Bitcoin – poorly understood and frequently talked about ignorantly – is a wonderful new financial tool… and a very timely one. But because of its virtues, it is about to be attacked.

But before I explain how, why, and my recommended responses, let me get everyone up to speed on what this stuff really is:

• Bitcoin is digital cash. You do not get an account, you get a wallet. Holding Bitcoin on a computer is the same as holding government money in your wallet.

• Bitcoin is distributed. There is no central office and no central computer… anywhere.

• Bitcoin can’t be printed up, like national currencies. It has to be ‘mined’, and this requires special computers, lots of calculations, electricity and a bit of luck. It’s neither free nor easy.

• Bitcoin is limited. Only 21 million of these things can ever exist, and they can only be mined on a very specific schedule. (About 11 million exist now.)

• Bitcoin can’t be changed. Bitcoin is a specific computer program and cannot be changed by any single party. It is a specific set of rules cast into a computer program, and since that program is open source, it can be checked by anyone to assure that there are no secret back doors.

• Bitcoin is pseudonymous. Every transaction is recorded, but real names are not. While it is not properly anonymous, it can be used anonymously if you do simple things like never using the same address twice. (There are even ‘laundries’.)

• Bitcoins are oblivious to borders, laws or rules. This is simply computer code – nothing else matters.

Why The Fiat Masters Must Attack Bitcoin

I say that Bitcoin will be attacked for the simple reason that it is the anti-fiat currency… and a lot of very powerful people have their entire kingdoms built upon fiat currency and its central banking game.

It is actually very similar to gold and silver in its overall effect: If Bitcoin, or gold, or silver – or any combination thereof – ever became dominant, no one could play games with the world’s money and skim from millions of people at once… or run welfare states in defiance of economic reality.

The bankers do not want to lose their positions, and if they let this alternative currency take over, they will. So, they will have to attack.. In fact, I am sure as I can be that they are doing it already.

I should add that there are socialist types who love this development because it could destroy the greedy bankers, but I don’t expect them to deter the attacks to any significant extent.

The Attacks

It is important to understand that the system is not invulnerable. It’s certainly not easy to attack (like a Cyprus bank account), but attacks both small and large are possible.

I’m not going to describe large attacks, as I don’t want to give anyone ideas. You can either believe me that they are possible, or not. These big attacks, however, would not be easy, and would have side-effects. So, I don’t expect to see them first. First, Bitcoin’s enemies have to win the PR war.

There was a great line in the movie Gladiator that applies right now:

You have a great name. Before they destroy you, they will have to destroy your name.

I’m not sure it’s fair to say that Bitcoin has a great name among the general populace, but it certainly does among the best and brightest of the younger generations. And this great name is spreading rapidly in places like Cyprus, and among people who fear a Cyprus-style mass theft coming to their area.

Gold and silver are the traditional ways of avoiding predation, but trying to cross a national border with precious metals these days is to invite theft and punishment. (This was not much of a problem before the 20^th century.) Bitcoin, on the other hand, can be moved world-wide, instantly, from the comfort of your chair.

So, the first attacks will be combined with a PR war. The point will be to scare people away. “You’ll get ripped-off!” will be their emphatic meme.

Do not underestimate fear, by the way: Humans are hard-wired to over-respond to it. Fear works, which is why power-mongers always use it. And these people also own, influence or control the broadcasting systems that consume nearly all of the Western world’s attention.

So, the first attacks will be those that we are already seeing: Malicious hackers breaking into whatever clustered systems they can and stealing. (Or running Distributed Denial of Service [DDoS] attacks.) They are attacking exchangers, wallet hosting services, and so on – anything largish that can be hit. They are already publicizing these attacks, but I expect more and better.

The coming attacks will be publicized rapidly – with stories and releases prepared ahead of time – and will paint the worst possible picture. Afterwards it will be seen that the first loss estimates were wildly high, but that won’t matter to the people who see the headlines on the evening news. Joe and Jane Obedient will believe the worst.

This is all manipulation, obviously, since people are being ripped-off in government money, on gigantic scales: millions of thefts at once. Heck, every productive person in the West has about half their earnings taken from them every year in the form of taxes, not to mention the 5-10% they lose every year in the form of inflation. To compare these things to a few stolen wallets is a sick joke. But, such is the state of the West at this sad moment: The large abusers are sanctified and the innovators are demonized.

What to Do About It

Here’s my list:

1. Be prepared. Don’t let it shake you. Don’t compromise your beliefs.

1. Tell others to prepare. Tell people to expect attacks and a PR war. Tell them to upgrade their security and to be personally ready. Bitcoin will be called all sorts of things: A Ponzi, a fraud, a tool for terrorists, a threat to civilization, and so on. It’s not fun to have those accusations hurled in your face, so expect it and get ready for it.

1. Prepare for the worst. At some point we may need an alternative to the government-owned Internet. Setting up our own systems will not be hard or expensive, but it will require action on our parts. Learn about mesh networks (PDF) and packet radio. Those who can code should think about writing new high-latency protocols, or reviving old ones like FidoNet.

1. Do not rely on Internet exchangers. We should all be grateful to Bitcoin Exchange Mt. Gox and the others, but they are vulnerable and will soon enough be compromised or shut. The future lies with over the counter (OTC) exchangers.

1. Keep having fun! Bitcoin has been a gas – don’t let go of that. Adapt, improvise, overcome! Yes, there will be more bad days from here on, but don’t let them steal your joy for any length of time. Hold to the good, reject the fear. Do what resonates within you; do what makes you feel good and creative and productive.

The Best of Paul Rosenberg