Satoshi, is now the time to consider donating lots of bitcoin to charity?
I don't know who the person or people are who, under the name Satoshi Nakamoto, created the Bitcoin system. The creator(s) want to keep their privacy, and given the ideology behind Bitcoin, that's not too surprising.
There can only be 21 million bitcoins. It is commonly speculated that Satoshi did much of the early mining, and owns between 1 million and 1.5 million unspent bitcoins. Today, thanks in part to a speculative bubble, bitcoins are selling for $800, and have been north of $1,000. In other words, Satoshi has near a billion dollars worth of bitcoin. Many feel that this is not an unreasonable thing, that a great reward should go to Satoshi for creating such a useful system.
For Satoshi, the problem is that it's very difficult to spend more than a small portion of this block, possibly ever. Bitcoin addresses are generally anonymous, but all transactions are public. Things are a bit different for the first million bitcoins, which went only to the earliest adopters. People know those addresses, and the ones that remain unspent are commonly believed to be Satoshi's. If Satoshi starts spending them in any serious volume, it will be noticed and will be news.
The fate of Bitcoin
Whether Bitcoin becomes a stable currency in the future or not, today few would deny it is not stable, and undergoing speculative bubbles. Some think that because nothing backs the value of bitcoins, it will never become stable, but others are optimistic. Regardless of that, today the value of a bitcoin is fragile. The news that "Satoshi is selling his bitcoins!" would trigger panic selling, and that's bad news in any bubble.
If Satoshi could sell, it is hard to work out exactly when the time to sell would be. Bitcoin has several possible long term fates:
- It could become the world's dominant form of money. If it replaced all of the "M1" money supply in the world (cash and very liquid deposits) a bitcoin could be worth $1 million each!
- It could compete with other currencies (digital and fiat) for that role. If it captured 1% of world money supply, it might be $10,000 a coin. While there is a limit on the number of bitcoins, the limit on the number of cryptocurrencies is unknown, and as bitcoin prices and fees increase, competition is to be expected.
- It could be replaced by one or more successors of superior design, with some ability to exchange during a modest window, and then drifting down to minimal value
- It could collapse entirely and quickly in the face of government opposition, competition and other factors during its bubble phase.
My personal prediction is #3 -- that several successor currencies will arise which fix issues with Bitcoin, with exchange possible for a while. However, just as bitcoins had their sudden rushes and bubbles, so will this exchange rate, and as momentum moves into this currency it could move very fast. Unlike exchanges that trade bitcoins for dollars, inter-cryptocurrency exchanges will be fast (though the settlement times of the currencies will slow things down.) It could be even worse if the word got out that "Satoshi is trading his coins for [Foo]Coin" as that could cause complete collapse of Bitcoin.
Perhaps he could move some coins through randomizing services that scramble the identity association, but moving the early coins to such a system would be seen as selling them.
Some view bitcoins as like lottery tickets. They will probably go to zero, but they just might be worth a million, and they've certainly hit a thousand and will again. Everybody has a different answer of when you should sell. One common philosophy if you hold a lot of something speculative, is to sell at different times to reduce risk. When you might be at a peak, sell a large block -- up to half. If it goes up, you still have the other half for superb reward. If it plummets, you still got your FU money and did well. Opinions vary, but I think that $1K might be one of those points. $100 was also one (though hindsight tells you otherwise now.)
You can't sell, but you can give
If you're Satoshi, even if you felt that now is the time, you can't sell. It is arguable that it's quite likely that a large portion of that fortune can never be sold. But you can give. Donation of a large block to charity, done overtly in public, might not cause the panic selling. So it seems rational to give away the portion that probably can never be sold.
Others have faced this issue. If Bill Gates sold his stake in Microsoft, even after leaving the company, it would seriously depress the price. But he is able to donate to his foundation. The foundation has the option to hold or sell, though most foundations tend to sell upon donation.
Gifts to charity can be done in a couple of ways. They can be direct, or you can endow a foundation to give the money out over time. People with large gifts tend to make their own foundation, but for smaller donors, there exist many big charities that will run a "Donor Advised Fund." In a DAF, you give the money to the charity, and it is now theirs, but they make a non-binding promise that they will give out grants with it as you advise. It's non-binding, but if they didn't keep to the promise, donors would desert them.
Gifts to charity have big tax consequences, though I don't know what country Satoshi is in. The tax status of bitcoins is still uncertain. Are they currency? Are they a security? Are they just a collectible? Whatever the case, you probably owe tax if you convert them to fiat currency, with a basis value either of zero or the cost of mining. But if you give appreciated things to a charity you get a double tax deduction.
- You do not have to pay the capital gains tax on the sale of the security, because you didn't sell it.
- You get a deduction for the value of the security on the day you gave it. (Up to 50% of your adjusted gross income.)
This means that if you have a lot of bitcoins, and you think the price is decent, you should consider giving away coins up to half of your income. If your income is entirely from selling bitcoins, you will want to give away one coin for every 2 you sell, plus a bit more for your other income. And Satoshi has a lot of bitcoins.
Creating a foundation
A foundation normally makes sense when you have a year of huge gains and you want a big deduction, but are not ready to do all your giving. So you hold it in a foundation. You also hire staff to manage the grants. I don't know if it would be possible to create a whole foundation which is legally bound to obey orders that come in anonymously, signed by a special private key. It would be an interesting challenge for the lawyers. This is why the Donor Advised Fund might be more interesting. Since the promise is non-binding, I believe you could find one willing to take "advice" on grants via digitally signed messages.
Of course, to get these deductions you probably need to let the tax authorities know what you're doing, at least if they audit you. But you will also get that attention if you sell your bitcoins for yourself, and take the huge gain. If they're smart enough, and they look, they will see you are Satoshi. They are bound not to reveal it, but you can probably expect it might leak out to spies and others, if they don't already know. It's a tough call.
Who to give to?
Well, that's up to you. But it seems obvious to me that this foundation might be well served supporting things that made Bitcoin possible, like free and open source software, and cryptographic research. Even if Bitcoin goes down in flames, it could leave behind as a legacy the funding of hundreds of millions of dollars of great software for the world. And yes, my own charity, the EFF might be a candidate, though you might be a bit soured because of how we temporarily stopped taking BTC donations in 2011 when there were more legal questions around it. Our approach -- to preserve the foundation -- is to be the lawyer rather than the defendant in the legal battles we get involved in, but we shifted back and we've always been very grateful to all our supporters who donate BTC to us. There are many other great charities who could benefit, both related to Bitcoin and completely unrelated. The choice, as reward for having created Bitcoin, is entirely yours.
I also suggested in one of my earlier articles that incentive competitions could be a good use of the coins. "20,000 BTC for whoever cures a disease" or does something similar. I can hook you up with my friends at the X-Prize if you like that idea. Or perhaps create your own version of a recurring prize like the Nobel prize (The Satoshi prize) in cryptography or anything you like.
If bitcoins soar to astronomical heights, you'll have even more resources both for yourself and the causes you support, and you won't be hindered much by what you donated early on. On the other hand, if bitcoins collapse, it will be a great shame to have missed this opportunity to better the world even more than you've already done. The truth is, doing these donations might even acclimatize the marketplace to you using your bitcoins. You can give away those very earliest coins which are certain to belong to you, and sell some of the later coins for your own purposes.
Put out the word: Tell all open source projects and tech charities to be sure they have a bitcoin address on their pages, and can be accessed by TOR because they might win their lottery. It would cause a lot of folks to take bitcoin who don't already, and get the world ready for your donations. Warn the world you will also sell, more modestly, as you donate. For small open source projects without charity status, there will be no deductions, so a foundation makes sense there too.