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Journal Journal: Are we pwned by bitcoin?

Bitcoins are a digital currency or "cryptocoin" which has seen its share of enthusiastic coverage in hacking and anti-censorship circles. These digital money are apparently un-hackable, untraceable and voted "most likely to be outlawed" [1]. Google added to the publicity when one of their engineers released an open-source client for the bitcoin economy [2] and EFF lauded it as "a step towards censorship-resistant digital currency"[3] and accept donations in bitcoins.

Un-hackable it may be, but is the bitcoin itself a hack, of the social engineering type? The rumour is spreading [4] that the bitcoin system is designed as a pyramid scheme and hidden in plain sight. Here are the hints:

* Bitcoins are randomly allocated to users computers, and were designed to flow fast at first and then slow to a trickle as time went on. An advantage for early adopters like the inventors.

* As the free money supply winds down and the userbase grows, economic theory hold that the value of a bitcoin will start increasing over time. Knowing this, it is irrational to actually spend your bitcoins. Instead you hoard them and use dollars for your actual purchases, while you wait to cash in. Already, the value of bitcoins has increased a hundredfold. It's a return on investment that puts Madoff's ponzi-scheme fund to shame.

So here is the situation for a late adopter:
As a late-comer to the bitcoin economy, you are helping drive up the value of it while only getting a meager amount of coins yourself, compared to the early adopters. It looks like a bad deal, but you are reluctant to pull out, because it looks like your coins are still going to increase phenomenally in value.

But what if you made it big and actually tried exchanging that hoard of bitcoins for real cash? You could be in for a surprise. Like for the Linden-dollar of Second Life, there is no central exchange to rely on. There are only small companies or individuals which may do some exchanging at some price. While you can always change your dollar into a Yen, the bitcoin is more like an old comic book which you may or may not find a buyer for on eBay. If you tried exchanging that glut of bitcoins, there may not be enough buyers. Supply and demand would have the bitcoin value fall like a rock and we don't want that, do we?

In a clever feat of coding it seems like the guys behind Bitcoin has pulled the ultimate social engineering hack. The code is open-source, the network is peer-to-peer. Google and the EFF helps spread the word and every sucker running a coin-mining farm [5] voluntarily enrichs the hackers while being too greedy or afraid to pull out.

[1] http://news.slashdot.org/story/11/05/16/1316211/BitCoin-the-Most-Dangerous-Project-Ever

[2] http://news.slashdot.org/story/11/03/23/0210207/Google-Engineer-Releases-Open-Source-Bitcoin-Client

[3] http://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant

[4] http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea

[5] http://idle.slashdot.org/story/11/05/24/1257229/Increased-Power-Usage-Leads-to-Mistaken-Pot-Busts-for-Bitcoin-Miners

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