Journal of a bitcoin explorer. Where will it lead?
Keywords:
cryptocurrency [crypto currency],
blockchain [block chain],
ledger,
digital signature,
cryptographic hash,
Satoshi Nakamoto,
mining,
altcoin,
crowdsourcing,
consensus system.
I wish I had more money to give out, because there were so many awesome entries in this contest.
I've been doing this bitcoin blog for a year and a half, since
First Post, New Blog
(4 July 2015). I've taken it as far as I need and will be cutting back to two posts a month, mainly to keep up with any news.
A year ago my weekly bitcoin post fell on Boxing Day, so I had
Bitcoin Boxing the Dollar
(December 2015).
This year it falls on Christmas Eve, so I'll just have a simple post celebrating Christianity's favorite holiday.
Bitcoins wearing stocking hats and serving as ornaments it will be.
Google image search on 'bitcoin christmas'
A week ago I documented the bitcoin price in
Buying Ethereum,
making it easy to observe that the price is up nearly 20% in the seven days since then. I'm sure we'll see all sorts of reasons for the rise when I look at December news, but that's the sort of price rise you only see in a pyramid scheme. Take it as the gift it is and enjoy it while it lasts.
One of the advantages of that transaction has been to become familiar with Coinbase, the service that holds my account ('wallet' in cryptocurrency jargon). They send me occasional emails informing me about new features. For example, during the last few months I learned:-
...I felt I had sufficient knowledge to buy a small quantity. I signed on to Coinbase (always an irritating three-step process: password, SMS code, email link), discovered that I needed a fiat currency (Euros in my case) to buy anything, sold half of my bitcoin, and bought an equivalent amount of ethereum (NB: lower case, to be consistent).
Coinbase charged a 1.5% commission on both sides of the transaction.
After the second transaction, Coinbase showed that I still had all of the Euros in my account. I thought about trying a double spend to see what would happen, but decided that I didn't want to risk getting a black star next to my name.
The Coinbase account overview gives a price history of the currencies. Here's a comparison of the two currencies over the past year. Did I exchange a winner for a loser?
Left: ETH;
Right: BTC
In my previous post,
Bitcoin in the News : 2016-11 More++,
I noted, 'It sounds like every purchase with bitcoin might trigger a corresponding capital gain/loss'. If this is the case when I sold half of my bitcoin (a small amount) to prepare the ethereum purchase, the accounting is going to be awkward.
Even though my previous post,
Bitcoin in the News : 2016-11 Election,
had more than enough bitcoin news for a single month, there were a few other stories worth mentioning. The most important of these was the subject of a New York Times article by Nathaniel Popper, which automatically confirms its importance:-
2016-11-18:
Bitcoin Users Who Evade Taxes Are Sought by the I.R.S.
(nytimes.com)
•
'The tax agency sent a broad request on Thursday to Coinbase, the largest Bitcoin exchange in the United States, asking for the records of all customers who bought virtual currency from the company from 2013 to 2015. '
I took away two points from this. Bitcoin transactions (1) are subject to capital gain treatment, and (2) can be used for 'creative' financial manipulation. The NYT article noted,
The basic tax rules for Bitcoin users were set down by the I.R.S. in 2014. The agency’s guidance said that people should treat their virtual currency as property, rather than currency, for tax purposes. [...; An I.R.S. agent] identified two companies that were buying Bitcoin and misreporting them with the I.R.S. as technology expenses.
For more angles on the IRS and Coinbase, see Google's related stories:-
An unrelated story underscored another point of friction between sovereign governments and bitcoin:-
2016-11-03:
Chinese Government To Force Capital Controls On Bitcoin Exchanges
(newsbtc.com)
•
'Local exchanges will deal with limitations regarding the amount of funds moving outside of the country. Additionally, the government also wants to cap the number of Bitcoins sent abroad. Neither of these scenarios can be enforced, though, as no one can exert control over Bitcoin.'
China featured in another pair of stories from the same source and writer:-
2016-11-16:
Is Bitcoin Mining Destined for Data Centers?
(bitcoinmagazine.com)
•
'For many, Bitmain’s recent announcement of the realization of a major data center in northwestern China served as a reminder of the level of mining centralization in Bitcoin.'
Is China the defacto capital of the bitcoin world? With yearend arriving even faster than usual, I'm ready for another round of retrospective opinion pieces like this one:-
2016-11-21:
Bitcoin was supposed to change the world. What happened?
(vox.com)
•
'To a large extent, Bitcoin today is still used for the same applications -- illicit transactions and financial speculation -- that it was in 2014 and 2012.'
As for buying non-illicit stuff, here are two stories on the current state of affairs:-
2016-11-22:
iPayYou Brings Bitcoin To Amazon
(pymnts.com)
•
'Bitcoin wallet iPayYou continues to work toward a future with bitcoin as the default currency. It was just announced that iPayYou has made a way for consumers to pay for items on Amazon with bitcoin, called Amazon Direct.'
2016-11-25:
Bitcoin Black Friday Deals for the Digital Currency Enthusiast
(nasdaq.com)
•
'Here are a few options for anyone looking to get a good deal on some crypto-friendly merchandise this weekend.
•
Hardware Wallets
•
OpenBazaar Stores and Other Specialty Sites'
Getting back to that first story, the IRS and Coinbase, it sounds like every purchase with bitcoin might trigger a corresponding capital gain/loss. What am I missing?
Bitcoin news last month was dominated by the U.S. presidential election results (as was most news in general). The victory of Donald J. Trump over Hillary Clinton reminded many observers of the unforeseen, populist result of the Brexit vote near the end of June. At that time I wrote two posts --
Stores of Value
(25 June 2016) and
Bitcoin in the News : 2016-06 Price
(02 July 2016) -- both of which could serve as templates for the current post-election analysis.
News stories for November followed a predictable pattern. First there was the pre-election prognostication.
Then there was the immediate reaction to the unexpected result. There were so many stories that Google News offered 'Full Coverage'. Here is their main story followed by the related stories.
In June I wrote about 'store of value'; here we have 'safe haven'. Are they the same thing or is there a subtle distinction? Whatever the answer, the following days brought more reflective stories.
As for the post-election price bumps, I was surprised to find a number of reasons offered by the pundits. Here are contradictory views from the period
2016-11-09 Full coverage:-
2016-11-09:
Cryptocurrencies rise on Trump victory
(techcrunch.com)
•
'What’s clear is that when politics defies conventional expectation, and when very many best laid plans are laid to wrack and ruin, cryptocurrencies are acting as a haven and a hedge against uncertain times -- alongside the traditional one: gold.'
2016-11-09:
The Trump Train Goes to Washington; Three Ways Trump Helps Bitcoin
•
'[Trump has] already done more in one night than President Obama has done in eight years. Thank you America, for joining me and the rest of the liberty movement on the right side of history.'
That first sentence of 'Trump Train' shows that the rest of the opinion piece is not exactly thoughtful analysis. What are the 'Three Ways Trump Helps Bitcoin'?
'Bitcoin price should go up even faster for the rest of the year'
'Not having World War III should be good for Bitcoin'
'Choosing the right President protects the Internet and Bitcoin'
'Not having World War III' should be good for just about everything and not everyone agrees that Trump is the 'right President', but Americans do have freedom of expression ... at least for now.
Although my previous post,
Quantum Computers,
was only a low level introduction to the subject, it piqued my interest. I ended that post with a vague objective for a follow-up:-
In my next post I'll try to learn more about quantum algorithms.
I continued watching videos and quickly discovered that the algorithm with a direct impact on bitcoin is
Shor's algorithm
(Wikipedia):-
Shor's algorithm, named after mathematician Peter Shor, is a quantum algorithm (an algorithm that runs on a quantum computer) for integer factorization formulated in 1994. Informally it solves the following problem: given an integer N, find its prime factors. On a quantum computer, to factor an integer N, Shor's algorithm runs in polynomial time (the time taken is polynomial in log N, which is the size of the input).
Next I found a short video on Youtube starring Peter Shor,
What is Shor's factoring algorithm?,
but it's much too short to explain the subject properly. Another video,
Shor's Algorithm,
looked more promising, but required knowledge of math concepts that I wasn't familiar with.
Fortunately, it was the last clip in a course playlist,
Intro to Quantum Computing
(no.23/23), that covered the math from the start.
From the first videos in the course, I learned that quantum mechanics are based on linear algebra, a subject I studied many years ago when I was still capable of learning complicated new things.
Although I wasn't able to complete the intro course before writing this post, I found another video that explained the algorithm using more basic math. After one full viewing, I can't say that I've grasped it completely, but I'll watch it a few more times until it sinks in.
The Youtube page for that clip says, 'Published on Nov 26, 2016', which is the date on this current post. (How lucky is that?) It's part of another course playlist,
Quantum Mechanics and Quantum Computation,
that currently stops at '43 Quantum factoring : Period finding', so I assume it will be updated wth the new clip(s) in due time.
From all of this it looks like the cryptographic underpinnings of bitcoin might indeed be at risk in the not-too-distant future, especially if there is an equivalent of Moore's law that applies to quantum computer hardware. Not to worry too much, because
Quantum cryptography
(Wikipedia) promises a parallel evolution:-
Quantum cryptography is the science of exploiting quantum mechanical properties to perform cryptographic tasks. The best known example of quantum cryptography is quantum key distribution which offers an information-theoretically secure solution to the key exchange problem. Currently used popular public-key encryption and signature schemes (e.g., RSA and ElGamal) can be broken by quantum adversaries. The advantage of quantum cryptography lies in the fact that it allows the completion of various cryptographic tasks that are proven or conjectured to be impossible using only classical (i.e. non-quantum) communication.
With all of that in mind, I'll continue any further investigation of the quantum world outside the confines of this blog. After two posts on a quantum detour, I'm ready to return to the main subject: bitcoin.
'Is Bitcoin Doomed?' (newsweek.com)
•
'Cyber security experts say bitcoin will disappear when the first quantum computer appears.'
•
Since I know little about quantum computing, I'll digress for the next few posts to spend time on it.
I spent a pleasant few hours watching Youtube videos on quantum computing and chose the following as a good introduction.
Quantum Computer in a Nutshell (Documentary) (30:01) • 'The reservoir of possibilities offered by the fundamental laws of Nature, is the key point in the development of science and technology.'
The description continued,
Quantum computing is the next step on the road to broaden our perspective from which we currently look at the Universe. The movie shows the history of progress in this fascinating field of science, introduces the most promising models and algorithms, explains the advantages of quantum computers over classical solutions, and finally presents wonderful people thanks to which the quality of our lives is constantly being improved. Even if you don't want to understand the video, please watch till the end at least to realise how big is the human thirst for knowledge.
An important message I picked up from another video was that quantum computers don't replace traditional computers -- they allow us to tackle problems that traditional computers can't handle because of algorithmic complexity. That topic is covered briefly at the end of the video. In my next post I'll try to learn more about quantum algorithms.
