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Opinion: Professor Bitcorn Strikes Again

By Kyle Torpey Nov 12, 2014 7:02 AM EDT

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NEW YORK (InsideBitcoins) — Over the past year or so, it has become clear that most of the bitcoin critics have no idea what they’re talking about. In the case of presentations or interviews involving former Federal Reserve Bank Examiner Mark T. Williams, you can always be sure to find a long list of logical fallacies or factual inaccuracies. The “Professor Bitcorn” World Tour recently made a stop in Washington D.C. for the World Bank Conference where Williams outlined ten major risks associated with bitcoin and other cryptocurrencies. As usual, there were a number of issues with the so-called “problems” outlined by Williams in his recent presentation. Let’s take a look at all of these supposed issues point by point.

  1. Bitcoin is not legal tender

For his first point during his presentation, Professor Bitcorn decides to point out an issue that exists with every form of money that has ever been used by mankind. He notes: 

“If businesses or individuals suddenly decide no longer to accept it, bitcoin will become worthless.”

Williams seems to believe that a legal backing for a currency is a safeguard against this problem, but the countless instances of hyperinflation caused by governments over the course of history should be enough to immediately debunk this as an issue that only applies to bitcoin.

  1. Extreme price risk

Williams is mostly correct with the points made in section two. Bitcoin is more properly used as a store of value rather than a unit of account at this point in time, and it could take many years for the volatility in the bitcoin price to subside. Williams notes:

“Bitcoin trades like a high-risk commodity.”

This should come as no surprise as “high-risk commodity” isn’t a completely incorrect definition of bitcoin right now.

  1. Extreme price risk can quickly erase company profit margins

This section describes the issues with a business using bitcoin as a unit of account. Pointing out this flaw can be described as disingenuous at best because merchants can easily convert bitcoin payments into dollars as soon as a customer pays for goods or services. As mentioned above, bitcoin is better as a store of value than a unit of account, which means it still makes sense for businesses to keep some of the bitcoins that are sent their way by customers.

  1. Bitcoin is a hyper asset bubble in the process of deflating

Although there is no debating that the $1200 bitcoin price near the end of 2013 was a bubble, to say that the price will go lower from here may be a misguided assumption. Williams claimed that bitcoin would be trading below $10 by mid-2014, and that turned out to be quite false. His forecast that the bubble will continue to deflate towards this level seems to have no basis in reality as the $9 million worth of bitcoin placed on the market by Bearwhale were quickly scooped up by traders who believed the bottom had been met.

  1. Growing concentration and bankruptcy risk to financial middleman

This point seems to be the exact opposite of what is happening in reality. Williams claims that the concentration of merchant services in Coinbase and BitPay “creates a dangerous level of industry concentration risk should one or both of these firms fail.”

There are plenty of problems with this argument, but the most obvious one is that there are many more players in the game than Coinbase and BitPay. Snapcard, Coinapult, BitReserve, and others are also in the business of hedging bitcoin price risk. It would be more correct to say that there are more options for hedging bitcoin volatility risk coming onto the market.

  1. Bitcoin exchange bankruptcy risk

Exchange bankruptcy is a real concern, which is why there are plenty of fixes for better security and transparency in the works. Whether you’re talking about proof-of-reserve or multisig addresses, it seems clear that the best way to avoid another MtGox scenario is already built directly into the bitcoin protocol. This is a basic issue involved in any system that requires third-party trust. Bitcoin is the first digital payment system that removes the requirement of third-party trust, which is why the community always points out that controlling your own private keys is of the utmost importance.

  1. Bitcoin use can trigger significant tax risk

There’s really no sense to be made of this point at all. Software that will automatically calculate the capital gains taxes associated with your bitcoin holdings is already available.

  1. Transactional fraud risk – double spending

The various attack vectors for double spending are real, although they haven’t been an issue for merchants at all. Also, BitPay actually takes on the risk of a double-spend for their merchants. There are ways to mitigate the risks associated with a double-spend during that first ten minute window, and the safeguards for combatting these risks are better dealt with by third parties for now. It’s also likely that new services, such as Monetas, will be able to further mitigate these risks in the future. Greenaddress is another interesting option if a merchant wishes to securely accept bitcoin transactions with zero confirmations.

  1. Significant consumer protection risk

The ninth point made by Williams during his presentation has to do with the lack of chargebacks in bitcoin. He notes:

“Once bitcoin transfers are made they are irrevocable leaving consumers with no recourse for dispute resolution.”

This is true, and new users definitely need to be warned about how bitcoin works before they use it for the first time. However, this should be viewed as a feature, not a “major risk.” At the core of bitcoin’s value proposition is the idea of censorship resistance. Adding the possibility of chargebacks and dispute resolution directly into the protocol leaves you with something that isn’t bitcoin at all. This risk should be included in a manual on how to use bitcoin properly, but it is not a problem that means “the system cannot function at reliable and safe levels.”

And finally, we discuss point #10 in Part 2: Former Federal Reserve Regulator is Afraid Bitcoin Could Destroy Central Banking

You can follow @kyletorpey on Twitter.

Illustration created with photo by: naosuke ii

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