In the near future, when your national government debases the official currency (dollars in the U.S.) in order to avoid default, bank accounts and bonds will become nearly worthless. Judging by what happened in Brazil in the 1960s and 70s, after months of disruption people will adjust to life where prices and wages double every few weeks. “Junk silver” (pre-1965 dimes, quarters, and half-dollars) is what we recommend as your day-to-day money during the transition. For the longer term, savings are normally kept in precious metals, such as gold Krugerrands or platinum Eagles, but an alternative has appeared. Bitcoins also are a good choice of long-term savings medium.
What Are Bitcoins?
Bitcoins are electronic money, embodied solely as data in the cloud (the dispersed global internet). Like all money (dollars, yen, gold), it has value only because people freely offer and accept it in exchange for goods and services. In fact, numerous currency exchanges around the world today routinely change bitcoins to and from national currencies.
Bitcoins are more like gold than like currency. Like gold, bitcoins’ value is not backed by any government decree. Hence, like gold, bitcoins retain their buying power as currencies crash all around them. Also like gold, bitcoins are not liquid enough for you to pay employees’ wages with them or to buy a loaf a bread at the supermarket. It is true that bitcoins may gain liquidity in coming years because, unlike gold, they are easily transferred over the internet. Nevertheless for now, they are like gold: a medium for long-term savings under your sole control, not for daily spending.
Cannot be Debased but Can be Speculated
On the one hand, bitcoins cannot be debased. They cannot undergo government-induced hyperinflation because they are independent of any government. Like an ounce of gold, a bitcoin’s value will always be precisely what global consensus says it is, even after any nation transforms its own currency into so much worthless paper.
On the other hand, bitcoins can be speculated. An irrational buying frenzy may send its dollar price soaring (a crash in dollar value compared to bitcoin). A selling panic may reduce its dollar price (a rise in the dollar compared to bitcoin). Even though a bitcoin’s value can never fall to zero (unlike a national currency), currency-exchange speculators can still lose.
Cannot be Stolen but Can be Scammed
Bitcoins are incorporeal. They exist only as data in the internet cloud, linked to a password (a “private key”) that only you know. They have no physical manifestation. This means that they cannot be physically stolen. No one can break into your home, or safe-deposit box and abscond with them. No embezzling banker or broker can touch them. No corrupt customs inspector can confiscate them. No narcotics enforcement officer can arrest them.
On the other hand, someone can trick you into paying for promised goods or services, then take your money and vanish. This is true whether you paid in dollars, gold, or bitcoins. Also, someone can learn your password and take your money, again whether it was your online banking account password, or your bitcoin private key. In fact, I cannot think of any phishing or scam, from the badger game to the pigeon-drop, and every traditional con in-between, that cannot be performed with bitcoins. More about popular scams in a moment.
Transferred Directly but Subject to Law
Bitcoins are transferred directly and privately from one person to another. Unlike the transfer of gold, stocks, or bonds, you need not involve a bank or broker. This means that no one will ask you to prove your source of funds and demand that you fill out U.S. federal form 8300 if the value of the transaction exceeds $10,000. No banker or broker will secretly report the transfer on federal form 4789. No one will secretly report on federal form 4790 that the transfer crossed national borders. Finally, no one will send the IRS a copy of form 1099 reporting that you paid $100 for bitcoins, then sold them for $150, thereby owing capital gains taxes on $50.
On the other hand, although bitcons’ privacy makes it hard for the government to look over your shoulder, this does not reduce your taxpayer obligation. If you transact bitcoins in a way that uses over $10,000 in currency or that transfers that amount across a national border, or if you sell bitcoins (or anything else, for that matter) for more than you paid, then you have the civic duty as a citizen to voluntarily fill out the appropriate forms and report yourself to the government. Failure to do so is a federal crime.
Private but Not Anonymous
As mentioned, when you buy bitcoins, sell them, send them to buy stuff, receive them to sell stuff, donate them, or get them as gifts, the transaction is direct—between two people. Unlike use of bank checks or credit cards, no third party (the bank) is involved.
On the other hand, people distrust strangers for good reason. There is no limit to the ingenuity of con artists, scammers, and thieves. It is vital to know all about your customer whenever you deliver something of value not face-to-face. Do not be surprised when someone asks for your personal information before sending you bitcoins (or gold) in return for currency via the internet. Conversely, you should send bitcoins (or gold) in return for currency via the internet only from someone whom you trust. More about scams in a bit.
Irrevocable, so Favors Seller Not Buyer
Once you send bitcoins to someone the payment cannot be retrieved. In theory, if you were defrauded you might sue or file criminal charges. But in practice, there is no obvious way to prove (to preponderance of the evidence or reasonable doubt, respectively) that the defendant was the actual recipient of the bitcoins. Bitcoins are always sent to faceless addresses, not to individuals. (More about this in a moment.) The important thing is that once you send bitcoins, they are gone forever.
As mentioned, few merchants today accept bitcoins. But if bitcoins become popular as a medium of exchange for minor purchases, they will favor the seller, not the buyer. Consider the most popular internet scam today, which stole over half a billion dollars from merchants in 2009, and has grown since then. Here is how the scam works:
Your business is to sell $500 laptops. An online customer buys one with a credit card or Paypal transfer. You ship the laptop to the address he gives. (Alternatively, he stops by your store, identifies himself with the credit card or Paypal transaction number, and carries the laptop away.) A month passes. Then, an email from Paypal or the credit-card bank says that they are taking back the $500 because the customer says that he never ordered nor received any laptop. He says that he must have been a victim of identity theft. They take back the $500. You have no choice. You are out the laptop and the $500.
(1) What if the customer is lying, is enjoying his new laptop, and merely claims identity theft in order to steal from you? (2) What if the customer is telling the truth and the thief (who got the laptop) used his credit card or Paypal account? (3) What if (the most popular variant) the customer actually wanted to buy some hubcaps, not a laptop, and sent the Paypal money to you following the hubcap seller’s instructions, who then picked up the laptop and vanished, with never any intent to deliver hubcaps to the fool. He just wanted a free laptop. (4) What if… The “what ifs” are endless. The point is that, no matter how it went down, the bank or Paypal will take back the $500. You have no choice. You are out the laptop and the $500.
Same scenario, but now the online customer pays you with bitcoins instead of Paypal or credit card. You turn over the laptop. A month later, he says that he wants his money back because [whatever]. You tell him to go pound salt. End of story.
Who Favors, Who Opposes?
Who favors bitcoins and advocates their use? Those who believe that individuals are independent and responsible for themselves.
- gold bugs
- internet-savvy preppers
- merchants tired of being ripped off
- internet gambling sites
- international money changers
- drug users and dealers
Who opposes bitcoins and wants them outlawed? Those who believe that individuals are dependent and must be protected from themselves.
- credit card companies
- intrusive governments
- con artists and their victims
The Simplest Way to Get Into Bitcoins
Get a personal key-pair. Every bitcoin conceptual “bucket” or “account” comprises two passwords: a public address (address for short) that is used to deposit bitcoins into the account, and a private key (privkey for short) that is used to spend money out of the bucket. The bitaddress.org website and the Android “Bitcoin Address Utility” app will generate a key-pair that you can examine and read based on a phrase. The bitcoin “wallet” programs for PC, Mac, Linux, iOS, or Android, as well as the website wallet at Blockchain will generate key-pairs but they store the privkeys internally, where you cannot see them.
Accumulate bitcoins into your public address. Tell contributors to send bitcoins into your public address. (For example, see my “tip-jar” at the bottom of this essay.) If you acquire bitcoins at a money-changer or bank account, withdraw them into your public address. You need no software to receive and accumulate bitcoins into your public address. You need no software to see your accumulated balance online. Just visit <http://blockexplorer.com/address/1GDGfpdvoP5xw5bCJzazCyJoCKbQdJd6jh>. But first, replace “1GDGfpdvoP5xw5bCJzazCyJoCKbQdJd6jh” with your own public address. That one is mine. (Again, see my tip-jar below.) Notice that anyone who knows your public address can see its balance. And anyone who sent you money knows your public address.
Disburse bitcoins from your private key. For this you will need software. Probably the easiest way is to use the Blockchain website. Or you can download and install any of the numerous free bitcoin “wallet” programs available for every operating system.
Eventually migrate to two “accounts” or “buckets”. If you use bitcoins only to prep for hyperinflation, then you may stop reading here. But if you eventually use bitcoins for day-to-day activity (such as my tip-jar below, or buying from bitcoin-accepting merchants that are starting to spring up) then you should have two key-pairs: one for the high-value prepper nest-egg, whose privkey should be guarded with your life, and one for daily buying, whose privkey can reside in your smartphone.
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Frank W. Sweet is an NRA-certified firearms instructor who teaches the safe and effective use of handguns for self-defense. He was awarded an M.A. in Civil War Studies in military history from American Military University in 2001. He is the author of Legal History of the Color Line (ISBN 9780939479238), Six Gems of Forgotten Civil War History (ISBN 9780939479023), and of numerous published historical essays. To receive a schedule of his firearms training courses, email to firstname.lastname@example.org. The information above should not be construed as legal advice.
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