Bitcoin is not like gold

Duke of Marmalade

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B/S go slowly with me here, I don’t have your insight. QE is exclusively operated by central banks, how can you blame commercial banks? How does QE lead to higher rents and wages that can’t buy food?
 

fpalb

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In other words BTC was invented to make long distance payments quicker and less transactionally expensive than conventional banking facilities.
I snipped your opening paragraphs to just this line, but I address all of it: While the whitepaper doesn't explicitly delve into 'Shortie Syndrome' there is other evidence that Satoshi was also pushing the libertarian angle somewhat, this quote for example:

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts​

Also the community he first announced bitcoin to and some of the prior work cited by the whitepaper has strong links to the cypher-punk movement. You've probably never heard of this but the cypher-punk manifesto https://www.activism.net/cypherpunk/manifesto.html is an interesting read particularly when you consider it was written in 1993! before the internet as we know it and all of the privacy and big-data issues that are becoming more relevant.

ANYWAY, I say the above because it might interest you not because I think it matters that much. Satoshi's original intentions are of little practical relevance now that bitcoin is out in the world out of his control. What it does and how it can be used are what is important.

You list out the requirements of a money system and for sure BTC has them, as do fiat currencies. But it lacks at least two key requirements that fiats have....

1. Mises' Regression requirement - that it traces back to something of "real" value. Sorry, the circular argument that it is money because it is money doesn't cut it for me.

2. With fiat money we have a reasonable assurance of what the price of real things will be at least in the short to medium term. If we were to have a poll of what do we think the inflation rate will be over the next year it would show how remarkably trusting we are on this front. To put it in pictures, a company should have no difficulty in recruiting a contractor for one year at say €8,000 per month but I doubt whether even you would contract to work for a year for 0.5 BTC per month.

...I contend that almost all of the "value" it currently has is speculation that it will get even bigger...
I don't think these are requirements, and I think bitcoin is proving it. Bitcoin is showing that people are willing to choose a speculative store of value that offers both more potential upside and more potential downside instead of steady predictable downside (fiat) or less-upside/less-downside (gold, in my opinion).

You only mentioned bitcoin fulfilling the medium of exchange function of money, but I think we can do a brief comparison of all three functions and rate them:

Medium of Exchange
Gold is clearly the worst, it's the least portable, it's hard to divide, it's also arguably harder to verify, it's not widely accepted.
Fiat is the best for the vast majority of cases, especially where you have access to the best fiat (dollars, euros) and 1st world financial services.
Bitcoin is the best when fiat is forbidden, it can also be cheaper and faster in cases where you want to send money across international borders or there are other frictions with fiat.
Bitcoin cannot currently handle transactions at any significant global scale. This MUST improve for bitcoin to ever have any widespread use as a medium of exchange. BUT IF the lightning network or other such layers on top of bitcoin provide a real solution to this there is potential for instant secure cheap transactions without geographical boundaries, there is potential for micro-payments on a scale we've never seen - it may be better than fiat in many ways, but it does not work yet and may not.

Store of Value
This is where it gets interesting, I think there are two aspect to this which I'll address separately.
1) Is it likely to maintain it's real value over time
Gold is probably the winner here, it's definitely the winner in terms of robustness, it has a long history, it's recognized globally, it has no exposure to failure of a single state, it's limited in supply by the laws of physics, it has some non-monetary value to provide an almost certain floor as a consolation prize even if its use as money dwindles.

Fiat varies from country to country. In Argentina,or Venezuela it's terrible. USA and Europe not too bad, for now. I guess people thought GBP was not too bad, and then Brexit happened, so you never know. Will the euro exist in 5 years? probably, 20 years? maybe 100? I don't know, not many have lasted that long.

Bitcoin is new with a short history, most would say it has more potential upside and downside than both fiat and gold. There's no non-monetary use to provide a floor. Like gold it is not exposed to risk of any particular state, but any other number of events can cause a loss in confidence. At first glance it's easy to consider it the worst of the 3 here.

2) how practical is it to use as a store of value
This is where I think bitcoin starts to show some advantages over both fiat and gold, and I think this is really important to make up for the other shortcomings of it:
  • without counter-party risk you can secure it with a password
  • without counter-party risk you can store it in a redundant manner in as many geographical locations as you want (and in sophisticated ways using multi-sig wallets).
  • without counter-party risk you can store it cheaply in any amount.
  • It is the most transparent, you always know the exact percentage of the total in existence that you hold.
  • you can cross international borders with it undetected in any amount.
  • you can prove you hold it without giving anyone else access to it.
  • it is difficult for someone else to know that you hold it.

Unit of account
Not much to say here, this is much less important than the previous two monetary functions and Fiat wins here. From what I can tell things are almost never priced in gold or bitcoin due to the volatility. Not a big deal for bitcoin as wallets can do the price translation for you anyway. Bitcoin of course has fungible equal units which can be used as a unit of account if desired.

But then there was the missing link - Mises' Regression Theorem or rather Plain 'Ol Common Sense (POCS) - how can it serve as money if it has no (intrinsic) value? He wanted any value at all, you can see that in his musings "value, any value". And then out of necessity he squared the circle and he admits it was circular. He postulates that if even some folk are prepared to accept it as a transaction for real goods then, there you go, it has some value ergo (here's the big leap) it has value for everybody and is a self fulfilling medium of exchange i.e. money.
When wikileaks got cut off from all traditional fiat channels and started accepting bitcoin they had no other choice. Bitcoin was the only option that fulfilled the functions of money for their use-case. This is bitcoin providing value in and of itself. You can call it circular and say it's not enough, but I disagree. In short, I think by now Bitcoin has proven Satoshi's thought experiment to be true - If something can fulfill the functions of money in enough ways that make it stand out from the alternatives it can be enough even in the absence of intrinsic value or government backing, but the hardest part may be bootstrapping it.

My opinion is that bitcoin has already been bootstrapped and reached critical mass, probably since 2013. I know you're thinking that it's in a huge bubble and that everyone holding it now is doing it for short term speculation and that they'll all leave as soon as it stops shooting up. I certainly agree that a lot of people are, but not enough that next bear market will kill bitcoin.

The 2013 bubble
If you haven't already I'd recommend looking back at the 2013 bubble and the aftermath. Look at how bad this chart must have looked in 2015: https://news.bitcoin.com/wp-content/uploads/2016/12/Mike-Casey-chart1.png I was closely following the whole thing. A lot of things went wrong all at the same time. The Silk road market (which many had assumed accounted for ALL of bitcoins use) got shutdown in late 2013, bitcoin oddly started rallying and shot up from $100 to $1000 in 6 weeks. This was parabolic growth which of course had to crash. The crash coincided with Mt Gox which had up until then been the primary way peopled had traded bitcoin with fiat for years.

This was bitcoins biggest crash to date, and the first one since it had really come into the mainstream media. It got crucified. The price crash, the Goxxing and the shutdown of 'the only place people used bitcoin anyway' was a triple-whammy that saw the price steadily decline for the whole of 2014 with bull trap after bull trap, and plenty of fodder for bitcoin obituaries declaring it dead: https://99bitcoins.com/bitcoinobituaries/page/9/ To make things worse the US government had almost 150,000 bitcoins they had seized from Silk Road and planned to auction off, so the market was going to get flooded with supply.

2015 wasn't much better, the price fell to the $200 range and stumbled along with the odd little spurt of hope before falling back. Sentiment was bad, even among some long-time bitcoiners. I posted on this site on the single thread that ever mentioned bitcoin and no-one cared. There was no media hype anymore, and I'm pretty sure there were almost no short term speculators from the 2013 bubble left.

So without all those short term speculators who was left? I was left, and there was enough other long term guys like me to keep it going, developers kept coding, the people who really believed kept building the exchanges, wallets and other services. Infrastructure improved, miners kept mining, transactions kept being made. At $200 and 15.75 in circulation bitcoin still maintained a market cap of about $3 billion without all the bubble speculation. The unique combination of ways bitcoin fulfilled the functions of medium of exchange and was a practical store of value was enough for us.

My opinion on the risk
Given my opinion about why I think bitcoin is money, I also see the main risk to bitcoin being that if it no longer sufficiently fulfills the functions of money it will lose users and eventually will fail. It has to offer enough improvements in certain aspects of the functions of money over gold/paypal/fiat etc to ensure that it remains useful.

While it has actually improved in terms of how easy it is to buy and store securely, I am disappointed that bitcoin has not managed to scale quickly enough to keep up with adoption. It used to be as cheap or cheaper than fiat in all cases, but it no longer is. I don't think it has to be a better medium of exchange than fiat in all cases to survive and have a niche, but it has to be good enough, and certainly better than it is now.
 
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Duke of Marmalade

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fpalb very interesting post as usual. Your individual points are hard to dispute and that’s why I gave my eppur si muove response because I fear that no matter how convincing your arguments I will never recant:rolleyes:

One thing I cannot dispute is that some (intelligent) people think it has value as evidenced by your good self. Ergo in line with Satoshi’s thought piece it attains that missing link to make it money. Maybe it will survive on that basis but it’s price is destined to be roller coaster.

One thing it will never be allowed to be is a mainstream currency. That’s because its main strength - it cannot me managed- makes it totally unsuitable for society’s needs just as the gold standard before it proved unfit for purpose.

Pity to learn that Satoshi was indeed a hard core disciple of Shortie Syndrome:p
 

fpalb

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fpalb very interesting post as usual. Your individual points are hard to dispute and that’s why I gave my eppur si muove response because I fear that no matter how convincing your arguments I will never recant:rolleyes:

One thing I cannot dispute is that some (intelligent) people think it has value as evidenced by your good self. Ergo in line with Satoshi’s thought piece it attains that missing link to make it money. Maybe it will survive on that basis but it’s price is destined to be roller coaster.
Thanks, and I respect your position, as I said when I finished explaining the technical 'how and what' of bitcoin and mining - the 2nd half is the harder part - as it's more down to opinion and economic theories which are hard to prove. It's a leap of faith in a way, though as time has passed and the more I re-think it such as explaining it here the more sense it seems to make to me - but I accept I might also be wrong. I have no doubt it will continue to be a roller coaster, that's half the fun.

One thing it will never be allowed to be is a mainstream currency. That’s because its main strength - it cannot me managed- makes it totally unsuitable for society’s needs just as the gold standard before it proved unfit for purpose.
Bitcoin being banned in the US was one of my biggest fears for the system in 2013. I only bought in significantly after watching senate hearings which made it clear they had no intention of doing so.

The argument that bitcoin won't be 'allowed' is an interesting one for a number of reasons. It's difficult to enforce beyond just driving it underground, like banning drugs or internet piracy. It's global so one country banning it just moves bitcoin related businesses to other countries, there's usually a few countries willing to allow what others ban so they can take that business. It's already getting integrated to the legacy financial systems in at least minor ways - bloomberg terminals, nasdaq, the new futures markets. Plenty of people and institutions with a lot of capital and influence in the US are invested in bitcoin and bitcoin companies, they'll lobby against banning it.

Perhaps funniest of all, I watched a US senate hearing last year about bitcoin and an FBI or CIA woman was asked how much they're encountering bitcoin and she answered by saying that she mostly hears about it from her colleagues buying it! Maybe those in power just get on the train instead of trying to stop it!

I don't know how any of this will play out, but I totally agree that if bitcoin keeps growing there will have to be conflict with some traditional aspects of society, and there will be plenty of people who will want it eradicated.
 

Duke of Marmalade

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I was in Dunnes Stores Cornelscourt yesterday. Very busy this time of year. There are let's say 20 tills. Queues at them all. Thousands of people transacting. The vast majority using credit cards or debit cards. I marvel at how efficient money transmission has become. Then I start to muse. Is there in the milling throng a frustrated fpalb itching to use BTC and annoyed that Dunnes are forcing him to use fiat? Will there come a day when BTC is mainstream? Investopedia speculates 15% adoption. Will there be a day when 3 or more of those tills will be dedicated to BTC because 15% of the population are being paid in BTC?

The answer is never, not even if 15% of folk wanted it to happen. Society ( I won't say Central Banks as we all know they are out to get us) will ban it long before it comes about. Banning the use of a currency is not to be compared with banning, say, drugs. Banning drugs does not stop the craving, might even enhance it. Banning the use of a currency would be 99.9% effective because banning its use removes (almost) all need for it.

Now as to the use of bitcoin in those parts of the world that do not have our highly sophisticated money transmission systems, the idea that equipping these folk with $500 Smartphones is the solution seems ludicrous to me.
 
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fpalb

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Will there come a day when BTC is mainstream? Investopedia speculates 15% adoption. Will there be a day when 3 or more of those tills will be dedicated to BTC because 15% of the population are being paid in BTC?
Look, this is so many steps and years away that it's not worth debating, this would be the very last steps of adoption. bitcoin needs to succeed as digital gold first and needs to increase the transaction rate and become mainstream for internet payments and remittances and all of the other things where it can have more of an edge over legacy stuff.
[/QUOTE]

The answer is never, not even if 15% of folk wanted it to happen. Society ( I won't say Central Banks as we all know they are out to get us) will ban it long before it comes about. Banning the use of a currency is not to be compared with banning, say, drugs. Banning drugs does not stop the craving, might even enhance it. Banning the use of a currency would be 99.9% effective because banning its use removes (almost) all need for it.
Fair point
Now as to the use of bitcoin in those parts of the world that do not have our highly sophisticated money transmission systems, the idea that equipping these folk with $500 Smartphones is the solution seems ludicrous to me.
You should look into M-pesa in Kenya if you haven't already. They leapfrogged so people have mobile phones (not yet as sophisticated as our smart phones of course, but how long?) and solar power without having domestic electricity, a wired phone network or a bank account.

Smart phones are so useful and being produced in such numbers that I work under the assumption that in the near future the vast majority of the world will have a phone and internet access. Especially when Zuckerberg, Musk and others are pushing hard to provide the necessary infrastructure.
 

spondulix

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To address your points:

Gold has an intrinsic value - bitcoin has none

Bitcoin's value is intrinsically linked to the decentralised Bitcoin network. The value of the Bitcoin network is in its utility. You can transfer value (Bitcoin) at a cost (Bitcoin) to a peer, free of regulation and 3rd party liability (a bank).

You cannot have the Bitcoin network without Bitcoin. There is only one Bitcoin network. It does not accept euros.

The network is an amazing technical feat. However is dated and it has scaling issues (but it is faster than using e.g. SWIFT). Bitcoin miners charge fees to add your transaction to the distributed ledger. These fees are growing with time as the network becomes more congested.

Bitcoin is sometimes the only means of accessing exchanges to get other cryptocurrencies. That's because the Bitcoin Network arrived first. The other cryptocurrencies have different characteristics and utility.

Beyond all of this, Bitcoin has value because people want it and it is scarce. There will be 21 million and that is that.

Is Bitcoin overvalued? Maybe. It will settle at a particular value over time. Other, more scalable cryptocurrencies may overtake it in the long run.

Gold is difficult to value - it's hard to justify $1,300 per oz. But Bitcoin is easy to value - it's worthless

Mmm, Bitcoin seems to be worth something right now. It won't be worthless until the network is worthless.

Gold is a naturally occurring metal - bitcoin is artificially created

An iPhone X is artificially created.

Gold has been in demand for thousands of years - bitcoin has been around for a few years - 4 or 5?

Yes, and it's in demand.
 
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joe sod

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To all the bitcoin holders on this site most say they only have a small amount invested compared to their overall investments. Therefore they might have much more invested in say global etfs. These global etfs would have big investments in say banking and oil companies, therefore you might be more invested in banks and oil stocks compared to bitcoin indirectly. Yet there are no passionate debates about the benefits of banking investments at 3am in the morning. Is bitcoin a form of "identity investment", you might not have much money invested but you want to be associated with it
 

ant dee

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Well, truth is our global etfs and banking investments are boring. Nothing to talk about.
Will probably give us decent profits but whats to talk about?
 

fpalb

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Yet there are no passionate debates about the benefits of banking investments at 3am in the morning. Is bitcoin a form of "identity investment", you might not have much money invested but you want to be associated with it
For some people bitcoin is just a speculative investment, for others it's a medium of exchange for the niche cases where it's advantageous over competitors, and for others it's ideological:
https://twitter.com/JulianAssange/status/941600368588476416
Or any combination of the three.
 

Duke of Marmalade

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You should look into M-pesa in Kenya if you haven't already. They leapfrogged so people have mobile phones (not yet as sophisticated as our smart phones of course, but how long?) and solar power without having domestic electricity, a wired phone network or a bank account.

Smart phones are so useful and being produced in such numbers that I work under the assumption that in the near future the vast majority of the world will have a phone and internet access. Especially when Zuckerberg, Musk and others are pushing hard to provide the necessary infrastructure.
I have now looked into M-pesa. In what I am about to say I may have got the wrong end of the stick in which case I stand to be ejected:oops:

Firstly I concede that the idea of large numbers in the unbanked developing world possessing smartphones is not so ludicrous as I intuited.

Now I know you were not claiming that M-pesa was a crypto. But on the contrary it seems to underpin that crypto has nothing to offer in this space. One of the promos for mobile banking which I read quotes the example of the daughter needing to send money home to her family. Being unbanked she hithertofore had to place the money in notes in an envelope and trust someone to physically deliver it. Now with her mobile banking she can to this instantly mobile to mobile. But she is transferring currency she believes in. It is held by a trusted party like Vodafone. Her security is the good ol' PIN technology. No need for her to have miners work through 10s of millions of nonces. Bitcoin would cut out the need for a trusted party as Satoshi intended but the idea that she would have any confidence in knowing she has a secure and transferable amount of nothing doesn't wash.
 

fpalb

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Now I know you were not claiming that M-pesa was a crypto. But on the contrary it seems to underpin that crypto has nothing to offer in this space. One of the promos for mobile banking which I read quotes the example of the daughter needing to send money home to her family. Being unbanked she hithertofore had to place the money in notes in an envelope and trust someone to physically deliver it. Now with her mobile banking she can to this instantly mobile to mobile. But she is transferring currency she believes in. It is held by a trusted party like Vodafone. Her security is the good ol' PIN technology. No need for her to have miners work through 10s of millions of nonces. Bitcoin would cut out the need for a trusted party as Satoshi intended but the idea that she would have any confidence in knowing she has a secure and transferable amount of nothing doesn't wash.
We're just looking at the 'medium of exchange' aspect here. My views on this are that pretty soon everyone will be paying for everything with their phone. In brick and mortar shops you'll be making contact-less payments with it. Other payments will be made via apps - online banking for bills, dedicated apps like the one to top up your leap card (if not tapping the phone itself instead of a leap card), paypal for other things. All else being equal, practicality wins, and this is why physical cash is disappearing.

I think M-Pesa or paypal or anything else that works better than crypto as a medium of exchange will be used instead of crypto. So I think we will see a continuation of crypto only being used as medium of exchange in cases where it is is better, which right now is a set of niche cases like this one I wrote about recently . The previous two posts I wrote on the same page of that thread also relate to the reasons bitcoin might be used over alternatives, particularly by merchants.

One advantage is the global nature. M-pesa is fine until you want to transact with someone in a country that doesn't support it. We still don't have a system apart from crypto that's available worldwide, I guess paypal is the closest. Paypal is interesting because they originally were trying to make something like bitcoin, something outside the existing financial system, but they found they couldn't do it due to the regulatory burden and this is why I think a product from a company will never directly compete with bitcoin entirely, as Peter Thiel, co-founder of paypal said:

“PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.”

So yeah, basically I agree with him I think bitcoin has its work cut out for in the mainstream medium of exchange aspect, and so much of it depends on how the technology will improve in terms of speed, cost, ease-of-use and transaction throughput and this is hard to predict. It is more competitive in the store of value aspect currently.
 

Duke of Marmalade

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We're just looking at the 'medium of exchange' aspect here. My views on this are that pretty soon everyone will be paying for everything with their phone. In brick and mortar shops you'll be making contact-less payments with it. Other payments will be made via apps - online banking for bills, dedicated apps like the one to top up your leap card (if not tapping the phone itself instead of a leap card), paypal for other things. All else being equal, practicality wins, and this is why physical cash is disappearing.

I think M-Pesa or paypal or anything else that works better than crypto as a medium of exchange will be used instead of crypto. So I think we will see a continuation of crypto only being used as medium of exchange in cases where it is is better, which right now is a set of niche cases like this one I wrote about recently . The previous two posts I wrote on the same page of that thread also relate to the reasons bitcoin might be used over alternatives, particularly by merchants.

One advantage is the global nature. M-pesa is fine until you want to transact with someone in a country that doesn't support it. We still don't have a system apart from crypto that's available worldwide, I guess paypal is the closest. Paypal is interesting because they originally were trying to make something like bitcoin, something outside the existing financial system, but they found they couldn't do it due to the regulatory burden and this is why I think a product from a company will never directly compete with bitcoin entirely, as Peter Thiel, co-founder of paypal said:

“PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.”

So yeah, basically I agree with him I think bitcoin has its work cut out for in the mainstream medium of exchange aspect, and so much of it depends on how the technology will improve in terms of speed, cost, ease-of-use and transaction throughput and this is hard to predict. It is more competitive in the store of value aspect currently.
Eppur si muove it is worthless:)
 

jman0war

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Many bitcoiners are also into gold.
But the scarcity of gold will soon be tested.
They say we are about 20-50 years from mining asteroids.
At that point it is expected that "rare earth" deposits will be found in abundance.
 

jman0war

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What gives bitcoin its value.

I understand the scarcity aspect, (like gold), I understand the security, anonymity and ease of use aspects, (I say understand, I mean accept at face value, because life is too short to follow then query the explanations, I'm not as brave as the Duke). I understand the network aspect.

However none of these, to my mind, make bitcoin worth more than a debit card linked to a bank account with no money.
Censorship-Resistant transaction that is not subject to seizure.
Ari Paul of Blocktower Capital explains it in the short video on this page.
http://www.businessinsider.com/cryptocurrency-value-explained-by-crypto-hedge-fund-cio-ari-paul-2017-11
 

jman0war

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The Feds in the US are looking to shift more than $9M worth of Bitcoin from a single seizure, so that last piece is a fallacy.
Fair enough, if you give up your private key, then yes your bitcoin can be "seized"
By the way, the bitcoin only lives in the blockchain.

If you trust your private key to a custodial service, then yes that custodian may be subject to the laws of that country.
But in bitcoin, that is generally unwise.

Think of it like this, if you have cash or money in a bank, authorities can seize it.

The bitcoin blockchain, exists in cyberspace and is not subject to any particular countries laws. Bitcoin isn't something you can take physical possession of. Authorities can acquire your private key (password), that unlocks your bitcoin on that blockchain. But they can't compel the blockchain to give up anything.
 

ant dee

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The Feds in the US are looking to shift more than $9M worth of Bitcoin from a single seizure, so that last piece is a fallacy.
Leo you are mistaken here.
If someone funds Wikileaks via a bank transfer, that transaction can be censored or seized.

If someone funds Wikileaks private bitcoin wallet via his private bitcoin wallet, that transaction is irreversible, censorship resistant.

But if I used my custodial Bitcoin wallet, eg Coinbase, to fund Wikileaks' Coinbase account, Coinbase might get a court order and reverse the transaction, since it never actually touched the blockchain.
It was just a change in Coinbase's private ledger. Coinbase acts pretty much like a traditional bank in that regard.

Regarding seizure, if someone's house gets raided and the Feds locate and capture the private keys, then the Bitcoin is seized. Technically, just the keys of the wallets are seized, transferring control to the Fed, but its the same thing.
However, if the Feds don't find the private keys (you can encrypt them, or even use a mnemonic phrase you can remember and have basically a 'brain-wallet') the Bitcoin cannot ever be seized, unless the individual gives them up.
 

Leo

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But they can't compel the blockchain to give up anything.
Correct, they can't compel the blockchain to give it up, but in search & seizures authorities are successfully seizing bitcoin. So as stated in the linked article, it is resistant to seizure, but it is still subject to such in certain circumstances.
 
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