while the government has clamped down on property lending to rein in rising prices.

Spending up in Australia

Chinese buyers, including people from Hong Kong and Taiwan, spent $US22 billion on homes in the States in the year through March, up 72 per cent from the same period in 2013 and more than any other nationality, the National Association of Realtors said in its annual report on foreign home purchases.

“Clearly the property market wouldn’t nearly be so robust as it is today without mainland money,” Mizuho’s Antos said. “How did they do it? With Bank of China’s help. There has been a tremendous amount of mainland money flowing offshore and it couldn’t have happened without” official approval.

And Chinese have become the biggest investors in Australia’s commercial and residential property, with purchases surging 42 per cent to $5.9 billion in the year to June 2013, according to the Foreign Investment Review Board.

Vancouver’s real estate market has also seen the impact, having been “fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” according to real estate agent Malcolm Hasman.

China needed to improve its oversight of capital flows after $US2.7 trillion in unexplained funds moved overseas in the decade prior to 2012, Anthony Neoh, a former government adviser who helped the country open up to foreign money managers, said last year, citing data from Integrity International. Those funds fueled property bubbles in cities such as Hong Kong instead of being invested in domestic assets, he said.

“We know the demand to move abroad is there,” said ANZ’s Zhou. “Even if you impose various restrictions, the money will find its way out of the country, via underground banks and other means.”

Bloomberg

Henry Sapiecha

The trading coin for internet currency is changing the concept of worldwide virtual currency

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Henry Sapiecha

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The trading coin for internet currency is changing the concept of worldwide virtual currency

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Henry Sapiecha

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BITCOIN VALUE UPSURGE SAYS THIS ARTICLE

Let me begin this column with a lengthy disclosure. One morning last week, I stopped at my bank, filled out a withdrawal slip for $1027.51, and walked away with an envelope full of cash. The odd amount was deliberate; I had been instructed by LocalTill to be exact in everything I did. What’s LocalTill? Don’t bother Googling it – its shady-looking website offers only murky details, explaining that the firm is a way for “merchants to accept secure transactions when selling goods online”. It’s something like PayPal, except LocalTill isn’t tied to your bank account or credit card, and instead deals only in cash. This makes its transactions less traceable, less regulated, and, as I would soon experience, more final.

Next, per LocalTill’s instructions, I drove to a local Bank of America branch and asked for an out-of-state wire transfer slip. I scrawled out LocalTill’s New York bank account number and handed my wad of cash to the teller. This was a dizzying moment: I’ve been on the internet forever and have been well-schooled in frauds that begin with the instruction, “First, wire your money to an out-of-state account …” Yet here I was doing exactly that. If LocalTill was a scam, I’d have no recourse. So why was I willing to take such a risk?

Fantasy Footwear

Bitcoin, of course. Bitcoin is a “digital currency” invented in 2009 by a cryptographic expert who went by the pseudonym Satoshi Nakamoto, but whose true identity remains unknown. It exists only in computers, minted at a regular rate by a network of machines around the world, and its value isn’t regulated by any government. The currency, like its creator, clings to the shadows. Bitcoins are like cash in that they aren’t tied to your identity, and transactions made with Bitcoins are irreversible and untraceable. But they’re like credit cards in that they aren’t physical. In the past, if I wanted to pay you for certain unmentionable services rendered, I’d have to get a fancy briefcase, fill it with bills, then take a long, dangerous trip with my stash. Bitcoin allows me to transfer money to you online, instantly, for free. As a result, it’s perfect for the black market – a couple of years ago, it became a media sensation when Gawker reported on its use as the central currency on Silk Road, a site that sold virtually any drug in the world. Lately, Bitcoin has also been hailed as an emerging global safehaven, a place for nervous Europeans and panicky gold-bug types to store their wealth away from the prying reach of financial regulators.

I’m not very panicky about the world’s currencies, nor am I looking to buy drugs online. Indeed, I don’t care at all for Bitcoin as a currency. Instead, I wanted to buy Bitcoins as pure, shameless speculation. I wanted a chance to ride a rocket ship. Partly due to its growing legitimacy as a currency, but mainly because of speculators like me, the value of Bitcoin is entering a bubble phase – its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace. In 2011, back when Gawker reported on Silk Road, you could buy a Bitcoin for about $US9 ($8.60). Since then the price has seen terrific fluctuations, but it has generally gone up. At the start of this year, each Bitcoin was worth about $20. From there, the chart turns into a hockey stick – by March, Bitcoins hit $40, and within a month they’d doubled again.

Three weeks ago, I began hearing about Bitcoin everywhere I turned. One afternoon I had lunch with a partner at Andreessen Horowitz, the large Silicon Valley venture firm, who told me that he’d been fielding pitch after pitch for start-ups that offered Bitcoin-related services. After lunch, I got an email from David Barrett, the chief executive of the fantastic, expense-reporting start-up Expensify. Barrett wanted to let me know that his firm would soon let people submit expenses and get paid by their employers in Bitcoins. He explained that the feature wasn’t a gimmick. Bitcoin would be helpful for people who regularly submitted expenses internationally; other services – like PayPal – charge hefty fees for moving money overseas, but with Bitcoin people could send money for free.

I made a mental note to start looking into a story about Bitcoin’s apparent rise to legitimacy. But before I could get started, Bitcoin took over the media. Henry Blodget was calling Bitcoin “the perfect asset bubble”. Felix Salmon published a lengthy treatise on why the bubble was sure to burst. The New Yorker spoke to some of Bitcoins’ leading boosters about the future of the currency. Meanwhile, the price just kept going up: early last week, the value of Bitcoins soared past $US100 each. This week, it went past $Us200. If you want a Bitcoin today, it will cost you about $US235, and if you wait till tomorrow, it will be more.

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Hence, my disclosure. No one is quite sure why the price of Bitcoins has spiked so quickly so fast, but one of the leading theories is that it’s been hit by what Quartz’s Zach Seward calls a “demand crisis”. The world’s supply of Bitcoins is essentially fixed, but because people in the media keep talking about it, demand keeps rising. This leads to higher prices – and as prices go up, people who currently hold Bitcoins develop greater and greater expectations for the currency. This causes Bitcoin holders to hoard their stash, which further reduces supply, which in turn boosts the price and sparks yet more media attention – and the cycle continues until the bubble pops.

Thus, by writing about Bitcoin, I’m serving, in some small way, to raise its price. And as of last week, that benefits me directly. Thankfully, my wire transfer to LocalTill went through; after taking its $US21.51 processing fee, the firm transferred my $US1000 to Bitfloor, one of the many online Bitcoin exchanges where people trade Bitcoins for cash. I immediately put in a purchase order, and within seconds the deal was done. I was the proud owner of 7.23883 Bitcoins, which I’d purchased for about $US138 each. If I sold my coins now, my original $US1000 investment would be worth $US1700 – not a bad return in less than a week’s time.

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But I’m not selling just yet. I agree with Blodget and Salmon that the Bitcoin market is a bubble; at some point, as in all bubbles, prices will stop rising and they’ll likely plummet, and a lot of people will lose a lot of real and imagined money. But that’s pretty much all anyone can say about the market with any certainty. When the bubble will burst, at what price and for what reason, is completely unpredictable. And until then, while prices are going up, you could make a lot of real money from this digital funny money.

My own guess is that the bubble’s popping isn’t imminent, and I think that when prices do fall, they’ll land somewhere higher than the $US138 I paid for my Bitcoins. I’m certain that I’ll be able to double my investment, and I might even hold out to triple it. (After that I’ll get shakier about keeping Bitcoins.) Why do I think prices will get that high? Because at the moment, it’s a logistical nightmare to turn dollars into coins. You’ve got to take several leaps of faith, trusting sites that look like they were put together by teenagers. I initially tried to buy coins using MtGox, the largest trader, but the cash-processing service it uses refused to accept deposits greater than $US500. What’s more, last week, shortly after Bitcoins hit $US142, MtGox was hit by a denial-of-service attack that took it offline for several hours. The site I used, Bitfloor, is hardly any safer. Last fall it was hit by an epic hack that resulted in the theft of 24,000 coins, at the time worth $US250,000 – and worth, amazingly, $US5.6 million today. (Bitfloor now claims to store most of its customers’ coins in machines that aren’t connected to the internet, and it uses two-factor authentication to protect its users’ accounts.)

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At the moment, the shadiness of the Bitcoin market dissuades mainstream investors. And – as we saw in the housing and dot-com bubbles – it’s when the masses get involved that bubbles really take off. Over the next few months, I expect that we’ll see better, more secure services for transferring dollars into Bitcoin exchange systems. You’ll be able to send money to sites like MtGox instantly from your bank account. At that point – when ordinary people can order up Bitcoins as easily as they bought shares of Pets.com back in 1999 – the real money will pour into the Bitcoin economy, and that’s when prices will begin to get really crazy.

That’s just a theory. It could be a stupid one; Bitcoin could collapse tomorrow. And remember, I’ve got a conflict of interest here – if this piece gets you interested in Bitcoin, I get richer. Still, though, one week into my Bitcoin trade, I’m very, very pleased with myself.

Farhad Manjoo is Slate’s technology reporter and the author of True Enough: Learning to Live in a Post-Fact Society.

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Sourced & published by Henry Sapiecha

Bitcoin has just been through a wild ride.

It flew to an intraday high of $266, but then crashed 60 per cent to a low around $105.

Amazingly, it’s already staged a big comeback, erasing more than half of its intraday losses.

Now, it’s trading just below $200. The chart above shows the big move upward in just the last hour or so.

The biggest question everyone has had about Bitcoin in recent weeks – aside from how it works – is whether or not it’s in a bubble.

After all, the virtual currency has seen a remarkable rise since January, when it was trading below $15.

Since the plunge began, we’ve seen some interesting defenses of the virtual currency popping up on the Internet.

A Reddit user posted a graphic showing the Spartans’ shields from the movie 300 redesigned as Bitcoins with the word HOLD! across the top.

Another Reddit user sought to use technical analysis to explain away today’s move.

Henry Sapiecha

THE LATEST ON THE ANONYMOUS CURRRENCY BITCOIN

Money is a delusion – but a delusion that works as long as it’s shared. The value of a U.S. dollar was once tied to a government guarantee that you could, at any time, exchange it for a quantity of precious metal – but since America officially abandoned the gold standard in 1971, its value is now more or less rooted in its ubiquity. If large swathes of people decided they would no longer accept it, it would suddenly be worth a lot less.

Government currencies like the American dollar are also a bit odd, in that a government can decide to print more money at any time to serve its own purposes. This is very handy for the government, but through inflation it causes each individual dollar to be worth a bit less each time.

It’s a problem that will persist with pretty much any currency that’s managed by one central organization. And distrust of these organizations is one of the strongest driving forces behind alternative currencies like Bitcoin. The idea is to create an entirely new currency that’s widely accepted, fairly stable, and more or less inflation-proof because the money supply can’t be increased at the whim of some central figure.

So how do you create a new currency?

The answer, more or less, seems to be that you simply build it, convince people it’s worth something, and give them an incentive to get on board.

Bitcoin was first proposed in 2008 – a fortunate time, since faith in the global banking hegemony and government control of money was crashing as the global financial crisis kicked in.

It was designed by “Satoshi Nakamoto” – a pseudonym, possibly for a group of anonymous designers who have never revealed themselves. Bitcoin’s key selling points from day one were solid, trustworthy and transparent technology, a controlled money supply and a built-in early adopter bonus that made them very cheap to produce while the currency got off the ground.

The third point is probably the most important; Bitcoins are produced by getting a computer to crunch complex algorithms. Once a certain amount of work is done, you create a brand new bitcoin. That amount of work was very quick and easy early in the piece, so early adopters were able to churn out large numbers of coins. But the algorithms are designed to become progressively more difficult over time, until a point some time around 2040 when the supply will be capped forever at around 21 million bitcoins.

Effectively, if you got in early, you could use your personal computer to churn out thousands of bitcoins – giving early adopters a heavy incentive to find things to do with them. But now, the Bitcoin mining process is already so difficult that you need a specialized rig bristling with dozens of graphics cards to make any decent progress.

This gradual restriction of supply is what Bitcoin advocates maintain makes the currency inflation-proof. There’s no such thing as “quantitative easing” in the Bitcoin world. In fact, as the money supply crawls to a stop, the currency should deflate over time, making each bitcoin increase in value.

Of course, it also makes the Bitcoin system look a lot like a pump and dump scam as well – early adopters mined huge amounts of bitcoins early on for very little effort, and stood to gain huge amounts of cold, hard, non-virtual cash if they could convince other people the bitcoin was worth something. But let’s backtrack a little before we explore that.

How bitcoins work

The most important feature of a digital unit of currency is that ownership can be authenticated, and the money can’t be spent twice. You can ensure this by keeping a central ledger somewhere of who owns exactly which bitcoins – but the genius of the Bitcoin system is that this ledger is completely decentralized and run as a peer-to-peer system like the BitTorrent network.

When you make a transaction, the Bitcoin network sends out a notice and a confirmation process takes place. In this confirmation process, the transaction history of the particular bitcoin being moved is checked against the records of a number of different nodes in the system. Only when several nodes “agree” that the bitcoin is authentic does the actual transfer occur.

A bitcoin itself is just a string of letters and numbers – the system would be vulnerable to all sorts of hacks if it wasn’t for this peer-to-peer tracking system. And although the bitcoin’s entire transaction history is sent around the network for checking, it’s only a series of bitcoin wallet addresses that are used, rather than account names – making it virtually impossible to work out exactly who owned the coin in the real world.

This also makes it virtually impossible to prove you owned a bitcoin if you misplace its alphanumeric code. If you delete your wallet file or forget your passwords, your money is gone forever.

Getting money in and out of the Bitcoin system

First off, you need a wallet. You can either download the original Bitcoin client and run it on your own computer, or you can trust a third party online service like MyWallet to take care of it for you.

From there, there’s a number of ways to buy bitcoins with regular cash. You can strike a deal directly with another bitcoin owner over at Bitcoin OTC, use a big-time currency exchange like Mt.Gox or any number of others.

If you want to keep your identity as far away from the transaction as possible, you can use a cash deposit service like bitinstant – you notify the service that you want to buy X dollars worth of bitcoins, they give you some deposit details, and you simply walk into a bank (or another deposit location like a 7-11 or Walmart store) and drop off the cash with a given account and reference number. Once the transaction is verified, the bitcoins are transferred to your ownership. The process takes less than an hour and costs you a four percent fee.

To get money out of the system, you’ve got to effectively sell your bitcoins. The easiest method is probably to register with a big exchange, sell your coins and have them transfer the money to your local bank account.

There’s other services that will pay you back through Paypal, vouchers and all sorts of other options – and if you want to keep things totally anonymous, you can always strike a deal directly with somebody who wants to buy the bitcoins, and dodge the transaction fee in the process.

What’s a bitcoin worth?

Graph showing the value of 1 Bitcoin from 2009-2013. Created at bitcoincharts.com.

As I write this, close to US$30. Here’s a live update. The currency is still pretty volatile, its value changes constantly. If you’d bought yourself a bitcoin in December last year, you’d have doubled your money in the last 50 days.

That’s nothing compared to the gains the early adopters have made, though – bitcoins were worth literally nothing back when the system went online in January 2009. They were trading for less than US$0.10 back in September 2010, and only broke the US$1 mark in February 2011. They spiked up to US$27 in May 2011, then crashed down to US$3.50 within a couple of months when Mt.Gox and MyBitcoin were hacked, resulting in a leaking of user information and some straight-up bitcoin theft.

Right now, it’s riding higher than it ever has and spiking upwards like crazy, and there’s every chance you can still make money as a speculator – as well as every chance that it’ll crash again before 2014.

What can you buy with bitcoins?

Lots of things. Bitmit is like a sort of Bitcoin eBay, although its most popular items are cash buybacks, electronics components, video games and the odd porn site membership.

There’s a heap of traders that accept Bitcoin payment listed on the Bitcoin wiki, selling everything from photographic services, to pizzas, to coffee beans and hotel stays.

Of course, most people don’t get into anonymous crypto-currencies to buy coffee beans. The anonymous nature of the service also opens the door to the online black market, and this is where Bitcoin seems to have made its biggest mark.

Through deep-net, highly encrypted and anonymous sites like Silk Road, you can have an astonishing array of illegal drugs sent straight to your doorstep through the post in virtually undetectable fashion. Silk Road deserves its own article – it’s fascinating.

Through other sites, you can order pretty much anything from weapons to the services of a hitman. It’s all anonymous, so trust is paramount and there’s a lot of scammers out there trying to take you for a ride, as well as plenty of ways to expose yourself to the risk of being caught.

And of course, you can use bitcoins to send money to organizations like Wikileaks or The Pirate Bay, even if payments are blocked by organizations like PayPal or Visa.

Pros and cons of bitcoins

Pros:

  • They’re more or less anonymous if you take the right precautions, meaning your transactions can’t be tracked or taxed
  • They will never devalue due to inflation – in fact, a slow process of deflation is built into the algorithm
  • There is often no transaction fee when moving bitcoins
  • You can buy things with them
  • You can trust the authenticity of your bitcoins, and prove your ownership of them
  • You can speculate on bitcoin values by buying and selling them as the market fluctuates

Cons:

  • Like U.S. dollars, they have no inherent value. If other people don’t want them, they’re worthless
  • Bitcoins will never be any good for over-the-counter or face to face payments, because every time you make a transaction, there’s a roughly 10 minute wait as the network validates the bitcoins’ ownership. This wait will get longer in the future, too.
  • Like cash, if you lose your Bitcoin wallet, you lose your money
  • Currently, the most popular uses for bitcoins seem to be speculation, scams, money laundering and black market contraband sales. This is not escaping the attention of the authorities. However, it remains to be seen if they can actually do anything to stop it
  • They can be stolen

A couple of final thoughts about Bitcoin

There is definitely money to be made in this system for smart operators. Of all the attempts at creating an anonymous digital currency, Bitcoin is far and away the most successful to date.

But there’s still a few reasons, beyond just the bitcoin’s volatile value, to pause before you jump in with a substantial amount of your own money.

Firstly, while there are more than 1.8 million registered Bitcoin users, a large amount of the money seems to be concentrated to a few users. We know this, because while it’s totally anonymous, you can get a hold of the entire transaction history for the network. In October 2012, this report was released showing that the vast majority of Bitcoin accounts hold very small amounts of money, more than 75 percent of all bitcoins are being hoarded instead of being spent, one anonymous figure holds around 25 percent of all the bitcoins in circulation, 90 percent of Bitcoin traffic seems to be speculative trading and not goods and services purchases, and it seems as if other large holders are trying to shift their bitcoins around a lot to conceal exactly how much they own.

So while Bitcoin advocates point to the fact that the currency is definitely being used for goods and services to prove that it’s not some sort of giant Ponzi scheme, it’s also irrefutably true that the vast majority of existing bitcoins aren’t being used at all. And while the idea of the whole system is to create a currency that’s not at the mercy of some central administration, you could easily argue that a few key figures hold a huge amount of power over the bitcoin’s value.

Secondly, if one person or group were to control enough “nodes” of the Bitcoin checking system, it’s theoretically possible for that group to change the rules and start fraudulently awarding itself money. You’d need to control a lot of the network to make it happen … But then, according to some sources Deepbit‘s mining collective already clears more than a third of all Bitcoin transactions.

And thirdly, there is an awful lot of genuinely dodgy stuff going on in this system. From hacking and theft, through scams and money laundering, to illegal contraband sales, there’s a reasonable chance that any bitcoin you buy is directly or indirectly helping bad guys do business. But then, it’s up to you whether that’s better or worse than giving your cash to a national government, isn’t it?

CLICK HERE FOR AN EARLER BITCOIN STORY WE PUBLISHED >

Sourced & published by Henry Sapiecha

THE LATEST ON THE ANONYMOUS CURRRENCY BITCOIN

Money is a delusion – but a delusion that works as long as it’s shared. The value of a U.S. dollar was once tied to a government guarantee that you could, at any time, exchange it for a quantity of precious metal – but since America officially abandoned the gold standard in 1971, its value is now more or less rooted in its ubiquity. If large swathes of people decided they would no longer accept it, it would suddenly be worth a lot less.

Government currencies like the American dollar are also a bit odd, in that a government can decide to print more money at any time to serve its own purposes. This is very handy for the government, but through inflation it causes each individual dollar to be worth a bit less each time.

It’s a problem that will persist with pretty much any currency that’s managed by one central organization. And distrust of these organizations is one of the strongest driving forces behind alternative currencies like Bitcoin. The idea is to create an entirely new currency that’s widely accepted, fairly stable, and more or less inflation-proof because the money supply can’t be increased at the whim of some central figure.

So how do you create a new currency?

The answer, more or less, seems to be that you simply build it, convince people it’s worth something, and give them an incentive to get on board.

Bitcoin was first proposed in 2008 – a fortunate time, since faith in the global banking hegemony and government control of money was crashing as the global financial crisis kicked in.

It was designed by “Satoshi Nakamoto” – a pseudonym, possibly for a group of anonymous designers who have never revealed themselves. Bitcoin’s key selling points from day one were solid, trustworthy and transparent technology, a controlled money supply and a built-in early adopter bonus that made them very cheap to produce while the currency got off the ground.

The third point is probably the most important; Bitcoins are produced by getting a computer to crunch complex algorithms. Once a certain amount of work is done, you create a brand new bitcoin. That amount of work was very quick and easy early in the piece, so early adopters were able to churn out large numbers of coins. But the algorithms are designed to become progressively more difficult over time, until a point some time around 2040 when the supply will be capped forever at around 21 million bitcoins.

Effectively, if you got in early, you could use your personal computer to churn out thousands of bitcoins – giving early adopters a heavy incentive to find things to do with them. But now, the Bitcoin mining process is already so difficult that you need a specialized rig bristling with dozens of graphics cards to make any decent progress.

This gradual restriction of supply is what Bitcoin advocates maintain makes the currency inflation-proof. There’s no such thing as “quantitative easing” in the Bitcoin world. In fact, as the money supply crawls to a stop, the currency should deflate over time, making each bitcoin increase in value.

Of course, it also makes the Bitcoin system look a lot like a pump and dump scam as well – early adopters mined huge amounts of bitcoins early on for very little effort, and stood to gain huge amounts of cold, hard, non-virtual cash if they could convince other people the bitcoin was worth something. But let’s backtrack a little before we explore that.

How bitcoins work

The most important feature of a digital unit of currency is that ownership can be authenticated, and the money can’t be spent twice. You can ensure this by keeping a central ledger somewhere of who owns exactly which bitcoins – but the genius of the Bitcoin system is that this ledger is completely decentralized and run as a peer-to-peer system like the BitTorrent network.

When you make a transaction, the Bitcoin network sends out a notice and a confirmation process takes place. In this confirmation process, the transaction history of the particular bitcoin being moved is checked against the records of a number of different nodes in the system. Only when several nodes “agree” that the bitcoin is authentic does the actual transfer occur.

A bitcoin itself is just a string of letters and numbers – the system would be vulnerable to all sorts of hacks if it wasn’t for this peer-to-peer tracking system. And although the bitcoin’s entire transaction history is sent around the network for checking, it’s only a series of bitcoin wallet addresses that are used, rather than account names – making it virtually impossible to work out exactly who owned the coin in the real world.

This also makes it virtually impossible to prove you owned a bitcoin if you misplace its alphanumeric code. If you delete your wallet file or forget your passwords, your money is gone forever.

Getting money in and out of the Bitcoin system

First off, you need a wallet. You can either download the original Bitcoin client and run it on your own computer, or you can trust a third party online service like MyWallet to take care of it for you.

From there, there’s a number of ways to buy bitcoins with regular cash. You can strike a deal directly with another bitcoin owner over at Bitcoin OTC, use a big-time currency exchange like Mt.Gox or any number of others.

If you want to keep your identity as far away from the transaction as possible, you can use a cash deposit service like bitinstant – you notify the service that you want to buy X dollars worth of bitcoins, they give you some deposit details, and you simply walk into a bank (or another deposit location like a 7-11 or Walmart store) and drop off the cash with a given account and reference number. Once the transaction is verified, the bitcoins are transferred to your ownership. The process takes less than an hour and costs you a four percent fee.

To get money out of the system, you’ve got to effectively sell your bitcoins. The easiest method is probably to register with a big exchange, sell your coins and have them transfer the money to your local bank account.

There’s other services that will pay you back through Paypal, vouchers and all sorts of other options – and if you want to keep things totally anonymous, you can always strike a deal directly with somebody who wants to buy the bitcoins, and dodge the transaction fee in the process.

What’s a bitcoin worth?

Graph showing the value of 1 Bitcoin from 2009-2013. Created at bitcoincharts.com.

As I write this, close to US$30. Here’s a live update. The currency is still pretty volatile, its value changes constantly. If you’d bought yourself a bitcoin in December last year, you’d have doubled your money in the last 50 days.

That’s nothing compared to the gains the early adopters have made, though – bitcoins were worth literally nothing back when the system went online in January 2009. They were trading for less than US$0.10 back in September 2010, and only broke the US$1 mark in February 2011. They spiked up to US$27 in May 2011, then crashed down to US$3.50 within a couple of months when Mt.Gox and MyBitcoin were hacked, resulting in a leaking of user information and some straight-up bitcoin theft.

Right now, it’s riding higher than it ever has and spiking upwards like crazy, and there’s every chance you can still make money as a speculator – as well as every chance that it’ll crash again before 2014.

What can you buy with bitcoins?

Lots of things. Bitmit is like a sort of Bitcoin eBay, although its most popular items are cash buybacks, electronics components, video games and the odd porn site membership.

There’s a heap of traders that accept Bitcoin payment listed on the Bitcoin wiki, selling everything from photographic services, to pizzas, to coffee beans and hotel stays.

Of course, most people don’t get into anonymous crypto-currencies to buy coffee beans. The anonymous nature of the service also opens the door to the online black market, and this is where Bitcoin seems to have made its biggest mark.

Through deep-net, highly encrypted and anonymous sites like Silk Road, you can have an astonishing array of illegal drugs sent straight to your doorstep through the post in virtually undetectable fashion. Silk Road deserves its own article – it’s fascinating.

Through other sites, you can order pretty much anything from weapons to the services of a hitman. It’s all anonymous, so trust is paramount and there’s a lot of scammers out there trying to take you for a ride, as well as plenty of ways to expose yourself to the risk of being caught.

And of course, you can use bitcoins to send money to organizations like Wikileaks or The Pirate Bay, even if payments are blocked by organizations like PayPal or Visa.

Pros and cons of bitcoins

Pros:

  • They’re more or less anonymous if you take the right precautions, meaning your transactions can’t be tracked or taxed
  • They will never devalue due to inflation – in fact, a slow process of deflation is built into the algorithm
  • There is often no transaction fee when moving bitcoins
  • You can buy things with them
  • You can trust the authenticity of your bitcoins, and prove your ownership of them
  • You can speculate on bitcoin values by buying and selling them as the market fluctuates

Cons:

  • Like U.S. dollars, they have no inherent value. If other people don’t want them, they’re worthless
  • Bitcoins will never be any good for over-the-counter or face to face payments, because every time you make a transaction, there’s a roughly 10 minute wait as the network validates the bitcoins’ ownership. This wait will get longer in the future, too.
  • Like cash, if you lose your Bitcoin wallet, you lose your money
  • Currently, the most popular uses for bitcoins seem to be speculation, scams, money laundering and black market contraband sales. This is not escaping the attention of the authorities. However, it remains to be seen if they can actually do anything to stop it
  • They can be stolen

A couple of final thoughts about Bitcoin

There is definitely money to be made in this system for smart operators. Of all the attempts at creating an anonymous digital currency, Bitcoin is far and away the most successful to date.

But there’s still a few reasons, beyond just the bitcoin’s volatile value, to pause before you jump in with a substantial amount of your own money.

Firstly, while there are more than 1.8 million registered Bitcoin users, a large amount of the money seems to be concentrated to a few users. We know this, because while it’s totally anonymous, you can get a hold of the entire transaction history for the network. In October 2012, this report was released showing that the vast majority of Bitcoin accounts hold very small amounts of money, more than 75 percent of all bitcoins are being hoarded instead of being spent, one anonymous figure holds around 25 percent of all the bitcoins in circulation, 90 percent of Bitcoin traffic seems to be speculative trading and not goods and services purchases, and it seems as if other large holders are trying to shift their bitcoins around a lot to conceal exactly how much they own.

So while Bitcoin advocates point to the fact that the currency is definitely being used for goods and services to prove that it’s not some sort of giant Ponzi scheme, it’s also irrefutably true that the vast majority of existing bitcoins aren’t being used at all. And while the idea of the whole system is to create a currency that’s not at the mercy of some central administration, you could easily argue that a few key figures hold a huge amount of power over the bitcoin’s value.

Secondly, if one person or group were to control enough “nodes” of the Bitcoin checking system, it’s theoretically possible for that group to change the rules and start fraudulently awarding itself money. You’d need to control a lot of the network to make it happen … But then, according to some sources Deepbit‘s mining collective already clears more than a third of all Bitcoin transactions.

And thirdly, there is an awful lot of genuinely dodgy stuff going on in this system. From hacking and theft, through scams and money laundering, to illegal contraband sales, there’s a reasonable chance that any bitcoin you buy is directly or indirectly helping bad guys do business. But then, it’s up to you whether that’s better or worse than giving your cash to a national government, isn’t it?

CLICK HERE FOR AN EARLER BITCOIN STORY WE PUBLISHED >

Sourced & published by Henry Sapiecha

BITCOIN BEATS BANKS BEFORE BEING BROKERED BY BIG BUSINESS-A WORLD CASH SYSTEM

Bitcoin is the world’s first fully decentralized, peer-to-peer (p2p) virtual currency. It allows users to make anonymous and untraceable cash transactions anywhere in the world without any sort of real-world intermediary. So unlike PayPal and other online services, it can’t be squeezed in the same way by governments or other control agents.

Created in 2009 by a shadowy figure who goes by the name Satoshi Nakamoto, there are currently about 6 million bitcoins in circulation. That number will eventually rise, in regular intervals, to a total of 21 million by 2033. A money system without any sort of central bank? A currency whose supply increases at a steady and predictable rate according to a concept elucidated by the Nobel laureate economist Milton Friedman?
Marketing with no money

Just how revolutionary is Bitcoin?

Reason.tv sat down with Mercatus Senior Research Fellow Jerry Brito to learn how Bitcoin operates and what the implications are for traditional state-based fiat currencies. “Whether Bitcoin succeeds or fails is neither here nor there,” says Brito, who predicts that currencies in the future will almost certainly be deregulated and decentralized – with or without governments’ consent.


Marketing with no money

Sourced & published by Henry Sapiecha

 

BITCOIN BEATS BANKS BEFORE BEING BROKERED BY BIG BUSINESS-A WORLD CASH SYSTEM

Bitcoin is the world’s first fully decentralized, peer-to-peer (p2p) virtual currency. It allows users to make anonymous and untraceable cash transactions anywhere in the world without any sort of real-world intermediary. So unlike PayPal and other online services, it can’t be squeezed in the same way by governments or other control agents.

Created in 2009 by a shadowy figure who goes by the name Satoshi Nakamoto, there are currently about 6 million bitcoins in circulation. That number will eventually rise, in regular intervals, to a total of 21 million by 2033. A money system without any sort of central bank? A currency whose supply increases at a steady and predictable rate according to a concept elucidated by the Nobel laureate economist Milton Friedman?
Marketing with no money

Just how revolutionary is Bitcoin?

Reason.tv sat down with Mercatus Senior Research Fellow Jerry Brito to learn how Bitcoin operates and what the implications are for traditional state-based fiat currencies. “Whether Bitcoin succeeds or fails is neither here nor there,” says Brito, who predicts that currencies in the future will almost certainly be deregulated and decentralized – with or without governments’ consent.


Marketing with no money

Sourced & published by Henry Sapiecha