Rubber-hose cryptanalysis and protecting your bitcoins

From Wikipedia:

In cryptography, rubber-hose cryptanalysis is a euphemism for the extraction of cryptographic secrets (e.g. the password to an encrypted file) from a person by coercion or torture—such as beating that person with a rubber hose, hence the name—in contrast to a mathematical or technical cryptanalytic attack.

As you may be aware there have been several recent kidnappings and torture of high profile bitcoin/cryptocurrency holders where they were beaten until they gave up their bitcoins (private keys). This is a growing problem and it creates a new reality that we must deal with.

The first rule of thumb is to not brag or publicize the fact that you have bitcoins. But what if you are already a high-profile early adopter/evangelist like myself?

(By the way, if you are just getting started now, you are tomorrow’s early adopter.)

First of all, being an early adopter doesn’t mean you have a lot of bitcoins. Most of us gave them away while promoting the idea of the better world that Free Market Money could bring. That doesn’t matter because most people won’t believe you anyway.

Nevertheless, here are a few things you can do (I have done all three):

Situational Awareness

Pay attention to your environment at all times. Watch your drinks in public places as it is quite easy for someone to spike your drink. Know who you are dealing/meeting with.


Practice self-defense. Learn how to carry and use a concealed weapon if you are comfortable with that.

Give Away Your Bitcoins

I’ve donated all of my bitcoins to a Multisignature Irrevocable Charitable Remainder Trust. The group of trustees holds the private keys to a multi-signature bitcoin wallet which I have no control over. The trust indenture explicitly forbids the payment of any ransom demand. Breach of that contract will bring severe penalties to the trustees. Even more so, the likelihood of getting all the trustees to agree to sign a transaction and break the contract is remote.

The trust advances me a modest, monthly allowance to cover my living expenses (tied to a cost of living index) and, at the time of my death, the capped monthly allowance will continue to be paid to my designated heirs. After their deaths the proceeds will be transferred to a charity that I have pre-selected. If my cost of living rises faster than the index I can petition the trustees for an adjustment but they are not bound to honor the request and hard caps are set in place.

No matter how much I am tortured I have no influence over the trustees as they are explicitly bound by the contract. All that a torturer can get from me is a few hundred bucks that I may be carrying on me at the time. Even if a family member is kidnapped and tortured, none of us have any influence over the irrevocable trust. We only get the monthly allowance while we are alive.

By setting up this arrangement in advance I have already made the decision that I would rather die (and have my bitcoins go to charity) than to see them go to criminals. I’ve lived a great life and I’m prepared to go on to the next world at any time. Death doesn’t scare me. That is an extreme position to take and I know that most people won’t do what I’ve done. Hopefully, you don’t have to make that decision. Take care, be safe, and shut-up about your bitcoins. If you would like assistance setting up your own irrevocable trust structure please contact me.


Cryptocurrency Dreams and Nightmares

Cryptocurrency mania is in full force and many people are throwing their money at the “latest and greatest” token or coin offering.

First, let’s attempt to distinguish between a token and a coin.

Tokens tend to be a currency that is needed to run a specific software application in a specific business model. An analogy is the Chuck E. Cheese tokens needed to play video games in their arcade. You trade your hard currency for cheap tokens to put in the machines to make them run.

The reasons for using a token are many:

The tokens can be of any size (think microtransactions) and can be cheaper to transact if they are centrally issued and processed (which removes the need to have an expensive mining/blockchain model). This comes at the cost of giving up censorship resistance as the issuer/administrator can reverse transactions “at will” or under the pressure of outside influence.

Tokens are a great way to “pre-sell” products and services. Think of them as pre-sold gift cards that can be redeemed for the goods and services of the issuer. They are a contingent liability of the merchant issuer.

Breakage. Many of the tokens will be lost or go unused resulting in profits to the issuer.

Tokens are a great way to raise money for a startup or growing company.

“Coins” are more like “community currencies” or “affinity currencies” and are for the sole purpose of creating an alternative currency. Their success is dependent upon both their monetary features (scarcity, censorship resistance, etc.) and the willingness of the community to trade their goods and services for it. They can be built and promoted around affinity groups like “cat lovers” or “belly dancers”, etc.

“Community currencies” have arisen from the most highly valued commodities – evolving into a medium of exchange within those communities. Gold (being durable, divisible, and scarce) became one of the most popular in previous times.

It is the most useful commodity that becomes the primary medium of exchange.

Nevertheless, there always exists certain sub-communities and affinity groups that, for whatever reason, choose certain commodities as their own preferred medium of exchange. The ultimate value of these currencies rests upon what someone is willing to trade for it. The most commonly accepted are the most liquid. Those holding the minority currency face ongoing liquidity challenges. Without strong enough support by their respective communities these currencies can wither and die.

There are many community currencies in the crypto space with bitcoin being the largest and most liquid. In fact, due to its size, acceptance and immutability, it has become the primary (and often only) gateway to all other coins/tokens.

Tokens and coins often overlap in their uses as described above.

While there is no end in site for the current novelty of these technologically-enhanced financial instruments, be careful to not let it cloud your judgement when evaluating potential opportunities.

A key point to remember is that most startups fail and, if they have issued a special purpose token, it is likely that the token will fail along with it. Caveat emptor.

Bitcoin is the “new world currency” Peter Thiel wanted PayPal to be

From Quartz:

Bitcoin prices rose on a Wall Street Journal report (paywall) that Peter Thiel’s investment fund recently made a major wager on the cryptoasset, adding to the list of bigwigs whose support for the market has inflamed the mania. But the PayPal co-founder is no bitcoin arriviste—he’s had a vision for a stateless digital currency for nearly two decades.

Founders Fund, the venture-capital firm co-founded by Thiel, bought $15 to $20 million worth of bitcoin last year, the Journal said yesterday, citing unidentified sources. Those holdings are now reportedly worth hundreds of millions, as bitcoin’s price climbed 14-fold in 2017. Bitcoin rose as much as 13% to $15,392 on the CoinDesk price index in the 24 hours since news of the Founders Fund holdings broke.

When Thiel started PayPal, he never saw it as simply a payment mechanism for eBay sales, or a way for millennials to split bar tabs. In a Reddit “Ask Me Anything” session in 2014, Thiel talked about his failure to deliver on his original ambition to turn PayPal into a “new world currency.” (The company’s website now says it’s “committed to democratizing financial services.”)

What exactly would Thiel’s “new world currency” achieve? Here he is at a company meeting in late 1999, according to Eric M. Jackson, an early PayPal marketing executive and the author of a book on the company:

“PayPal will give citizens worldwide more direct control over their currencies than they ever had before. It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

PayPal was founded in 1998 by Thiel, an avid libertarian, and others. He wanted to use cryptography to send money online, according to Nathaniel Popper’s 2015 book Digital Gold. But the company ran into roadblocks over concerns that it could help foster illegal activities like money laundering. As restrictions mounted, PayPal scaled back its ambitions and Thiel eventually left the firm. Digital currency was seen as an “unfulfilled dream of Silicon Valley,” Popper writes.

Does that ambition sound a little like a “peer-to-peer electronic cash system” that bypasses centralized authorities like banks and mints? That’s what the pseudonymous Satoshi Nakamoto described in his Oct. 2008 paper (pdf) setting out the mechanics of bitcoin.

Bitcoin has benefited from the interest of high-profile institutional backers. Though Wall Street’s involvement remains minuscule, news of interest in the burgeoning market has added fuel to the crypto boom. Major global exchanges in Chicago have developed derivatives that could help institutional traders and investors participate in the mania. One of those firms could be Goldman Sachs, which is setting up a trading desk for cryptoassets, according to Bloomberg. Bloomberg itself recently added price data for ethereum, litecoin, and ripple to its terminal network that’s used by professional traders. Donald Wilson (paywall), founder of high-speed trading firm DRW, set up a crypto unit in 2014.

News of such endorsements is the closest thing to “fundamental” information that could assign a value to these digital coins. Stocks, for example, are issued by companies whose earnings can help the equity’s worth; fiat currencies’ value often depends on the interest rate that the government pays on its debt. For now, the value of a bitcoin mainly depends on the faith that more people, like Thiel, will embrace it.

Correction: a previous version of this story referred to Goldman Sachs as a future bitcoin investor. It is reportedly setting up a trading desk to make markets.

Mining Bitcoin Saves Energy and Lives

Do you own your life or are you a slave?

If you own your life then it follows that you also own the product of your life energy.

This is your property.

If someone takes your property without your voluntary consent, they have taken a piece of your life.

And you are their slave to some degree.

Bitcoin, properly used, can be difficult to take from you without your voluntary consent.

Bitcoin is a tool that can help you protect your property and thus, your life.

Bitcoin is a matter of life and death.

Save energy, save your life.

Choose life, choose bitcoin.

H/T TopNewsBitcoin

When borrowing to buy bitcoin is a rational choice

The knee-jerk reaction by most financial advisors is to scoff at the idea of borrowing to buy bitcoin. But what if this decision is the rational choice after weighing the facts, risks and opportunities?

Here are just a few facts:

The US dollar has lost over 98% of its value since 1913.

The US National Debt is over 20 trillion. The only way they can deal with this is to default or print more money – either way they destroy the purchasing power of the currency.

In a situation where the world accelerates the “flight to real values”, one of the most attractive destinations will be bitcoin due to its scarcity and security. Capital always flows to where it is respected and protected. Bitcoin offers a refuge like no other.

Ask, what are the odds that bitcoin will continue to appreciate at a faster rate than what you are paying on the borrowed debt?

Here are some historical examples of borrowing non-scarce assets (fiat money) to purchase scarce assets:

Real Estate

It goes without saying that people have been borrowing to purchase real estate for some time now because it has historically been a great hedge against inflation. The one thing we can practically count on is that politicians and central bankers like to print money.

Post WW1 Germany

The German government, struggling to pay war repatriations, resorted to the running of the printing press. Financially astute Germans (which included many of the Jews) saw the writing on the wall. They mortgaged and bought up as many assets as possible – primarily businesses and real estate. They leveraged their purchases by putting the smallest down payment possible and obtained long-term, fixed-interest rate debt – payable in German Marks. Within a few years (1917- 1924), after the currency was destroyed by hyperinflation, they were able to pay off all these mortgages for the equivalent cost of a postage stamp. The end result was enormous wealth and free and clear assets. Tragically, this led to widespread resentment of the Jews which helped fuel the rise of Hitler (take heed bitcoiners, you could quickly become the new “hated class”).

Key Points

If you do decide to borrow, make sure that the debt can be paid back with only fiat. Make sure that it is long-term, fixed-interest rate debt. You don’t want any adjustable rate mortgages. Figure out how you plan to service the debt if the bitcoin profits fall short and decide if you are willing to accept the consequences if you are unable to.

If you fully understand the risks and opportunities – and are willing to accept them – then this sophisticated arbitrage strategy may make sense for you.


Venezuelans Seeing Bitcoin Boom as Survival, Not Speculation

From the New York Times:

CARACAS, Venezuela — In the last month, John Villar has bought two plane tickets to Colombia, purchased his wife’s medication and paid the employees of his startup business in Venezuela — all in bitcoin.

As Venezuela’s national currency loses value at a catastrophic rate, thousands have begun turning to the world of cryptocurrency to salvage what little value remains from their increasingly worthless bolivars.

“This is not a matter of politics,” Villar said. “This is a matter of survival.”

Both poor Venezuelan retirees and wealthy business leaders are converting their bolivars into bitcoins online and then using the digital currency to pay for everything from doctor appointments and honeymoons to motorcycles and artisanal beer. The transactions are relatively swift for anyone with a smartphone: Websites like LocalBitcoin and Colibit function as exchanges where Venezuelans can buy and sell bitcoins using a local bank account.

The shift toward cryptocurrencies in Venezuela is taking place as the price of bitcoin has climbed to a peak of more than $17,000 this month. The digital currency debuted on a major U.S. exchange with its first futures contract Sunday. But while bitcoin is a speculative venture in developed nations, in Venezuela it has become a tool to keep families afloat, with some Venezuelans purchasing a small fraction of one coin to build their savings.

The number of Venezuelans using cryptocurrencies remains unclear, but weekly bitcoin trading volume through one popular website has soared from about $225,000 earlier this year to nearly $2.1 million in the first week of December — this in a country where the monthly minimum wage fetches less than $2 on the black market. According to data website Coin Dance, that’s far higher than the value of bitcoin transactions on the same website seen in more prosperous nations across the region, including Argentina, Brazil and Chile.

“Venezuelans are taking refuge in digital currencies,” said Rafael Useche, the founder of Colibit.

One of them is Jorge Ochoa, 34, who liquidated part of his bitcoin savings into dollars so that he could take his wife on a honeymoon to New York City.

The flight toward cryptocurrencies in a nation where inflation in bolivar prices is projected to surpass 2,000 percent next year falls in line with what has happened in other countries stricken by war or economic collapse. Following the debt crisis in Greece, hyperinflation in Zimbabwe and unrest in Ukraine, rising numbers of distressed citizens utilized bitcoin.

In Venezuela, the so-called “crisis currency” is allowing desperate Venezuelans to make potentially life-saving purchases. Villar has been unable to find several of the medications needed to treat his wife’s multiple sclerosis in Venezuela for the last two years, a story not uncommon in a country whose public health system has been crippled by shortages. Instead, he purchased them abroad with bitcoin and used courier services to deliver them to Venezuela.

“Bitcoin is already, for many in Venezuela, not about a business opportunity,” he said.

The early Venezuelan bitcoin adopters consisted largely of engineers and business leaders, but these days Useche said he is surprised by the number of poor, elderly Venezuelan making small bitcoin purchases. While the price of bitcoin has been highly volatile, Venezuelans with few or no other means of converting their bolivars into another currency believe it is a safer bet than the Venezuelan bills that steadily depreciate from one day to the next.

“More than an asset that right now is rising in price, it is a reserve,” Useche said.

Cryptocurrencies have become so fashionable that even President Nicolas Maduro has proposed a government-backed version called the petro, and members of his administration have met with Venezuelan bitcoin entrepreneurs to determine how it might work. Though few details have been released, many in the bitcoin world have responded skeptically to the idea, saying Venezuelans won’t trust a digital currency issued by a government they have little faith in.

Still, bitcoin has its fair share of detractors, from Wall Street to Caracas. Critics point out that the digital currency’s lack of ties to any bank or government, allowing users to spend money anonymously, can facilitate illicit payments. That’s a big concern in a country like Venezuela, which is a major drug transit zone and is rated one of the most corrupt in the world.

Authorities have largely permitted trading of bitcoin in Venezuela, though they have heavily fined and detained people who use computers to earn bitcoins by auditing online cryptocurrency transactions. Such “mining” operations use immense amounts of electricity, which is heavily subsidized in Venezuela — meaning the state essentially winds up paying for the process.

At the bitcoin’s current value, one miner computer alone can now earn more than $10,000 in six months.

“It’s a really great opportunity for Venezuelans in a desperate position,” said Andrea O’Sullivan, a cryptocurrency expert at George Mason University.

While there is no law on the books about mining cryptocurrency in Venezuela, not paying taxes on unreported earnings is illegal.

One Venezuelan bitcoin miner who spoke on condition of anonymity for fear of reprisal said authorities demanded he pay them $20,000 as a bribe but settled on taking 11 of his 20-some mining machines instead. He said the same officials now sometimes contact him seeking technical advice. Others interviewed for this story described being extorted by authorities who asked to be paid in bitcoin.

Even as the use of bitcoin becomes more prevalent, few businesses openly advertise that they accept cryptocurrency out of concern they will be extorted. It’s still difficult to make many purchases in Venezuela with bitcoin, so people have to convert it into bolivars to buy food and other items. Venezuelans with bitcoin can sell their digital currency on one of a half-dozen virtual exchanges filled with compatriots looking to buy bitcoin.

Dollars remain the go-to currency for many Venezuelans seeking to get rid of bolivars, but getting ahold of them can be difficult and generally requires a black market broker. Buying bitcoin eliminates the middleman because transactions can be done peer-to-peer. In addition, saving bitcoin does not require a foreign bank account. Venezuelans cannot hold dollars in a local account.

Mariana Leon, a crypto-economics consultant, said she has helped several companies in the sugar, chocolate and rum industries invest their bolivares in cryptocurrencies, keeping them in business even while other companies shuttered operations.

“The only reason they have survived is because they invested in cryptocurrencies,” she said.

For Villar, the stakes are especially high, and not just for his business. An engineer who once ran a biometrics enterprise, he is staking his financial future on the development of a game involving an alternative cryptocurrency called PepeCash. A dozen employees operate from a small office filled with computers in an industrial community east of the capital. All receive part of their salary in bitcoin. His wife, also an engineer, is now largely bound to a wheelchair.

“At this moment,” he said. “I don’t have a single bolivar.”