An InterAnalyst Publication

Bitcoin: What, Why, Where & How

Bitcoin Under Pressure
A Crypto-Currency Prediction
CURRENT INVESTMENT GUIDELINE






: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 2

Bitcoin is an open source peer-to-peer electronic money and payment network introduced in 2009
by pseudonymous developer "Satoshi Nakamoto". Bitcoin has been called a cryptocurrency because it
uses cryptography to secure transactions. Digitally signed payment messages are broadcast to and verified by
a decentralized network of computers all over the world. Specialized computers use a proof-of-work system
to prevent people from copying and spending the same bitcoin multiple times, a problem for digital
currencies known as double-spending. The operators of these computers, known as "miners", are rewarded
with transaction fees and newly minted Bitcoins.
Bitcoins are stored by associating them with addresses called "wallets". Wallets can be stored on web
services, on local hardware like PCs and mobile devices, or on paper print-outs. Thefts of bitcoins from web
services and online wallets have been covered in the media, prompting assertions that the safest way to
store bitcoins is in a paper wallet generated on an uncompromised computer by yourself.
In 2012, The Economist reasoned that Bitcoin has been popular because of "its role in dodgy online
markets",
[12]
and in 2013 the FBI shut down one such service, Silk Road, which specialized in illegal drugs
(whereupon the FBI took control of approximately 1.5% of all bitcoins in circulation). However, bitcoins are
increasingly used as payment for legitimate products and services, and merchants have an incentive to
accept the currency because transaction fees are lower than the 2 to 3% typically imposed by credit card
processors.

Notable vendors include OkCupid, Reddit, WordPress, and Chinese Internet giant Baidu.
Speculators have been attracted to Bitcoin, fueling volatility and price swings. As of November 2013, the use
of Bitcoin in the retail and commercial marketplace is relatively small compared with the use by speculators.
Integral to Bitcoin is a public transaction ledger and log known as the blockchain, which shows who owns
how many bitcoins currently and records the participants in all prior transactions as well. By keeping a record
of all transactions, the blockchain prevents double-spending (copying one bitcoin and spending it in multiple
different places) because the record shows that once a bitcoin has been spent, the previous owner no longer
controls it. The blockchain is maintained not by a central body but by a distributed network of computers
that run a program to solve cryptographic puzzles relating to information in the blockchain. Users who
devote computing power to maintaining the blockchain this way are called "miners" because they are
awarded in bitcoin when they are first to solve such puzzlesmining is how new bitcoins are generated. The
mathematical calculations performed by miners' computers serve to verify that each transaction is valid and
add the information to the blockchain. As more bitcoins come into circulation, the puzzles involved in mining
them become increasingly difficult, and the rewards are halved at regular intervals, until 21 million bitcoins
have been created and production stops. As Bitcoin achieves wider recognition and more people compete to
mine the coins, competition for the limited number of bitcoins awarded for solving the cryptographic puzzles
becomes more steep and more powerful computers are needed in order to competea fact which has
spawned a technology boom in sales of Bitcoin mining technology.
Wallets
Bitcoin functions using public-key cryptography, in which a user generates a pair of cryptographic keys: one
public and one private. Only the private key can decode information encrypted with the public key; therefore
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 3

the keys' owner can distribute the public key openly without fear that anyone will be able to use it to gain
access to the encrypted information (The private key, however, must be kept secret and secure.) The public
key can be used as an "address" to which other users can send bitcoins. Anyone wishing to use Bitcoin can
create one or more Bitcoin addresses, which are collected and tracked in "wallets". Anyone can send Bitcoins
to the public address provided by the owner of the wallet, while the private key must be entered by the
wallet owner to send bitcoins. Securing and protecting the private key is the essence of wallet security. If the
private key for an address is not kept secret, the bitcoins may be stolen; theft has been documented on
numerous occasions.
Wallets allow a user to complete transactions between addresses by requesting an update to the blockchain,
the public transaction log. Wallets come in a variety of forms: apps for mobile devices and computers,
hardware devices, and paper tokens. When making a purchase with a mobile device, the use of QR codes to
simplify transactions is ubiquitous.
Payment processing
In order to make a payment, a user transfers an amount of bitcoins from his or her account into the account
of the recipient, and then the transaction is validated by others in the network and recorded in the
blockchain ledger of all Bitcoin transactions. The time it takes others to validate the transaction means that
there is a delay of about 10 minutes in processing a payment.
Bitcoin payment processing fees are substantially lower than those of credit cards or money transfers.

The
competitive advantage lower fees confer to Bitcoin may lessen or vanish in the future, however. Without a
sustained increase in the value of Bitcoin relative to other currencies, payment processing fees must rise over
time, and once the Bitcoin ceiling is reached, processing transactions will no longer be rewarded with new
Bitcoins. This is due to the fact that the total number of Bitcoins is capped at 21 million and because the
creation of each successive Bitcoin requires a larger amount of payment processing work than the last. Fees
are generally independent of the amount being sent, making Bitcoin attractive for those seeking to transfer
larger amounts of money. In one instance, Bitcoins worth millions of US dollars were transferred for only a
few pennies.
Anonymity
Bitcoin uses cryptography for digital signatures but not for encryption. Bitcoin is pseudonymous as it is
possible though difficult to associate Bitcoin transactions with real-life identities.
[26]
In addition, Bitcoin
intermediaries such as exchanges are required by law in many jurisdictions to collect personal customer data.
Exchanges
Through various exchanges, Bitcoins are bought and sold at a variable price against the value of other
currencies. While there may be a seemingly large number, exchanges regularly fail, taking client Bitcoins with
them.

A published research study showed that 45 percent of Bitcoin exchanges end up closing.
History
Main article: History of Bitcoin
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 4

First mentioned in a 2008 paper published under the pseudonym Satoshi Nakamoto, Bitcoin became
operational in early 2009. The currency had early technical problems such as a 2009 exploit that allowed the
creation of unlimited bitcoins.
On average, Bitcoins have appreciated rapidly in relation to other currencies including the US
dollar, euro and British pound. In 2011 the value of one Bitcoin rapidly rose from about $0.30 to $32, before
falling back down to $2. Bitcoin began attracting media attention in late 2012, and numerous news articles
have been written about it. In 2013, some mainstream services such as OkCupid, Baidu, Reddit, Humble
Bundle and Foodler began accepting it. That year also saw the first interventions by law enforcement. Assets
belonging to the Mt. Gox exchange were seized, and the Silk Road drugs market was shut down.
During November 2013, the China-based Bitcoin exchange BTC China overtook Japan-based Mt. Gox and
Europe-based Bitstamp to become the largest Bitcoin trading exchange by trade volume. On 19 November
2013, the value of Bitcoin on the Mt. Gox exchange soared to a peak of US$900 following a United States
Senate committee hearing, at which the committee was informed that virtual currencies were a legitimate
financial service. On the same day, one bitcoin traded for over RMB 6780 (US$1100) in China. With roughly
12 million bitcoins in existence as of November 2013, the new price means increased the market cap for
Bitcoin to at least US$7.2 billion.
Economics
Large fluctuations in the value of Bitcoin have led some to question its ability to function as a currency since
people may be reluctant to hold onto their money in the form of Bitcoin for fear that it might lose value.
Stability in a currency's value plays an important role in people's willingness to use it. However the volatility
has little effect on the currency's utility as a medium of transfer from one currency to another since the
amount of time money is stored as bitcoin is small so fluctuations would also be minor. The fees and delays
involved in transferring money across borders via bitcoin are small compared to those imposed by banks and
their intermediaries in the standard way: pennies compared to dollars and minutes compared to days. As of
November 2013, the main use for bitcoins was likely for international money transferring purposes.
Bitcoin's deflationary bias encourages hoarding. However, currently Bitcoin does see some use as a currency.
Speculation
Bitcoins are often traded as an investment by speculators who expect the currency to increase in value as its
popularity widens. Bitcoins have been described as lacking intrinsic value as an investment because their
value depends only on the willingness of users to accept them. Their vulnerability to hacking also makes their
use as an investment more questionable.
Derivatives of bitcoins are thinly available. One organization offers futures contracts against multiple
currencies.
Certain investment funds have shown interest in Bitcoin with Peter Thiel's Founders
Fund investing US$3 million, and the Winklevoss twins making a US $1.5 million personal investment.
Bubbles
Many have mentioned speculative bubbles in connection with Bitcoin. Professor John Quiggin of the
University of Queensland has noted that since Bitcoin by design has no intrinsic value, it is "perhaps the finest
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 5

example of a pure bubble" currently known, but cautions that we have no way to predict when the value of
bitcoins will return to zero.
Alternative to national currencies
Some have suggested that Bitcoin is gaining popularity in countries with problem-plagued national
currencies, as it can be used to circumvent inflation, capital controls, and international sanctions. Bitcoins are
used by some Argentinians as an alternative to the official currency, which is stymied by inflation and strict
capital controls. In addition, some Iranians use Bitcoins to evade currency sanctions.
Financial journalists and analysts have suggested that there was a link between higher Bitcoin usage in Spain
and the 20122013 Cypriot financial crisis.
Legal issues
Bitcoin's association with criminal activities has historically hindered the currency from attaining widespread,
mainstream use and has attracted the attention of financial regulators, legislative bodies, and law
enforcement. The Washington Post has labelled it "the currency of choice for seedy online activities," and
CNN has called Bitcoin a "shady online currency." Its links to criminal activities have prompted scrutiny from
the FBI, US Senate, and the State of New York. The FBI stated in a 2012 report that "Bitcoins will likely
continue to attract cybercriminals who view it as a means to move or steal funds".
In March 2013 the US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for
"decentralized virtual currencies" such as Bitcoin, classifying American "Bitcoin miners" who sell their
generated bitcoins as Money Service Businesses (or MSBs), that may be subject to registration and other
legal obligations. In August 2013 the German Finance Ministry characterized Bitcoin as a unit of
account, usable in multilateral clearing circles and subject to capital gains tax if held less than one
year. The New York State Department of Financial Services, citing its authority to regulate money
transmissions and its concern with criminal activity (Silk Road in particular), announced an inquiry in late
2013 into possible regulations and guidelines for Bitcoin (a "BitLicense") and the holding of public hearings in
New York City. The US Internal Revenue Service has also stated that it is actively working on its own rules for
Bitcoin.
Some have suggested that due to its close association with illegal purchases, governments could outlaw
Bitcoin. This assertion has been made by Steven Strauss, a Harvard public policy professor, and was also
mentioned in 2013 SEC filing made by a Bitcoin investment vehicle. Following the shut down of Silk Road,
however, FBI Special Agent Christopher Tarbell said that "Bitcoins are not illegal in and of themselves and
have known legitimate uses".
Unauthorized mining
In June 2011, Symantec warned about the possibility of botnets engaging in covert mining of
bitcoins, consuming computing cycles, using extra electricity and possibly increasing the temperature of the
computer. Some malware also used the parallel processing capabilities of the GPUs built into many modern-
day video cards. In mid-August 2011, Bitcoin miner botnets were detected again, and less than three months
later Bitcoin-mining trojans infecting Mac OS X were also discovered. In April 2013 electronic
sports organization E-Sports Entertainment were accused of hijacking 14,000 computers to mine Bitcoins; the
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 6

case was settled in November with the organization fined $1 million USD if it breaks the law within the
following 10 years, or $325,000 if it does not.
Blackmarkets
Several news outlets assert that the popularity of Bitcoin hinges on the ability to use them to purchase illegal
substances. In 2013 The Guardian reported that the currency was primarily used to purchase illegal drugs and
for online gambling, and The Huffington Post stated that "online gambling accounts for a huge portion of
Bitcoin activity." Legitimate transactions are thought to be far less than the number involved in the purchase
of drugs, and roughly one half of all transactions made using Bitcoin are bets placed at a single online gaming
website. In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute
estimated that 4.5 to 9% of all bitcoins spent were for purchases of drugs at a single online market, Silk
Road. As the majority of the Bitcoin transactions were at this time speculative in nature, this academic
asserts that drugs constituted a much larger percentage of the products and services bought using the
currency, however. The Huffington Post stated in 2013 that online gun dealers use Bitcoin to sell arms
without background checks.
Money laundering
Fears have arisen that Bitcoin may be used to launder money, and a 2012 report by the FBI acknowledged
these fears but stated that there were no known instances of this occurring. However, in 2013 US authorities
seized assets belonging to Mt. Gox, a service that allowed users to exchange bitcoins for US dollars. Some say
one obstacle to bitcoins becoming widely used to launder money may be the fact that the transaction history
is public. During the US Senate hearing in 2013, Jennifer Shasky Calvery, director of the Treasury
Department's Financial Crimes Enforcement Network said that despite the possibility for using Bitcoin that
"Cash is probably still the best medium for money laundering."
Reception
Some economists have responded positively to Bitcoin, including Franois R. Velde, senior economist of the
Federal Reserve in Chicago who described it as "an elegant solution to the problem of creating a digital
currency." In November 2013 Richard Branson announced that Virgin Galactic would accept Bitcoin as
payment, saying that he had invested in Bitcoin and found it "fascinating how a whole new global currency
has been created", encouraging others to also invest in Bitcoin.
Other economists commenting on Bitcoin have been critical. Economist Paul Krugman has suggested that the
structure of the currency incentivizes hoarding and that its value derives from the expectation that others
will accept it as payment. Economist Larry Summers has expressed a "wait and see" attitude when it comes
to Bitcoin. Nick Colas, a market strategist for ConvergEx Group, has remarked on the effect of increasing use
of Bitcoin and its restricted supply, noting, "When incremental adoption meets relatively fixed supply, it
should be no surprise that prices go up. And thats exactly what is happening to BTC prices."
On 18 November 2013 the United States Senate held a committee hearing titled Beyond Silk Road: Potential
Risks, Threats and Promises of Virtual Currencies to discuss virtual currencies. At this hearing, held by
Senator Tom Carper, Bitcoin and other currencies were received generally positively, with it being stated that
Bitcoin was a "legal means of exchange" and that "online payment systems, both centralized and
decentralized, offer legitimate financial services" by US officials such as Peter Kadzik and Mythili Raman.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 7

ALL currencies involve some measure of consensual hallucination, but Bitcoin, a virtual monetary system,
involves more than most. It is a peer-to-peer currency with no central bank, based on digital tokens with no
intrinsic value. Rather than relying on confidence in a central authority, it depends instead on a distributed
system of trust, based on a transaction ledger which is cryptographically verified and jointly maintained by
the currencys users.
Transactions can occur directly between the systems participants at almost zero cost, without the need for a
trusted third party or any other intermediary, and are irreversible once committed to a permanent and fully
public record. Bitcoins mathematically elegant design ensures that the money supply can increase only at a
fixed rate that slows over time and then stops altogether. Anonymity, while not assured, is possible with the
right precautions and tools. No wonder Bitcoin is so appealing to geeks, libertarians, drug dealers,
speculators and gold bugs.
Bitcoin began in 2008, at the height of the financial crisis, with a paper published under the pseudonym
Satoshi Nakamoto. The technical design outlined in the paper was implemented in open-source software the
following year. It came to widespread prominence in 2012 and has been in the headlines ever since.
Investors are backing Bitcoin-related startups, the German finance ministry has recognized it as a unit of
account and senior officials told an American Senate committee on November 18th that virtual currencies
had legitimate uses. But there have also been many cases of Bitcoin theft. Exchanges that convert Bitcoin to
other currencies have collapsed or closed. Silk Road, an online forum where illicit goods and services are
traded for Bitcoin, was shut down by Americas Federal Bureau of Investigation in October but has since
reopened. The Bitcoin price has fluctuated wildly, hitting $230 in April 2013, falling below $70 in July, and
then exceeding $600 in November, prompting talk of a bubble.
The system is now straining at the seams. Its computational underpinnings have collectively reached 100
times the performance of the worlds top 500 supercomputers combined: more than 50,000 petaflops.
Bitcoins success has revealed three weaknesses in particular. It is not as secure and anonymous as it seems;
the mining system that both increases the Bitcoin supply and ensures the integrity of the currency has led
to an unsustainable computational arms-race; and the distributed-ledger system is becoming unwieldy. Will
Bitcoins self-correcting mechanisms, and the enlightened self-interest of its users, be able to address these
weaknesses and keep Bitcoin on the rails?
Bitcoin uses a technique called public-key cryptography, which relies on creating an interlocking pair of
encryption keys: a public key that can be freely distributed, and a private one that must be kept secret at all
costs. The public key is treated as an address to which value may be sent, akin to an account number. Each
transaction involves the paying party signing over a portion or all of the value in one of these addresses by
using his private key to perform an operation, called signing, on the contents of the transfer, which
includes the recipients address. Anyone can use the senders public key to verify that the senders private
key signed the transaction. All transactions are appended to a public ledger, called the block chain.
Public keys are ostensibly anonymous, because they are created randomly by software under the control of
each user, without central co-ordination. But it turns out that the flow of money from specific addresses can
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 8

be tracked quite easily. In a paper presented in October, academics from the University of California, San
Diego, and George Mason University engaged in a series of ordinary transactions to collect commonly used
addresses for Bitcoin wallet services, gambling sites, currency exchanges and other parties.
Follow the money
The researchers exploited a current weakness in most Bitcoin personal and server software, which generates
single-use addresses to store change from transactions. This allowed them to follow the movement of
Bitcoins across hundreds of transactions from large sums accumulated at single addresses, including ones
suspected of being controlled by Silk Road and stolen funds from exchanges. One of the authors, Sarah
Meiklejohn, says that the same technique could easily be used to provide the basis of warrants to serve
against exchanges or other parties. Law-enforcement agencies would regard this as a good thing, but to
advocates of a completely secure and anonymous online currency, it represents a worrying flaw. Ms
Meiklejohn says most current implementations of the Bitcoin protocol fall short of the level of anonymity
that is theoretically possible, and that her groups efforts represent just the tip of the iceberg of what could
be deduced from analysis of the public block chain.
The Bitcoin system offers a reward to volunteer users,
known as miners, who bundle up new transactions
into blocks and add them on to the end of the chain.
The reward is currently 25 Bitcoins (about $15,000 at
this writing). Miners pull active transactions waiting to
be recorded from the peer-to-peer network and
perform the complex calculations to create the new
block, building on the cryptographic foundation of the
previous block. Comparison of the results produced by
different miners provides independent verification.
About every 10 minutes, one lucky miner who has
generated the next block is granted the 25-Bitcoin
reward, and the new block is appended to the chain.
The process then starts again.
Mine craft
The Bitcoin system is designed to cope with the fact that
improvements in computer hardware make it cheaper
and faster to perform the mathematical operations,
known as hashes, involved in mining. Every 2,016
blocks, or roughly every two weeks, the system
calculates how long it would take for blocks to be created at precisely 10-minute intervals, and resets a
difficulty factor in the calculation accordingly. As equipment gets faster, in short, mining gets harder. But
faster equipment is constantly coming online, reducing the potential rewards for other miners unless they,
too, buy more kit. Miners have formed groups that pool processing power and parcel out the ensuing
rewards. Once done with ordinary computers, mining shifted to graphics-processing units, which can perform
some calculations more efficiently. Miners then moved on to flexible chips that can be configured for
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 9

particular tasks, called field-programmable gate arrays. In the past year, bespoke chips called ASICs
(application-specific integrated circuits) have appeared on the scene.
Your correspondent visited a miner who operates a rack of mining hardware in his modest apartment. He had
purchased his ASIC-based hardware a few months earlier, and it had arrived weeks late, causing him to miss
out on a bonanza, because after arrival, the kit generated Bitcoins so quickly that it paid for itself within three
days. But the edge that ASICs provide is quickly eroding. Between July, when the gear arrived, and mid-
November, the computational capacity of the Bitcoin network increased 25-fold, from 200 trillion to 5
quadrillion hashes per second. This was due in part to the arrival in September of a newer generation of more
efficient ASICs. Hashing capacity has increased so rapidly in 2013 that the practice of hijacking thousands of
PCs and using them for mining is no longer worth the effort. The average time between blocks has fallen to
between five and eight minutes.
The general consensus, says Mike Hearn, one of the volunteers who maintain the Bitcoin software, is that
with this new generation of ASICs, mining will have approached a point where only those with access to free
or cheap electricity will continue operations, and even they will produce a relatively marginal return on
investment, rather than the huge multiples (when exchanged into traditional currency) possible even earlier
this year. Mining has become increasingly commercial and professional, he says. Server farms with endless
racks of ASIC cards have already sprung up. But as part of Bitcoins design, the reward for mining a block
halves every 210,000 blocks, or roughly every four years. Sometime in 2017, at the current rate, it will drop to
12.5 Bitcoins. If the returns from mining decline, who will verify the integrity of the block chain?
To head off this problem, a market-based mechanism is in the works which will raise the current voluntary
fees paid by users (around five cents per transaction) in return for verification. Nodes in the peer-to-peer
network will try to estimate the minimum fee needed to get the transaction confirmed, says Mr Hearn.
Bitcoins growing popularity is having other ripple effects. Every participant in the system must keep a copy
of the block chain, which now exceeds 11 gigabytes in size and continues to grow steadily. This alone deters
casual use. Bitcoins designer proposed a method of pruning the chain to include only unspent amounts, but
it has not been implemented.
As the rate of transactions increases, squeezing all financial activity into the preset size limit for each block
has started to become problematic. The protocol may need to be tweaked to allow more transactions per
block, among other changes. A further problem relates to the volunteer machines, or nodes, that allow
Bitcoin to function. These nodes relay transactions and transmit updates to the block chain. But, says
Matthew Green, a security researcher at Johns Hopkins University, the ecosystem provides no compensation
for maintaining these nodesonly for mining. The rising cost of operating nodes could jeopardize Bitcoins
ability to scale.
The volunteer programmers who work on Bitcoins software have no special authority in the system.
The original paper that sparked the creation of Bitcoin has since been supplemented by layers of agreed-
upon protocol, updated regularly by the systems participants. The protocol, like the currency, is a fiction
they accept as real, because rejection by a large proportion of usersbe they banks, exchanges, speculators
or minerscould cause the whole system to collapse. Mr Hearn notes that he and other programmers who
work on Bitcoins software have no special authority in the system. Instead, proposals are floated,
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 10

implemented in software, and must then be taken up by 80% of nodes before becoming permanentat
which point blocks from other nodes are rejected. The rules of the system are not set in stone, he says. The
adoption of improvements is up to the community. Bitcoin is thus both flexible and fragile.
So far, it has kept going. But can it withstand the pressure as it becomes more popular? Its got this kind of
watch-like feel to it, says Mr. Hearn. It keeps on ticking, but a mechanical watch is fragile and can be
smashed. Perhaps Bitcoin, like the internet, will smoothly evolve from a quirky experiment to a trusted
utility. But it could also go the way of Napster, the trailblazing music-sharing system that pioneered a new
category, but was superseded by superior implementations that overcame its technical and commercial
flaws. From the print edition: TECHNOLOGY QUARTERLY

The developers of bitcoin are trying to show that money can be successfully privatized. They will fail, because
money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.
Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with
sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. But the
monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of
money.
Economists have long declared that currencies are essentially a tool to increase the efficiency of barter,
which they consider the foundation of all organized economic activity. In this view, money is a convenient
instrument used by individuals to get things done. It is not inherently part of the apparatus of government.
I think of the concept of privately issued tender as right money, because the whole idea appeals
instinctively to right-wing thinkers. They dislike centralized authority of all sorts, including monetary
authority. For example, Friedrich Hayek, Margaret Thatchers favorite economist, proposed replacing the
states monopoly on legal tender with competing currencies offered by rival banks.
Mr. Hayek presumably would have approved of bitcoin. The currencys issuer is an unknown computer
programmer, about as far from a government as can be imagined. Right now, bitcoin is tiny; at the current
exaggerated exchange rate, the total projected volume of coins is worth less than the gross domestic
product of Mongolia. Still, Mr. Hayek might well have dreamed of bitcoins becoming a global currency for
wages, prices and loans. He would, though, have hoped for a more stable value, not the increase from $13 to
$900 per bitcoin in less than a year.
But the right-money historical narrative is simply wrong, as the anthropologist David Graeber explains in his
book Debt: The First 5,000 Years. Straightforward barter played a tiny role in all premodern economies.
Instead, what we think of as purely economic activity was inseparable from an intricate structure of social
relationships and spiritual beliefs. Purely commercial activity was rare and it almost always relied on some
form of government-issued money. Barter was not the precursor to money; it has always been the inferior
alternative.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 11

So it is not surprising that barter economies only develop when governments break down. Similarly, truly
private money is an inferior alternative to the money that comes with the backing of a political authority.
After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can
raise taxes or pass laws to unwind monetary excesses.
In short, while the freedom promised by right money may be ideologically appealing, monetary relations are
too closely interwoven with other economic, political and social relations to be managed well by any
institution with less sway than a government. The detailed work of money creation can be delegated to
independent central banks and to a credit system of regulated private banks, but the ultimate authority of
any functioning monetary system will always be the ultimate political authority.
Bitcoin exemplifies some of the problems of private money: Its value is uncertain, its legal status is unclear,
and it could easily become valueless if users lose faith. Besides, if bitcoin ever really started to take off,
governments would either ban it or take over the system. The authorities might be motivated by a genuine
concern about the stability of a shadow monetary system or they might act out of self-preservation. Tax
evasion would be too easy in a right-money parallel economy.
Mr. Hayek thought left-wing thinkers ignored the dangers of big government. He may have been right, but his
idealism cannot overturn reality. All effective money is state-backed what could be called left money.
Of course, the global monetary system has suffered from appalling management in recent years. The
authorities, especially in the United States, first allowed banks to act almost as if they were in a right-money
world, lending and speculating wildly. That led to a typical right-money disaster a sudden loss of trust and
the failure of leading institutions. The authorities rescued the financial system, but their monetary system
still cannot provide steady support to the rest of the economy.
The outcome could have been much worse. Banks are still in business and consumer inflation rates are
generally low. Still, the typical current combination of low interest rates, large government deficits and high
ratios of debt to G.D.P. amounts to an invitation to monetary accidents.
Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for
criminal activity. Part is technological this is a cool idea. And part is speculative gamblers bet that
Bitcoins value will increase.
But I suspect another important factor is political: Bitcoin appeals because governments are not fully living up
to the responsibility that comes with state-sponsored money.
Market Based Investment
Like any other tradable market based investments, Bitcoin is just one of many Crypto-Currencies. Its
bubbling, but we suspect it will eventually pop as most bubbles do. Primarily because Governments will
eventually tax it.
U.S. agents have shut down what became known as the Silk Road Bitcoin Site where hackers and drug dealers
sold their illegal wares using Bitcoins, and arrested founder Ross William Ulbricht this week on charges of
money laundering, conspiracy to commit drug trafficking and other crimes.
The government is after Bitcoin and focus on concerns about criminal activity to justify taking down what
they see as avoiding taxes. In August, New York regulators subpoenaed 22 companies active in the Bitcoin
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 12

economy, including well-known venture-
capital firms like Google Ventures and
Andreessen Horowitz, seeking to uncover
possible illegality.
I have stated before. I do not see where the
government will sit on its hands when the
G20 is already agreeing to hunting down
money everywhere. They think if they can
collect taxes, then they will retain power.
That will fail. Nonetheless, we are in the age
of Massive Deflation as government eats
their own to sustain their own power.
On Monday, November 25
th
, Congress held its first congressional hearing on virtual currencies focusing on
bitcoin. As Congress discussed bitcoin, the price of one bitcoin soared to more than $750 apiece. Overlooked
was the concern focused on anonymity and lack of regulation.
Personally, it is hard to imagine a world where they will allow bitcoin to survive when they are doing
everything in their power to hunt down money. Canada is already looking at taxing it and the concerns
expressed by Congress clearly place this within the legal definition of what they call money laundering. What
once was real washing of illegal money for legal use like the mob buying old 1930s roadside motels and
pretending they were fully booked every night to get illegal cash into the system, is now applied to even
storing gold or cash in a safe deposit box. Having an account outside the USA is money laundering hiding
untaxed money from the government. So bitcoin can fit into that category and what federal judge would rule
against the government? NONE!
The downside of such schemes the government interprets as money laundering is they can wipe you out
besides 25 year jail terms. There was the old tax-straddle of the 70s where you sold December gold in a
rising market and bought Feb gold. You could then move money from one year to the next to avoid taxes.
When the IRS figured out the play, that gave birth to mark-to-market accounting and then they retroactively
applied penalties, taxes, and interest. Brokers got sued over that and these trades, which were in the courts
for years.
The IRS can claim you made a profit now just like stocks on a bitcoin. They can demand retroactive taxes and
penalties. When you dance with the Devil, keep in mind he can say anything and do anything. If 25% of the
population used bitcoin, you can imagine the loss in taxes and the chase would be off like a good old fashion
English fox hunt.
There is no alternative to the dollar. They can change the rules at any time and hiding money to them is now
money laundering so they can take that position and confiscate the whole thing. We have to reform the
system. These people will never go quietly into the night.
Do not get all excited that bitcoin will replace the dollar. Sorry, they are exploring the idea and allowing it to
get press for one single reason they intend to go to an electronic virtual currency so they get 100% of all
taxes. In 1934, they printed $10,000 notes when a Cadillac was $600. Today, $100 is the biggest bill. The next
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 13

phase is no bills. The euro tried to displace the dollar issuing 500 denomination notes. In Britain, they have
made them illegal it is all about taxes. The virtual dollar is coming. I would say after 2015.75 when the Fed
has zero power and they will go electronic. So for now, bitcoin serves a purpose to get people use to the idea
of a cashless society.
Excerpts from Bernankes September 6th letter released on Monday, in response to a letter from the
Committee on Homeland Security and Governmental Affairs asking for information on virtual currencies:
Historically, virtual currencies have been viewed as a form of electronic money or area of payment system
technology that has been evolving over the past 20 years. Over time, these types of innovations have
received attention from Congress as well as U.S. regulators. For example, in 1995, the U.S. House of
Representatives held hearings on the future of money at which early versions of virtual currencies and
other innovations were discussed. Vice Chairman Alan Blinders testimony at that time made the key point
that while these types of innovations may pose risks related to law enforcement and supervisory matters,
there are also areas in which they may hold long-term promise, particularly if the innovations promote a
faster, more secure and more efficient payment system.
Although the Federal Reserve generally monitors developments in virtual currencies and other payments
system innovations, it does not necessarily have authority to directly supervise or regulate these innovations
or the entities that provide them to the market. In general, the Federal Reserve would only have authority to
regulate a virtual currency product if it is issued by, or cleared or settled through, a banking organization that
we supervise. Given the Federal Reserves authority and the manner in which virtual currencies have
developed, the Federal Reserve has focused primarily on a supervised banking organizations role in the
products sale and distribution, as well as the applicable regulations, such as Bank Secrecy Act (BSA) /anti-
money laundering (AML) requirements.
The Federal Reserve plans to work with other FFIEC member agencies on electronic cash and related issues
such as virtual currencies, as needed, for banking organizations. The Federal Reserve will continue to monitor
developments as part of its broad interest in the safety and efficiency of the payment system. We also stand
ready to cooperate with other agencies in fulfilling their mandates, as appropriate.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 14

As this winter season unfolds between 2000 and
2030, here are some of the things you can expect:
Unemployment will move higher again, to
roughly 15% nationwide. It could go as
high as 25% when you include long-term
unemployed in the numbers.
Housing prices will fall an additional 15%,
despite the biggest stimulus plan in history
and the lowest mortgage rates in 40 years.
Personal bankruptcies and property
foreclosures will soar as much as 30%.
Consumers are simply saddled with too
much debt $42 trillion or $140,000 for
every man, woman and child in America
for there to be any other outcome. Falling
income will only make matters worse.
State and municipal governments will be forced into default, especially at the city and country level.
Their budgets are already in crisis and the Federal Reserve is running out of money with which to
cushion these institutions.
The Federal deficit will balloon from to as much as $5 trillion because of huge revenue shortages.
The global credit crisis will continue to spread around the globe like a contagious virus. Greece is
already down. Spain will be next and it will without a doubt come to the USA.
A second banking crisis will out, despite the lessons learned in 2008. Mortgage companies have
resumed offering low interest, no principal teaser loans. Investment banks have begun taking un-
necessary risks again. And this time, therell be no money for a bailout.
All of this will put the Dow and other indexes onto a volatile roller coaster ride that will end with the Dow
Jones losing as much as 80% by 2025.
To survive, you must implement the right strategy for this season.
So heres your guideline of what to do. . .

: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 15

The Chart below is a general guideline for each season.


75% - - 25% - - -
50% - 10% 25% - 15% -
80% 20% - - 20% - -
20% 10% - - - 30% 30%
ETFs ETFs ETFs ETFs ETFs ETFs ETFs ETFs

If your pension or retirement accounts do not have index funds, make a phone call and find out which funds
hold very similar assets to the indexes represented above.
I would not own gold, but if you must, then purchase it via a highly liquid ETF.
I would not own bonds yet, but if you must, then make them Treasury or very solid municipal bonds.
I would commence growing your Money Market account with any new contributions.
I would continue to own Investments until the Wealth Preserver finds Rule 2. Always use ETFs for your
diversification vehicles as they are extremely liquid and can be moved swiftly.
The table below represents how your stock market diversification should look during this season depending
on your personal risk profile; which can be determined here.


50% 30% 5% 5% 10%
40% 20% 15% 15% 10%
20% 20% 20% 20% 20%
ETFs ETFs ETFs ETFs ETFs ETFs
For the final leg of this shakedown change your portfolio allocations again.
Continue to stay very close to your Wealth Preserver and Wealth Maximizer subscriptions. It is likely
we will be in strong position to sell all equity positions in all sectors globally.
Convert it all back to T-bills or money markets.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 16

Then keeping a close eye on Wealth Maximizer, we will help guide you to selectively buy back into
leading sectors like health care, financials, and technology.
Absolutely stay away from East Asia ETFs (China, Japan, and South Korea). These markets will correct
into the early to mid-2020s.
The value of seeing the economic cycles ahead extends beyond your investment plans. You can also use this
knowledge to better position yourself financially for each season. We will alert paid subscribers when the
time is right to get into these markets.
Lower returns and higher risks will characterize this shakeout winter season. It will also reduce the cost of
living and the future costs of real estate and assets.
Do not take any chances.
Do not gamble.
Do not leverage.
If you have the money, pay off your highest interest debt first.
If you have the money, pay off your cars and mortgage.
Save and become more conservative.
Heres what to do with real estate . . .
If you want to retire and buy a house in Southern Florida, the Caribbean, Arizona, Idaho, Vermont or
British Columbia, wait until 2015 at least.
If youre financing a home between 2011 and 2015, lock in at a low 30-year fixed rate. Look to benefit
from falling short-term rates in the final slowdown from around mid-2017 into 2023.
Heres what to do with cars . . .
If you want to buy a car this year, dont. Rather lease it for the next two years. Buying now will only
result in significant depreciation. Instead, let the bank take the risk of falling car prices!
The best time to buy a car is in mid-2014. The economy will be weakest then and youll get a low
interest rate.
Heres how to maximize your retirement income and the assets you pass on to your children . . .
Maximize your 401K and matching contributions because surviving this winter shakeout is about
accumulation.
Buy variable annuities and variable universal life policies. These are important tools for deferring
taxes during your earning years, minimizing taxes during your retirement years, passing down as-
sets to your children and offering some protection against downside risk. You will use the Wealth
Preserver signals within both variable policies.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 17

Implement strategies to defer earned and unearned income, use Roth IRAs where possible, skew
investments toward tax-free items such as municipal bonds and minimize your real estate footprint
to avoid property tax.
As a starting point, use the guidelines we have given you to position your investment portfolio and financial
affairs to sail smoothly through whats ahead.
During the decade ahead, timing will become increasingly important to your success. Thats why you MUST
follow our monthly Wealth Preserver and our weekly Wealth Maximizer. In addition, you should read the
InsidersPower newsletter in detail. Thats where well tell you whats coming next, and what to do about it.
You will also learn how to adjust your financial plans and investment portfolio for maximum benefits and
minimum pain.
In short . . . keep reading this newsletter and we will keep you up to date.
: DECEMBER 2013



Copyright 2013 InterAnalyst, LLC 18



In 1986, Livio S. Nespoli wrote is first Investment Book called Invest with
History. In it, he revealed how an investor could use historical precedent
along with social mood and demographic trends to accurately predict the
direction of the markets, sometimes decades in advance.
Since then, Livio had delivered countless seminars to thousands of
professional and amateur investors teaching them how to accurately
identify booms and busts well ahead of the mainstream. He gained
international national attention for his warning investors of the 2000 peak
and 2008 stock market collapse months before they happened. But this was not the first time he was on the
money with his big picture forecast.
For example, in February of 2000 Livio accurately forecast the stock market collapse and the multi-decade
economic collapse that would begin. In other words, his proprietary indicators, which are now available to all
investors, accurately predicted the major economic and stock market events that could have made you
substantially richer over the past 18 years.
How does he do it? Well, while most economists focus on short-term trends, policy changes, technical
indicators, elections, things that are volatile, unstable and can change from day-to-day. Livio has always
focused on long-term trends and cycles, not the day trader mentality. Demographics. Business cycles.
Socionomic patterns. Things that have demonstrated themselves over hundreds and even thousands of years
to be consistent, predictable and measurable.
In addition, through over 80 years of research he has found that most of the largest financiers have known of
these proven and predictable Socionomic patterns. He has provided devastatingly accurate market entry and
exit points by helping you follow those historically proven cycles.
He studies the past to forecast the future, an approach that enables subscribers to position themselves with
an incredible degree of accuracy. Then he makes minor tweaks and adjustments in response to intermediate
term events that occur along the way.
And thats what he brings to you on his InterAnalyst subscriptions so youll know whats coming next, where
the immediate opportunities are, and where to park your money for the longer term.
As an InterAnalyst subscriber, you will know, for example, when its time to start profiting from the rise of
specific economies and exactly what investments will hand you the fastest profits.
Youll learn when commodities will likely reach their peak in their cycle and how to ride the gains. Youll also
learn when theyll turn down and what investments to make to profit from any moves down.
And youll learn when the property market will turn up again. Youll learn when, money markets and bonds
would be a better investment than equity allocations and when not. Youll be ahead of the markets on every
boom and bust and access the tools you can use to prepare yourself to profusion.