The Risk and Reward of Bitcoins

Money is supposed to be a store of value. After the recent collapse in the dollar convertible price of Bitcoins, the inevitable scrutiny in the viability of the monetary system is warranted.

by James Hall
Intellihub.com
April 17, 2013

The official description of Bitcoin states: Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority managing transactions and issuing money carried out collectively by the network. Purported myths and ground rules on how the alternative currency operates, provides calculated reading. Whether this accounting system can or would be accepted as an credible medium of exchange on any large scale is certainly an open question.

The need for an alternative currency to fiat debt created tender is apparent. However, establishing faith and acceptance in a competing and digital method of payment for transactions is almost inconceivable to the average consumer.

The Business Insider in Bitcoin Is Changing The World provides an analysis and a risk warning report.

“Bitcoin’s inventor, Satoshi Nakamoto, is a mysterious hacker (or a group of hackers) who created it in 2009 and disappeared from the internet some time in 2010.

Reddit, a social-media site, and WordPress, which provides web hosting and software for bloggers. The appeal for merchants is strong. Firms such as BitPay offer spot-price conversion into dollars. Fees are typically far less than those charged by credit-card companies or banks, particularly for orders from abroad. And Bitcoin transactions cannot be reversed, so frauds cannot leave retailers out of pocket.

Yet for Bitcoins to go mainstream much has to happen, says Fred Ehrsam, the co-developer of Coinbase, a Californian Bitcoin exchange and “wallet service”, where users can store their digital fortune. Several Bitcoin exchanges have suffered thefts and crashes over the past two years.

But the real threat is competition. Bitcoin-boosters like to point out that, unlike fiat money, new Bitcoins cannot be created at whim. That is true, but a new digital currency can be. Alternatives are already in development. Litecoin, a Bitcoin clone, is one.

A less nerdy alternative is Ripple.”

Wow . . . the innovative advantage for merchant acceptance might make one think that Amazon will be jumping into the cauldron and become the big daddy digital vender. Nonetheless, the spike and fall that has the appearance of a Bitcoin bubble will certainly give pause to any large retailer that is flirting with accepting payment through an exchange.

The implication in the article, Why Bitcoin crashed, and how Ripple might avoid the same fate, sets out the risks involved.

“That single point of failure is the most popular Bitcoin currency exchange, Mt Gox. There are other exchanges, but the bulk of Bitcoin trading happens there. Mt Gox claims to have been hit over the last couple weeks’ mania by the twin ills of denial-of-service attacks and sudden, excessive popularity, both of which amount to the same thing: Mt Gox’s systems falling over. The operation (which is based in Japan) has also shut down its own service at least once in an attempt to “cool down” the market.

And every time that has happened, a panic sell-off has been the result. That’s not surprising: Mt Gox’s status as the best-known exchange has led it to become the main data source for most of the Bitcoin rate visualizations out there, so when Mt.Gox goes down it affects visibility for a lot of people. And when people can’t see what’s going on, they panic, find another exchange and sell, sell, sell. Same goes for the biggest exchange unilaterally deciding to cool down the market – hardly a sign of viability.”

If the Bitcoin crash was simply a function of clearing house settlement failure, the claim that Bitcoins retain the properties of money evaporates. Blaming the breakdown on an exchange, illustrates that Bitcoins have more in common with the properties of a stock or commodity, than a hard currency.

The video, Bitcoin Mania! DDoS Attacks & Phishing Scams, reports on the speculative nature of a virtual currency that operates in the etherzone of the cyber world.

The Fierce Markets site announces Jeff Berwick’s effort, Here come the Bitcoin ATMs.

“Somewhat like a traditional ATM, says Berwick. Instead of connecting to your bank account, the software he and his team have developed is installed on an ATM and converts cash to Bitcoins stored in a Bitcoin wallet or extracts cash based on what’s stored in your personal Bitcoin account.”

Bitcoin convertibility back into a legal tender paper currency might go a long way to establish a workable alternative to using the bankster banking system. However, this digital currency is only as solid as the confidence level of users to store wealth in a medium that promises the return of capital or its equivalent value.

For now, Bitcoins has all the trappings of a speculative scheme to harvest profits, explained in the article, Bitcoin Miners Are Racking Up $ 150,000 A Day In Power Consumption Alone.

“Bitcoins are “mined” by unlocking blocks of data that “produce a particular pattern when the Bitcoin ‘hash’ algorithm is applied to the data.”

Blockchain.info, which tracks Bitcoin-related data, estimates that miners are generating $ 470,000 in Bitcoin-related revenue per day. In fact, due to the recent interest in the virtual currency and its popularity,operating margins for Bitcoin miners are close to record highs.”

Such practices do not conform to the properties required to qualify as money. It would seem to describe Bitcoins as an alternative accounting organism to the central banking system. In that regard and goal, the merits of instituting a functioning and reliable digital currency, should be encouraged. Nevertheless, the lack of market stability in Bitcoin value convertibility dooms this experiment in the absence of manipulative swings in currency quotations.

The destructive consequences of floating currency rates have plagued consumers and savers alike for decades. The desired objective is a decentralized monetary system, digital or coinage that has a fixed convertibility and stable purchasing value.

*****

James Hall is a contributor to Intellihub.com and writes for BATR

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The Risk and Reward of Bitcoins

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Congress Asks Bernanke For Full Risk Analysis On Fed"s Soaring Balance Sheet

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Several days ago we wrote about what we defined as the Fed’s “D-Rate” – the interest rate at which the cash outflows from payments by the Fed on its Excess Reserves will surpass that cash inflows from its asset holdings, a very troubling day because as we further explained, from that point on the Fed would be “printing money just to print money.” In other words, with every passing day, the Fed is getting ever closer to the point where the inflation it so very much wishes to unleash will force it to essentially request a technical bailout from Congress (and certainly will halt all future interest remittances to the Treasury), and the longer this takes, the lower the breakeven interest rate becomes, until one day it is so low the tiniest rise in rates will immediately put the Fed into the red. It now appears that Congress itself, the ultimate beneficiary of the Fed’s free money policy as nearly half of all US spending is funded by the Fed’s monetization of the deficit at ultra low rates, is finally catching on to what is the ultimate rock and hard place for Ben Bernanke. In a letter penned by the Chairman of the House Oversight & Government Reform Committee, Jim Jordan, says that he is “troubled by the corresponding effect that the Federal Reserve’s expanding portfolio could have on current and future economic growth” and has asked the Fed what its “future plans to unwind the [$ 3 trillion and rising at $ 885 billion per month] portfolio” are.

What is surprising that Jordan actually gets it:

I am especially concerned that the historically low interest rates brought on by the Federal Reserve’s monetary policy have hampered economic growth by distorting traditional financial incentives.

It gets better:

Younger Americans who have been working to save their income have faced meager returns in bank accounts and larger balance requirements, slowing their overall accumulation of wealth.’ Likewise, older Americans living off of interest-bearing accounts have been forced to move to riskier investments to maintain their standards of living.

And best:

Most strikingly, by maintaining low interest rates, the Federal Reserve has distorted the real cost of the national debt, effectively “incentiviz[ing] the U.S. government to borrow and overspend.”

Jordan is not happy:

The Committee has previously written to you with concerns about monetary policy in the United States. In July 2011, after a meeting between Committee staff and Federal Reserve staff, the Committee requested that you provide all Federal Reserve studies used to determine the value of Federal Reserve assets and “what the potential losses would be based on different unwind scenarios regarding the Federal Reserve’s portfolio…” The Committee also requested that you provide “all estimates and analysis of the potential costs of payment of interest on reserves” that would incentivize banks to maintain excess reserves. In response, you provided only publicly released studies, and you did not provide any precise estimates of the future cost of reserve interest rate payments

As a result…

I respectfully request the following information for the period November 25, 2008 — present:

1. All public and non-public studies, estimates, analysis, and evaluations of the value of the Federal Reserve’s assets and any potential losses associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;
2. All public and non-public studies, estimates, analysis, and evaluations of the potential costs of payments of interest on reserves sufficient to prevent inflation associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;
3. All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the value of the Federal Reserve’s assets and any potential losses associated with future unwind scenarios;
4. All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the Federal Reserve’s cost of payment of interest on reserves

Well, better late than never. However, we are confident that Jordan will be unhappy with the response whose advance preview we provide below:

Dear Jim,

 

Please accept this first completely blank napkin as evidence of all the rigorous analysis the Fed has conducted on all the issues you bring up. Also, on the second completely blank napkin we would have written the date on which we expect to begin unwinding the Fed’s balance sheet.

 

Peace out,

 

Chairsatan Ben

Full letter below.

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Congress Asks Bernanke For Full Risk Analysis On Fed"s Soaring Balance Sheet

Who Is The Most Active User Of Drones Over The United States?

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At this point everyone in the world knows what a drone is: some have been bombarded by one, others, thousands of miles away, have done the bombardment, and everyone else is split whether or not this remote-controlled form of international retribution and global Pax Americna should be allowed over the territory of the US – either for purely peaceful, or outright military, as was the case with the Chris Dorner manhunt, purposes.  And as with most issues that polarize US society, the approach is one of form opinion first, and investigate the underlying facts later.

To that end on Friday, the Government Accountability Office, or GAO, issued testimony on Unmanned Aircraft Systems (UAS, or also Drones), titled “Continued Coordination, Operational Data, and Performance Standards Needed to Guide Research and Development” which while full of largely useless information, does have an informative section detailing which entities received Certificates of Waiver or Authorization (COA) or said otherwise “permissions to drone” for a period , from the FAA, which is the ultimate authority granting UAS flyovers in the US. Among the agencies seeking and being granted such permissions are all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities).

So which entity engaged most actively in US-based droning in 2012? It will come as no surprise that of the 391 COAs issued in the past year, the Department of Defense accounted for 201 or, well over half of all authorized droning operations. One can rest assured that America is truly well defended, if mostly from enemies domestic.

The GAO’s take on this:

Currently, FAA authorizes all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities) UAS operations on a limited basis after conducting a case-by-case safety review. Federal, state, and local government agencies must apply for Certificates of Waiver or Authorization (COA), while civil operators must apply for special airworthiness certificates in the experimental category. Because special airworthiness certificates do not allow commercial operations, there is currently no means for FAA to authorize commercial UAS operations.

 

Since FAA started issuing COAs in January 2007, 1,428 COAs have been issued. At present, under COA or special airworthiness certification, UAS operations are permitted for specific time frames (generally 12 to 24 months); locations; and operations. So, one agency can be issued multiple COAs to operate one UAS for the same purpose. In 2012, FAA issued 391 COAs to 121 federal, state, and local government entities across the United States, including law enforcement entities as well as academic institutions (see fig. 2).

 

According to an industry forecast, the market for government and commercial use of UAS is expected to grow, with small UAS having the greatest growth potential. This forecast estimates that the worldwide UAS market could be potentially worth $ 89 billion over the next decade. The majority of this estimate is for military-type products (primarily the U.S. military) with the associated research and development for production estimated to be $ 28.5 billion over the next 10 years. As smaller UAS are expected to continue to improve in technology and decrease in price, their prevalence in the national airspace is expected to increase. The forecast also indicates that the United States could account for 62 percent of the world’s research and development investment for UAS technology over the coming decade.

For those not quite up to speed on the whole droning thing, here is a simplified chart explaining it all:

Finally, the risk factors read like a point by point challenge to either every black hat hacker out there, or Iran, whichever responds first.

Command, Control and Communication Systems

Ensuring uninterrupted command and control for both small and large UAS remains a key obstacle for safe and routine integration into the national airspace. Since UAS fly based on pre-programmed flight paths and by commands from a pilot-operated ground control station, the ability to maintain the integrity of command and control signals are critically important to ensure that the UAS operates as expected and as intended.

Lost Link

In a “lost link” scenario, the command and control link between the UAS and the ground control station is broken because of either environmental or technological issues, which could lead to loss of control of the UAS. To address this type of situation, UAS generally have pre-programmed maneuvers that may direct the UAS to hover or circle in the airspace for a certain period of time to reestablish its radio link. If the link is not reestablished, then the UAS will return to “home” or the location from which it was launched, or execute an intentional flight termination at its current location. It is important that air traffic controllers know where and how all aircraft are operating so they can ensure the safe separation of aircraft in their airspace.18 FAA and MITRE have been measuring the impacts of lost link on national airspace safety and efficiency, but the standardization of lost link procedures, for both small and large UAS, has not been finalized. Currently, according to FAA, each COA has a specific lost link procedure unique to that particular operation and air traffic controllers should have a copy for reference at all times. Until procedures for a lost link scenario have been standardized across all types of UAS, air traffic controllers must rely on the lost link procedures established in each COA to know what a particular UAS will do in such a scenario.

Dedicated Radio-Frequency Spectrum

Progress has been made in obtaining additional dedicated radio-frequency spectrum for UAS operations, but additional dedicated spectrum, including satellite spectrum, is still needed to ensure secure and continuous communications for both small and large UAS operations. The lack of protected radio-frequency spectrum for UAS operations heightens the possibility that a pilot could lose command and control of a UAS. Unlike manned aircraft—which use dedicated, protected radio frequencies—UAS currently use unprotected radio spectrum and, like any other wireless technology, remain vulnerable to unintentional or intentional interference. This remains a key security and safety vulnerability because, in contrast to a manned aircraft in which the pilot has direct physical control of the aircraft, interruption of radio transmissions can sever the UAS’s only means of control. UAS stakeholders are working to develop and validate hardware and standards for communications operating in allocated spectrum. For example, FAA’s UAS Research Management Plan identified 13 activities designed to mitigate command, control, and communication obstacles. One effort focused on characterizing the capacity and performance impact of UAS operations on air-traffic-control communications systems. In addition, according to NASA, it is developing, in conjunction with Rockwell Collins, a prototype radio for control and a non-payload communications data link that would provide secure communications.

GPS Jamming and Spoofing

The jamming of the GPS signal being transmitted to the UAS could also interrupt the command and control of UAS operations. In a GPS jamming scenario, the UAS could potentially lose its ability to determine its location, altitude, and the direction in which it is traveling.19 Low cost devices that jam GPS signals are prevalent. According to one industry expert, GPS jamming would become a larger problem if GPS is the only method for navigating a UAS. This problem can be mitigated by having a second or redundant navigation system onboard the UAS that is not reliant on GPS, which is the case with larger UAS typically operated by DOD and DHS.

Encrypting civil GPS signals could make it more difficult to “spoof” or counterfeit a GPS signal that could interfere with the navigation of a UAS. Non-military GPS signals, unlike military GPS signals, are not encrypted and transparency and predictability make them vulnerable to being counterfeited, or spoofed. In a GPS-spoofing scenario, the GPS signal going from the ground control station to the UAS is first counterfeited and then overpowered. Once the authentic (original) GPS signal is overpowered, the UAS is partially under the control of the “spoofer.” This type of scenario was recently demonstrated by researchers at the University of Texas at Austin at the behest of DHS. During the demonstration at the White Sands Missile Range, researchers spoofed one element of the unencrypted GPS signal of a fairly sophisticated small UAS (mini-helicopter) and induced it to plummet toward the desert floor. The research team found that it was straightforward to mount an intermediate-level spoofing attack, such as controlling the altitude of the UAS, but difficult and expensive to mount a more sophisticated attack. The research team recommended that spoof-resistant navigation systems be required on UAS exceeding 18 pounds.

Human Factors

UAS stakeholders have been working to develop solutions to human factor issues for both small and large UAS. According to FAA, human factors research examines the interaction between people, machines, and the environment to improve performance and reduce errors. Human factors are important for UAS operations as the pilot and aircraft are not collocated. The separation of pilot and aircraft creates a number of issues, including loss of sensory cues valuable for flight control, delays in control and communications loops, and difficulty in scanning the visual environment surrounding the unmanned aircraft. As part of its UAS Integration in the National Airspace System Project, NASA is working to develop human factor guidelines for ground control stations and plans to share the results with RTCA SC-203 to inform recommended guidelines. In addition, the Department of the Army is working to develop universal ground control stations, which would allow UAS pilots to fly different types of UAS without having to be trained on multiple configurations of a ground control station.

Source: GAO

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Who Is The Most Active User Of Drones Over The United States?

Beef industry putting the consumer at risk

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Beef industry putting the consumer at risk