Wednesday, January 1, 2014

Thoughts on Bitcoin and Why I Bought Peercoins from Vault of Satoshi December 30th 2013


By now everyone has heard about Bitcoin and are kicking themselves for not buying thousands when they were under a penny.

I was kicking myself, but I wasn't too worried.  I'm a student of history and economics, and I understand the purpose and reason for currency. And it's not to hoard value or appease American libertarians who hate the Federal Reserve. The purpose of a currency is to act as a medium of exchange superior to simply bartering goods. I believe that's common ground that all types and stripes of political beliefs will agree with so that's where I'll start.

So I wanted to understand the reason for the success of Bitcoin and alternative coins (altcoins) and articles from economists, columnists and forum dwellers seemed to fall into several camps:

1. Those who dismissed the utility of Bitcoin outright. I admit I find their arguments initially persuasive, like the comparison to the Tulip bubble of 1637. People who ignore history are foolish. However the comparison is specious. Tulips wither and die and are not easily transported and impossible to divide. They can't be used as currency. The closer comparison is with Gold or other precious metals. Gold might be a several thousand year bubble until we invent cheap space travel and mine the asteroid belt, but I doubt anybody cares if anything is a bubble unless it will pop within their lifetimes. So I formulated the first of my criteria whether Bitcoin or alternate coins are worth investing in : not whether it is a bubble, but whether the bubble will pop within my lifetime or whether I can exit quickly and pocket a decent sum.

2. Those who dismissed the security of Bitcoin due to major hacks of popular Bitcoin websites. At least 30% and perhaps 50% of Bitcoin wallets fail within the first few years and some take their client's Bitcoins with them, virtual theft. Since I'm a programmer this was where I feel most comfortable commenting on. Most of the major Bitcoin hacks and scams were due to people storing their Bitcoins in an online wallet, not because Bitcoin itself is insecure. As well, it is theoretically possible (though it would require the resources of the FBI or similar government agencies) to enumerate the Bitcoin transactions and trace them to their address. Whether that will ever be done remains to be seen given the ineptitude of law enforcement when it comes to computers, but if Bitcoin ever hits mainstream government will definitely pour resources into understanding and tracking Bitcoin transactions. Anonymity is not a serious concern of mine, and I have professional computer skills. If the coins are stored online in any way shape or form it would be unacceptable to me; if major companies like Sony or the DoD could get hacked then any website-of-the-day made by some unknown web programmer could get hacked. Web programming is very hard to get right and determined hackers can always breach security. On top of that, what's to stop a web programmer in a third world country from closing shop and stealing the coins? So I formulated the second of my criteria: if Bitcoin or altcoins could be stored offline, and not in online wallets, they would be ultimately as secure as carrying cash for me personally.

3.  Those who dismissed Bitcoin due to moral reasons. I find these arguments unpersuasive. I might not agree with or even sympathize with libertarian's concerns about the Federal Reserve or the banking system (my political beliefs are far closer to Krugman's than Internet libertarians who love Ron Paul) yet Bitcoin was not originally designed by nor does it entirely benefit libertarians. Yes, Bitcoin allows you to game the system and lie about taxes or buy drugs or guns, but the FBI's bust of Silk Road earlier this year proves the government can and will catch those who use Bitcoin illegally just as they catch criminals who use cash illegally. As for Bitcoin promoting the downfall of the Federal Reserve system, if I truly believed that I would be telling everyone to avoid Bitcoin like the plague. Of course Krugman was tongue-in-cheek and probably not serious, but there are definitely people who avoid Bitcoin because of moral reasons. I give them this food for thought: Bitcoin liberates citizens in countries where the government is not democratic and has no separation between fiscal and monetary policy. If your government is going to restrict you from moving money out of the country like China does or if your currency can't hold value long enough to make a purchase then Bitcoin is freedom. I will not argue whether the USA or Western countries do this (that dives into politics far too much for a tech blog) but suffice it to say Bitcoin is only as "evil" as the people who use it. So I formulated the third of my criteria: I will only buy Bitcoin or altcoins from a legitimate company where I can be sure the coins wouldn't go to help organized crime or criminals.

One nagging moral issue is that Bitcoin is a "pump and dump" scam and that those who got in first have the most and those who got in last and/or leave last will be left holding the bag. This would be true, except for the fact that the idea of Bitcoin, circumventing government control and fast transactions, has intrinsic value in of itself. There will always be black markets and dictatorships, and there will always be a need for sending money in a blink of an eye (well, 10 minutes in the case of Bitcoin since you need to wait 10 minutes for six network confirmations) so Bitcoin has real world value. So long as these two prerogatives exist, need to move money quickly and need to avoid repressive government, Bitcoin will have a market. Day traders could pump and dump all they want, but in the end the price would come back up because unlike a company whose products are inferior or service is terrible, these two ideas are not going away. So I formulated the fourth of my criteria: I will only buy Bitcoin or altcoins with the knowledge that certain beliefs and political conditions give people a reason to hold that coin. If it isn't being held by people to solve real world problems (not crypto problems) then I won't touch it. Any altcoin such as Peercoin would have to meet that criteria as well. That means that altcoin of the day (Google PhenixCoin and see how people were scammed) that wasn't being held by Chinese venture capitalists but only held by day traders or US libertarians probably doesn't qualify.

So, if I was to buy Bitcoins, it would have to meet all of the above strict criteria (no compromises).

For the last point I found Vault of Satoshi. It is a Canadian company which opened in the last year and currently sells BTC, LTC and PPC (Bitcoins, Litecoins, Peercoins). I knew this was caveat emptor. Sending unknown people money over the Internet is not a good idea folks. You never know who you're dealing with or whether they could run off with your money. But several things made me change my mind. First, the website lists the names and photos of their staff. Second, I found nothing but glowing reviews for Vault of Satoshi and especially in the forum. Reddit, for those of you who don't know, is a grassroots Internet website for news, opinions and other things. Millions of people read it everyday and if you want to get the pulse of Internet opinion (at least in English) Reddit is the place to be. It's completely unfiltered and NSFW, but I figured that if Vault of Satoshi was a scam redditors would have indicated problems long ago. Finally I saw the volume of money going through VOS and figured that I would be small potatoes. I would only be vulnerable as long as I had the coins online on their exchange. As soon as I downloaded the coins to my offline wallet, I would not be vulnerable. It wouldn't matter if VOS really was a scam -- they would have to scam at the exact instant I chose to buy my puny amount of coin. So I would be vulnerable for a matter of days or hours only. The fact I could take them to small claims court and they were located in a Western country also assuaged my fears.

All these precautions and beliefs were unnecessary though. Vault of Satoshi has been nothing but professional to me, and indeed they answered e-mails sometimes within hours or minutes. When I wired the money to them, I was asking questions over e-mail and they answered almost immediately. Their confirmation process requiring two forms of identification is standard bank practice in Canada and I believe it is done so VOS can protect itself against regulators if accusations of money laundering arise. I wired my money from a major location in Toronto and it was confirmed and ready for trading on VOS on the same day within a few hours. That seriously impressed me and I'm pretty sure some exchange in god-knows-whatistan country overseas on holiday wouldn't even bother to check my e-mails or questions for days or weeks at a time and perhaps hold my money up for weeks as well. As of January 1st, 2014 [remember caveat emptor -- do Google searches and Reddit searches on Vault of Satoshi if you are reading this post later as it may be out of date, who knows VOS could turn into a scam site two years from now] I recommend using Vault of Satoshi for all your BTC / LTC / PPC needs even if it's a hassle to setup and the volume is low compared to other exchanges (the amount of PPC selling is extremely low and I was lucky to find the volume I needed). Their customer service is superior, their web interface is superior and the overall experience is superior.

That was the financial aspect of security.

Finally we come to computer security. This has been a long post and I've talked a lot about non-technical details. I took extreme precautions to secure my computer long before I even thought about buying any Bitcoins or altcoins. These included:

1. Wiping my hard disk and installing Linux. I will not get into the details of whether Linux is more or less secure than Windows. However it made sense for me (for other reasons) to install Linux.

2. Creating a special virtual machine for coins. This virtual machine does only coins, all coins and nothing but the coins (no surfing forums for coin news to be vulnerable to XSS attacks, no watching Youtube, no nothing). I run nothing on the host machine and everything in VMs. That is the equivalent of sandboxing almost everything. This is not convenient for anyone who needs Windows or does computer gaming (I do very little). So I may write an article about how to do this all on a Linux Live CD. But the idea is the same -- run everything off a freshly installed operating system with all the updates and patches installed and no history of third party software.

3. Creating secure passwords that are memorable and long for all my e-mail accounts, VMs, operating system and so on. Never the same one. Made long through words with letters, numbers and symbols spaced between.

4. After I bought the coins, I burned not only the wallet.dat or coin files, but the entire VM onto removable media. I made sure to lock the wallet and keep it stored on several different types of media (hint: do NOT use flash media, it's incredibly unreliable) to stand the test of two or more years. I kept the passwords separate in safe locations.

This post has been rather long and I'm growing tired. I may write a second or third post going into why I selected Peercoin, and about the exact technical details of buying Peercoins/Litecoins/Bitcoins from Vault of Satoshi (a step by step tutorial) if there is demand. One last word of warning -- most altcoins are pump and dump scams. Do not let regret over Bitcoin stop you from investigating altcoins. At this moment I do not recommend anyone who isn't incredibly computer savvy (to the level of installing your own Linux and using kvm or Virtualbox at least) nor do I recommend anyone invest any money they aren't willing to lose. It takes a great deal of research and knowledge about the technical innards of the various coins to know which are worth investing in for the short term and/or long term and which are pump and dump scams. I believe that Peercoin is not a pump and dump but without going through the source code personally I am basically taking the word of Sunny King (inventor of Peercoin and Primecoin) and his forums. The people who got stiffed by Madoff probably thought the same way.

So, have fun, play safe and remember even if you did cash in on Bitcoin early on it probably wouldn't have been enough to let you retire early or even change your life. So you didn't really miss much, just another LCD TV or car or house or two (hopefully you already have a place of residence and are not homeless; you probably already have a car too and you probably have a TV!). All toys in the big scheme of things.

My next post about crypto, should there be demand, will be a step-by-step tutorial how to buy Peercoins/Litecoins/Bitcoins securely from Vault of Satoshi.

No comments:

Post a Comment