-- Posted Tuesday, 16 April 2013 | | Disqus

By Vincent Bressler

My article about the ultimate demise of BitCoin has engendered some strong reactions.  I think that is important to make a few points. 

BitCoin is one implementation of one open source cryptocurrency.   The value of any cryptocurrency is directly proportional to the cost to subvert that cryptocurrency. 




This chart illustrates the point but vastly simplifies the reality.  Subversion can happen in many ways and can provide many benefits to insiders.  For the stock market: high frequency trading, failure to enforce delivery of short sales, rehypothecation, are all part of the mix.  

BitCoin is specifically designed to be resistant to subversion of the transaction network itself, but subversion comes in many forms.   For instance, while the market cap of BitCoin remains relatively small and the market relatively illiquid, instability of the trading value of BitCoin will tend to subvert confidence.  Those who have a lot of liquidity can drive this process.  The picture becomes more complicated as the market cap of BitCoin expands and there are benefits to be reaped by borrowing, shorting, rehypothecating, etc.  BitCoin techies will say that the cryptocurrency technology provides a completely secure, definitive way to validate transactions, but you still need a complex system to validate transactions, a system that is beyond the comprehension of most people.  Such a system is subject to subversion because it can not be understood by ordinary humans. 

I believe that cryptocurrency technology will ultimately be used to validate ownership of real assets, such as a share in a mortgage or in a company.  The fact that BitCoin is regarded as wealth in its own right is a weakness, not a strength.  The actual value of BitCoin is determined by the balance between cost to subvert and benefit of subversion.  That is a horribly unsound foundation for a purported unit of wealth.

Vincent Bressler
vincent@missionctrl.com

-- Posted Tuesday, 16 April 2013 | Digg This Article | Source: GoldSeek.com

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