Saturday, June 18, 2011
Bitcoin Open Forum - Part 3
By request, here is my latest comment in post form:
Hello Neverfox and Ramon,
So it sounds like supporting (investing in or working for) Bitcoin is more about taking an activist role in an anarchist revolution against the government and the fat cat bankers than it is about finding the best way to protect your savings, amirite?
Ramon, you wrote: "Even if 1/10th of 1% of USD-denominated wealth were to go into either of two DCC options, that could be hundreds of millions of dollars."
The total market cap for all Bitcoins in existence right now is about $103 million. (Link) If it is true that Satoshi Nakamoto has a quarter of the 6.5 million bitcoins in existence, then he alone holds $26 million. What about those other six project developers along with Satoshi? What is their combined share? 40%? 50%? Do you think that the potential you cite for an inflow of hundreds of millions to a present market cap of $103 million makes it more or less likely to be adopted as a currency? Answer = Less.
Moldbug does a good job explaining this principle here:
"One metaphor for monetization is that of a storage vessel, like a battery for electricity or a tank for compressed gas. When people buy into the currency, they are charging the battery and compressing the tank. When they sell out, they are discharging the battery. When new currency is created (perhaps by alchemists) without a buy-in, the tank has sprung a leak. Etc. The charge, or the pressure, is simply the market capitalization of the entire present (and discounted future) monetary good. […]
Thus a correct, second-order strategy to pick a winner has to consider the monetary pressures across the whole path to complete monetization. If the leak will reverse direction halfway through the process, the process cannot complete and should never start. If large price increases in a commodity would cause a stockpile blowout, the walls of the tank are too thin. The whole premise of monetary restandardization is that the new currency will be stable and permanent. […]
However, because silver was fully demonetized in the 20th century and gold was not, the market capitalization of the gold stockpile is 60 times the capitalization of the silver stockpile [FOFOA: and 73,000 times the capitalization of Bitcoin]. Thus, comparable volumes of gas are pressing in to the gold tank and the silver tank, but the silver tank is 60 times smaller [FOFOA: and the Bitcoin tank is 73,000 times smaller].. It is actually surprising that silver has not risen faster and harder.
But this present advantage is also silver's long-term Achilles heel. The silver tank, being so much smaller, cannot take this kind of pressure. It will almost certainly explode. I have personal advice for those playing the silver market: bring your steel balls. If you buy into a bubble when it's small, and get out before it pops, you can do quite well. […]
Here is the problem with Bitcoin: the tank, I think, will pop…"
Gold is the only super-tank. It can absorb any flow the world throws at it without popping. It is stronger than all the pressure that is possible because of its uniquely large stock to flow ratio. And also the fact that the large stock is held in extremely strong hands that I like to call Giants and CBs. These Giants are the real-world producers and titans of today and yesterday, including a lot of real old-money Giants. Here are the bitcoin giants:
Do you think these seven hands are strong enough to hold? $26 million can buy a lot of socks, that's for sure, but if you cash out into that competing currency called dollars it can also buy yachts and other fun things like coke and hookers. How about when Nakamoto's share is at $50 million? Will he still hold firm to his Anarchist convictions? How about $100 million? At what point do you think he will sell out for that other competing currency that buys jets and cars and cool stuff? Please read these two lines until they finally sink in:
"Thus a correct, second-order strategy to pick a winner has to consider the monetary pressures across the whole path to complete monetization. If the leak will reverse direction halfway through the process, the process cannot complete and should never start."
What you want in a medium of exchange (and yes, in a store of value too) is stability and potential permanence. I think this guy at least gets that concept. But since perfect stability in both (MoE & SoV) is impossible in the real world, the perfect solution for the world we actually live in today is a non-hard currency that declines slowly in value with a counterbalancing wealth reserve that slowly rises in value. This is Freegold. It is not Bitcoin nor Bitcoin plus Freegold.
In comparing Bitcoins to gold, I think there is one characteristic in which Bitcoins outshine even gold, and I'll bet that we can all agree on this one (except maybe Terry). Bitcoins truly have no value outside of being either a medium of exchange or a store of value. Hoarding them will never directly and physically infringe upon the natural rights of others nor impede the flow of physical inputs to industry.
One of the reasons gold is money is that, of all the physical elements that meet other monetary requirements, gold is the one that comes closest to achieving the perfection of this monetary property that Bitcoin achieves, being completely worthless aside from its monetary uses. Bitcoin is truly an artificial, purely symbolic currency, which makes it, you guessed it, just like all the fiat currencies in the world today. Except there is one big difference: Bitcoin has a limited supply!
What this means in practical terms is that Bitcoin is a hard currency. And remember, hard means difficult and inelastic. Today Bitcoin is trading as an asset backed only by the speculation that eventually it will be sufficiently accepted and adopted as a medium of exchange. Let's be clear about this. Today Bitcoin is not widely (or sufficiently) accepted and adopted as a medium of exchange. Today it is a speculative asset backed by nothing more than being a neat idea mixed with a little misguided hope and speculation. As strictly a medium of exchange, today, Bitcoin is redundant and superfluous.
I'm sorry I have offended your sensibilities in some way. I believe you said you have no stake in Bitcoin, so I'm curious what it is then. I think I get Bitcoin enough to see some big flaws, and I think Rawdog does too. And I also think that some of the things you call inherent benefits are actually major flaws. I understand roughly how the coins come into existence, how they cannot be faked or counterfeited, how transactions are verified and secured in a decentralized way. I can even imagine how this may be a model for some untethered digital currency far in the future. But I doubt Bitcoin will be it, because it is a hard currency, and that's not what we want as a society.
Perhaps someday there will be a crypto-currency that is decentralized but not hard. That could work well with Freegold, but it is unlikely to ever be adopted unless we called it a dollar or a euro. Bitcoin will not be adopted because it is hard. If you could make it into an easy money (unrestricted in volume), get the dollar to coopt it as its new base, then you might be on your way to the likely adoption of a digital, untethered, decentralized crypto-currency.
But then it's still lacking that physicality that we, as a society, demand. When things start to go bad, we like our physical cash. We want that physical fallback, in case things go bad. I don't need to be a computer scientist to understand these things. And I don't need to embrace a concept or be an activist to understand it is simply a part of the reality in which we live.
We, as a society, like the physicality of our base money, whether we realize it or not. We also like having a central authority in charge of it. For example, if your house burned down and you had a shoebox with $500,000 cash in it, you can take the ashes to your local Fed and if they can verify your claim in the ashes, they'll reimburse you with brand new cash. They do this all the time. I used to know someone that worked in that particular capacity. There are many other benefits as well, to both the physicality of base money and the centralization of an authority that can print and manage that base money, and in some cases reverse the effects of loss through theft or other causes.
It is my contention that all the problems that emerge in this type of centralized system that we have today, are rooted in the fact that we save in the same units we transact in. In other words, it's our own fault, all the problems. By saving in financial products denominated in that same unit, we lend precious support to those that would abuse their control over it to gain advantage. It is my contention that all those problems are actually only mere symptoms of the disease, and not the disease itself. And yes, those problems are cut off at the root with Freegold. Freegold doesn't so much stop the bad printing as it simply renders it useless, or at least self-defeating.
I know we (in our precious metals online community) complain a lot about central planning. But I think, as a society, we do demand it. I don't personally, but I can recognize that "we" do (can you see the difference?). Of course central planning is often wrong, it is stupid by design (see here) and it always blows up, and in the end, as savers, we hate it when it blows up. We think it would be much better if we just had a totally free market system whereby no powerful entity could meddle in our business. I agree. But as a society, as a tribe, that's not what we want. We want a powerful central figure we can run to and complain, and to point the finger at when things go bad. We don't want to be all on our own like allinvain.
So what we (savers) actually need is a monetary refuge from the bad effects of that which the tribe demands. And this refuge, physical gold, is actually decentralized, private and anonymous just like Bitcoin. And it is enacted in a decentralized manner, by the choice of the saver. And I believe that in choosing to save in gold, we'll remove the exorbitant privilege that we've always in the past given to that central figure.
In the same way that Real Bills are non-inflationary, so is good credit. Bad credit is inflationary and frivolous government spending leads to systemic malinvestment. But Freegold will expose both of those for what they are. The price of gold will rise if the banks engage in bad credit or the government gets out of control. And when things go bad, the savers will be automatically protected from the political effort to socialize the losses (which always begins as soon as big losses happen). There will be a healthy competition between the paper realm and the physical realm (gold) to attract our savings. Our savings will only go into the paper realm if it is being respected by the central figure.
But for the transactional currency, we actually want exactly what we have right now. A physical monetary base that can be produced by only one entity (preferably in a transparent way, more like the ECB than the Fed) and a credit system that is capable of both healthy expansion and contraction.
In other words, I think Bitcoin tackles the wrong problems. It's like a doctor that sees only the symptoms and doesn't understand the disease. And even though it treats a few of the symptoms quite elegantly, I don't think that this is what we as a society want in our transactional currency. So I don't think it will ever be sufficiently adopted in that role, or the other. You don't have to like a particular outcome in order to see it. And if you are an activist promoting some change that's not very likely in the absence of your activism, you may be hanging out at the wrong blog.
Why is Bitcoin like a Ponzi or a pyramid? For the same reason gold is not. See Moldbug's tank analogy above. Most Ponzi schemes do not begin with the intention of being a Ponzi scheme. Some do. But most are just misguided strategies that get out of control and end in a stampede to cash out. I believe this may have even been the case with Bernie Madoff.
Wejn, I'm not engaging the merits of a crypto-currency here. I get it. It's a pretty cool idea if you could make one that was "easy money" rather than hard money like Bitcoin did, and just let it be the medium of exchange (SoV on short timelines). But I still think it fails to monetize in our lifetimes for a number of reasons.
This gets a bit deep, but the concept of money is just that, a concept. It is almost literally just a word that we know and relate to money. Dollars. When I write a check for $28 at the grocery store and take $28 worth of food home, no actual dollars will ever change hands between me and the store. This is the way it has ALWAYS been. I didn't get that until I had read the Gold Trail at least three times.
We think in terms of dollars, therefore dollars are our money. This is the Misean Regression I discussed in The Return to Honest Money. The most likely path for Bitcoin to monetize would be for a major global meltdown to wipe out the present concept of money. In other words, to wipe out the shared knowledge of price ratios between all real things. Then a barter good like gold would begin to rebuild this knowledge base from the ground up, and if Bitcoin became the symbolic currency valued by gold holders for its qualities, it could then establish a reliable and stable Bitcoin-gold market.
But you can't just shoehorn a new symbolic currency into a failed paradigm and expect it to be adopted and fix the paradigm. It simply doesn't work that way, hope, speculation and neat ideas notwithstanding. You can't just look at Bitcoin through the dollar lens and describe how it's better than the dollar. It's not about that. It's not about Bitcoin versus the dollar. It's about Bitcoin versus the next in line after the dollar. And in this case there are two new competitors, each specializing in separated parts of the money function.
Bitcoin obviously capitalizes on the crisis that the dollar now faces. And as I just pointed out, if the collapse was bad enough that the knowledge base of price ratios was wiped out, Bitcoin could then compete with other currencies to establish a new regressive link to gold or even silver. But oh my, what if some other people already saw this coming four decades ago and sought to create a currency to prevent a major meltdown from occurring that would have set us back to having to reestablish a fresh barter link? Hmm, maybe that's why the second most widely used medium of exchange in the world today was created based on its fundamental regressive link with the barter money par excellence?
The way I see it, Wejn, this young kid named Bitcoin that is trying to be a hard money doesn't stand a chance at monetization. And I don't need to fully understand the algorithms or encryption to judge the concept. I can stipulate that the encryption is really cool and bleeding edge stuff like you say, and still reject the concept on common sense grounds.
As for the douche in the videos, I actually like him in those videos. I think he is hilarious, and so do some of the other FOFOA regulars (ones that have emailed me rather than posting comments like Texan). I even got a couple donations for this post. So rather than gasping that old online insult: "wow, just wow," maybe contemplate why you don't like him if you truly don't have a stake in Bitcoin. There's a line at the beginning of the fifth video that pretty much encapsulates why I put up this post:
"First of all, a lot of people have been saying that I've been too harsh, and mean and hateful to people that are just trying to come up with a new idea. Maybe so. But if my harshness and my meanness and my hatefulness will stop one person from getting scammed into this, then it's all worthwhile."
I just put up a very simple poll. It's at the bottom of the sidebar. It reads:
Target price for Bitcoin = $0
You can all click on agree or disagree.
People have been emailing me for almost a year now asking what I think of Bitcoin. Well, thanks to this hacker story I finally took a good look at it, and now you all know what I think! ;)