Is Bitcoin A Scam?

Is Bitcoin A Scam?

In a recent article on CNBC, Jordan Belfort (also known as the “Wolf of Wall Street”) issued some dire warnings about Bitcoin.

  1. “I was a scammer. I had it down to science, and it’s exactly what’s happening with Bitcoin.”
  2. “Central banks don’t want it, they’ve spent all this time trying to stop money laundering, why now allow something that’s anonymous and lends itself to making money-laundering easy?”
  3. “There’s a lot of really honest people who are going to get slaughtered.”
  4. “The whole thing is so stupid, these kids have gotten themselves so brainwashed.”
  5. “This thing is going to evaporate like a mirage.”

I disagree. In fact, I will show that points one and two are invalid. Additionally, without points one and two, points three, four and five won’t make much sense either.

Is Bitcoin a scam?

If it’s possible to reduce scams to a science, then it should be fairly easy to identify if Bitcoin is a scam, as Mr. Belfort suggests. In fact, Mr. Belfort appears to have given us the formula.

What is a scam?

Here’s an example of a scam provided by Mr. Belfort himself.

In order to manipulate markets, Belfort highlighted the need for demand. “Back in the day” he had an army of people calling around the country and the world persuading people to buy stocks he would later “dump” and profit off of.

The scam that Mr. Belfort ran was intentionally established to defraud investors, centrally controlled, and operated in the shadows (except for the army of callers, that provided the necessary smokescreen). Let’s see if those things apply to Bitcoin.

Was Bitcoin created to defraud people?

Bitcoin was proposed by Satoshi Nakamoto as a peer-to-peer electronic cash system. Its purpose was to enable transactions between two parties without the need for a trusted third party. In this way, Bitcoin is both a payment network and a currency.

Bitcoin was not created to be an investment at all. It was based on the idea that it should be possible for individuals to transact with each other without needing a financial institution. Bitcoin could be seen as an alternative system to the current fiat system and central banking.

Satoshi Nakamoto left us this message in the first Bitcoin block ever mined.

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

Whether or not you agree with the philosophy of Satoshi Nakamoto, and that of the Cypherpunks and early Libertarian adopters, it is clear that this project was conceived as a technical solution (that also makes use of some clever low tech solutions) to a problem they were concerned about. That problem was the irresponsible expansion of the money supply to suit the needs of those in power and allow them to spend with no restraint.

In case you forgot, here’s the monetary base from the St. Louis Fed.

adjusted monetary base

Since Satoshi wrote that message in 2009, our monetary base has grown by a factor of four in just nine years. Maybe he was on to something?

We don’t know if the current system will survive, or how long the failure will take if it does eventually fail. But it seems useful to me to have an alternative just in case. Nassim Nicholas Taleb said this:

It may fail but we now know how to do it

Is Bitcoin centrally controlled?

In order to pull off a successful scam, Mr. Belfort had to make sure things went just as he wanted. He had to be in control, or the jig would be up. So, who’s in control of Bitcoin?

It turns out that power is shared among many groups in the Bitcoin network. There is no one in charge. Power is distributed among the participants in this way:

  • Users
    • Can choose which Bitcoin client and wallet to use.
    • Can run a full node or light node if they want.
    • Can reject software implementations they do not like.
    • Can signal support by choosing which software they use.
    • Can decide to leave Bitcoin for an altcoin if they want.
  • Miners
    • Can choose which cryptocurrency they want to mine.
    • Can choose which hardware they will use.
    • Can use an existing mining pool, or create their own.
    • Can signal their support by putting a comment in a block that they mine.
  • Software Engineers
    • Can write different clients to talk to the blockchain.
    • Can add new features if they want.
    • Can update the source code.
    • Vote by writing the software they think is best.
    • Can make powerful technical arguments to support changes to the protocol.
  • Businesses (including exchanges)
    • Can hire people to build applications that connect to the Bitcoin network.
    • Can offer services that they think users want.
    • Can offer support for services and software they like by using it at their company and making public statements of support in the media.
    • Can raise money from outside the Bitcoin network (VCs and such).
    • Are in the best position to create a PAC to push political reforms beneficial to Bitcoin
  • Chip Makers
    • Can design any hashing chip set that is economically beneficial for mining Bitcoin.
    • Can write software allowing chips to mine other algorithms.
    • Can sell hardware and also use it to mine Bitcoin if they want.
    • Only as successful as their supply chain and efficiency of the equipment they produce.

Each of these groups, the users, miners, software engineers, businesses and the chip makers cannot succeed on their own. Because of this, many disputes have arisen about which path Bitcoin should follow. These discussions often turn into arguments, but at the end of the day, one of two things will happen:

  1. Consensus is reached
  2. There is a fork (like what happened with Bitcoin Cash)

This method may seem troublesome because of differing economic incentives, but it has proven successful so far. This interesting experiment has shown that it’s possible to arrive at a consensus without a central leader; and that the result of such a system can produce not only rapid growth but an entirely new nascent industry (cryptocurrencies in general).

Does Bitcoin operate in the shadows?

An important part of the success of Mr. Belfort’s scam was operating in the dark. Once it was discovered what was going on, it would be impossible to defraud people (at least in the same way).

Dispelling the myth that Bitcoin operates in the shadows is quite easy. There are two important aspects to consider.

  1. The software that we call “the source code.”
  2. The blockchain itself, where the transactions are recorded.

It turns out that Bitcoin is open source, meaning that anyone can read it and even submit changes if they would like. However, not all changes are agreed upon within the community (such as trying to increase the number of Bitcoins beyond the 21 million limit, this would be rejected by the community).

Here is a sample of some of the Bitcoin source code, from the Bitcoin Core repository.

Bitcoin source code sample

You can see the rest of the code here.

The Bitcoin blockchain can be explored by anyone, and all transactions are a matter of public record, going all the way back to the “genesis block” that we talked about earlier.

Point #1 summary

It can be shown that no single entity is in control of Bitcoin and that it was not created for the purpose of defrauding people.

Interestingly enough, Mr. Belfort even admits this:

It’s not that Bitcoin’s a scam but its nature allows scams to occur

Jordan Belfort

We have also shown that Bitcoin operates in the open, due to its open source code supported by the community and the blockchain which is available for all to see and explore.

I think it’s safe to say that point number one (that Bitcoin is a scam as defined by Mr. Belfort) doesn’t check out.

Is Bitcoin anonymous?

The next argument from Mr. Belfort is that Bitcoin is anonymous, and therefore central banks “don’t want it” because it would help people launder money.

If Bitcoin was indeed anonymous, then it would make a good tool for money laundering, this is true. Unfortunately, Bitcoin isn’t anonymous.

In the USA all exchanges are required to comply with FINCEN regulation, including KYC and AML. This means that anyone buying or selling Bitcoin for US dollars will have their identity on file with a business that complies with these regulations.

Here’s Coinbase’s help page on the topic.

Why am I being asked to verify my identity?

ID verification is required to prevent fraud and keep the community safe. It also adds an extra layer of security by ensuring no one but you link your payment information such as your bank account or credit/debit card.

As part of our commitment to remain the most trusted cryptocurrency platform, all IDs must be verified through the Coinbase website or mobile app. We do not accept emailed copies of ID for verification purposes.

It’s the same thing for Kraken, Gemini, Bitrex as well.

So, while it may be possible to move Bitcoin temporarily to an address with an unknown origin; all exchanges offering BTC/USD trading pairs are regulated and controlled. This makes Bitcoin a suboptimal tool for money laundering.

What has the Federal Reserve said about Bitcoin?

We could spend all day speculating about what the central banks think, but there’s no need. In an article submitted in January of this year, the St. Louis Federal reserve had this to say:

Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.

Further, in a research piece also published on the Federal Reserve website just last month, Charles Kahn said:

Privacy in payments is desired not just for illegal transactions, but also for protection from malfeasance or negligence by counterparties or by the payments system provider itself. Proposals to abolish cash take inadequate account of these legitimate demands for privacy. While central banks can play a useful role in setting standards for payments privacy, they are unlikely to have a comparative advantage at providing privacy. Therefore the replacement of cash by central bank electronic money is likely to spur demand for alternative means of payments to solve specific privacy problems.

As we can see, the Federal Reserve understands that private transactions have an important role to play.

Point #2 summary

It has been shown that Bitcoin is not anonymous, and that cryptocurrencies are actually welcomed by the Federal Reserve, the largest central bank in the world.

Point number 2 (that Bitcoin is anonymous and unwanted by central banks) is therefore invalid.

Conclusion

We need to be careful about who we listen to. It has been shown that scams like Mr. Belfort’s have the following properties. They:

  • Have a central controller
  • Were planned as a fraud from the start
  • Operate in the shadows

It has been shown that Bitcoin:

  • Does not have a central point of authority
  • Was not a planned fraud, it was rather software written to solve a problem
  • Operates in the open, for all too see

Therefore, Bitcoin does not fit the definition of a scam, especially not like the one that Mr. Belfort had down to a science.

It was claimed that Bitcoin was anonymous and a tool for money laundering, therefore central banks wouldn’t allow it and don’t want it.

However, we have also shown that Bitcoin:

  • Is not anonymous
  • Is welcomed by the largest central bank in the world.

I rest my case.

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