Standing Athwart History, Yelling Go
Post #1598 • April 10, 2013, 4:04 PM
If you follow money news at all, you'll have noticed the flurry of stories around Bitcoin lately. Since Bitcoin is a digital currency maintained by a peer-to-peer network instead of a government, it has been on the radar of of the liberty community for a long time.
The entire global financial system at the central bank level is built upon attempting to force profits from a financial underclass that has a mathematically impossible task of repaying debt that continuously increases by definition. The fiat money systems of the world are quicksand by design precisely so on a macroeconomic scale the central banks can force market participants into loose monetary policy by increasing their inflation / monetary instability and making more and more investments look good by comparison.
When the largest central bank in the entire world has committed to unlimited quantitative easing until the economy moves from its platform, the only sensible way to take this is as final capitulation. They will continue to inflate the money supply until they have people standing on other ground. They expect that the "other ground" will be stocks, sovereign bonds, other investments in the markets that they control but with the rise of bitcoin they may be in for a rude shock when their marks decide to entirely circumvent their game and move off fiat money and heavily controlled markets en masse. What we are seeing here may very well be the beginning of that. ...
The tyrants fall, the utterly corrupt modern business model known as the nation state whereby the "customer" is effectively just some mark in a given geographic area and all participants in the tax farm system are a cartel of nation states acting in concert to extract the maximum possible from their cattle ceases to exist. The complete inability to control the economy of the world by force leads to the death of the very core concept of the modern nation state; Making your customer's patronage compulsory.
In any argument with a strident statist, they will cede any ground, acknowledge any fact, go to any length at all to divert attention from the core fact that the state extorts its customers. If any other business behaved in the manner that all the states in the world do people would be up in arms and screaming bloody murder on a regular basis; States hold zero responsibility to their customers, the power the customer holds over a business is that if they do not see value in the product delivered they can choose to discontinue their dealings with that business. This is the last and final sanction of incompetence that the state, the final bastion of utter incompetence is completely dependent upon.
What caught my attention earlier this year, though, prompting me to investigate it further, was something like this on reddit.
NerdfighterSean developed a script that allows reddit users to tip each other in BTC. This is likely the closest that micropayments, an idea advocated by Scott McCloud to support comics artists, has ever come to reality.
But since exploding in value recently, Bitcoin has garnered wider interest. Two months ago, one Bitcoin, or 1 BTC, was trading for US$20. This morning it's US$245. Forbes:
The great technological feat of Bitcoin is its solution to the “double spending problem.” The cryptographic protocols needed for one currency holder to “sign over” his currency to another have been well-understood for decades. But no cryptographic operation can prove you haven’t given the same coins to someone else. Before Bitcoin, the only known way to address this issue was to have a centralized transaction register. Control over that list was inevitably a point of control for the currency as a whole.
Bitcoin uses a clever scheme to maintain a fully decentralized transaction register, preventing double-spending without giving anyone de facto control over the system. The global, shared register of Bitcoin transactions is called the blockchain, and it’s organized into “blocks.” One block is added approximately every 10 minutes. Each node in the Bitcoin network creates a candidate block and then races to solve a difficult mathematical puzzle that takes its block as an input. The winner of the race gets to add its block to the blockchain, and in that block it can credit itself a fixed number of new bitcoins (currently 25 BTC) as a reward for participating in this process. All bitcoins now in circulation were originally created by this process, which is known as mining.
When a new block is announced, the other nodes in the network confirm that the proposed block follows all of the rules of the Bitcoin protocol. If it doesn’t, the block is discarded and the other nodes continue working on their own candidate blocks.
The New York Times:
"It is the most successful digital currency already right now," said Nicolas Christin, the associate director of the Information Networking Institute at Carnegie Mellon University. "Even if bitcoins become worth nothing, it has succeeded more than any academic proposals for a digital currency," he said in an interview from Okinawa, Japan, where he was attending a conference on financial cryptography that included a number of papers on bitcoins.
Bitcoin has arrived, although it has done so by crashing through the porch window instead of stepping politely through the door. Should you get involved? As a speculator, no. Also, you should not take financial advice from me for any reason. But as the creative fields trend towards disintermediation, artists should have a look at it. Using the same mechanism, viewers could as easily buy a work of art from you as tip you a few cents for an especially interesting blog post (ahem). It requires no intermediary payment services—money goes from the customer's computer to yours.
There is, of course, controversy. Felix Salmon thinks it's doomed.
[B]itcoins were created to be the most fungible commodity the world had ever seen – to the point at which they would effectively erase the distinction between a commodity and a currency. ... Bitcoin was constructed to behave like a currency: it’s very easy to use bitcoins to pay for goods and services, especially if what you’re buying is in a different country. Right now, there’s literally no way to build a website selling some kind of service, and have a meaningful fraction of the world’s online population be able to pay you for that service. Bitcoin was designed to solve that problem; to be, in effect, the lingua franca of online commerce.
But it’s very hard to be a currency when you’re also a commodity, governed by rules of scarcity and subject to speculative attack. And it’s also very hard to be a currency – or even a commodity, for that matter – when you’re as small as bitcoin is. Even now, at the top of a huge bubble, the total value of all the bitcoins in existence is the equivalent of about 2,000 standard gold bars -- not remotely enough to revolutionize the global payments and currency systems as we know them. Given the choice between something old and solid, on the one hand, and something new and virtual, on the other, the market is still voting for the asset class which has proved its worth over millennia.
Mencius Moldbug thinks that Felix Salmon is, well, mistaken.
First, every currency is a "vehicle for financial speculation." When you exchange good X for currency A on Tuesday, you are speculating that you will be able to exchange your A for good Y on Thursday. This is a guess about the future, ie, "speculation." Moreover, by choosing to use A as an intermediary rather than B, you are speculating that the exchange rate A/B will not change in B's favor between Tuesday and Thursday. Otherwise you would have chosen B.
(It's typical of our thoughtfree age that a successful financial columnist feels no qualms about using the word "speculation" as a pejorative. Can anti-Semitic rabbis be far behind?)
Second, Felix's sources will tell him that a currency has two roles: storing purchasing power and solving the coincidence-of-wants problem. This is because Felix's sources are thinking thoughts last actually thought in the 1930s, ie, before computers. With these magical devices, coincidence of wants is not in principle a problem, though small frictional effects persist.
It is trivial to do business in Bitcoin when BTC/USD is unstable. Simply post the price in USD, and use the BTC/USD exchange rate as of the transaction date. Even if buyer and seller are both saving in USD, within a couple of seconds they can exchange in, send Bitcoin, and exchange out. The prices realized may differ slightly from the posted estimate, but only slightly.
In the 21st century, a currency has only one role: storing purchasing power. Or to be more exact, containing the inevitable overvaluation of at least one asset in an economy where many actors want to store purchasing power. If you can use this store of value directly in transactions, nice. Nonetheless, rational actors will "speculate" on their optimal store of value, and convert on the fly if needed. Using, you know, computers.
The Austrians like it because it's rather like gold...
Bitcoins come about as the uncertain pay-off for an energy—and hardware—-consuming process that is extended through time. The per-time pay-off varies, based on the efficiency and sophistication of the more-or-less specific hardware used for the mining. Individual miners have started to pool their efforts, and this cooperation has tremendously reduced the uncertainty that each individual miner bears.
Due to this costly production process, bitcoins, although virtual, are constrained by scarcity. While a bitcoin has no material shape or content, the algorithm that generates it has been designed to replicate the competitive production of a scarce good. First, entry in the business of producing bitcoins is open to anybody. Second, the production process is capital and labor intensive, extended through time, and also uncertain. Third, production is subject to decreasing returns, thereby conforming to the generalized scarcity faced by acting individuals in the better-known physical world. Thus, bitcoins turn out to be the exact opposite of the “Linden dollars” of the Second Life “virtual world.” The latter are produced by a monopolist central authority, out of thin air, and without any other limitation but the very discretion of that same monopolist authority.
...albeit not enough like gold for their liking.
In conclusion, virtual monies, of which bitcoins seem to be the most perfected specimen up to date, do not allow acting individuals to manage the uncertainty of the future as well as material monies do. They could serve to intermediate exchanges among those who invest in the technology that creates them, stores them, and transfers them. Nevertheless, they could never achieve that degree of universality and flexibility that material monies carry with them by nature. Thus, on the free market, commodity monies, and presumably gold and silver, still have a great comparative advantage.
The Keynesians don't like it because it's too much like gold. Because of the mathematics behind Bitcoin, there is a fixed number of possible coins. Salmon again:
Take a gold bar valued at $600,000. At $60 per bitcoin, the value of that bar is 10,000 BTC. But then assume that bitcoins rise in value to $600 apiece, and then to $6,000, and then to $60,000 — as would have to happen if the fixed number of bitcoins was being used to store hundreds of billions of dollars in value. Then the value of the gold bar would plunge, in bitcoin terms — to 1,000 BTC and then 100 BTC and finally just 10 BTC. The same thing would happen to all other goods and services in the world, including your own salary. Everything would be constantly going down in price, if you thought in bitcoin terms.
Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities. And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.
The result is an economy which would simply grind to a halt, with massive unemployment and almost no economic activity. In a word, it would be a Depression.
Unsurprisingly, Paul Krugman said as much when asked to comment on Bitcoin in late 2011.
Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.
And because of that, there has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.
So to the extent that the experiment tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.
I may not be an economist leveraging my Nobel Prize as a high-visibility, partisan cheerleader, but unless you can eat your money, you're going to have to spend it at some point. Nearly all of my purchases decrease in nominal dollar value over time. I don't care, because I'm using them, and would rather have them than money. This seems obvious, and it seems equally obvious that if this kind of hyperdeflation scenario were a real danger, it might have happened once or twice before at some point in world history. As far as I can tell, it has not. And most of all, such a scenario hinges on a lack of competing currencies, which is exactly what Bitcoin is in the first place. If bitcoins become undesirably pricey, someone can spin up another digital currency with a different mathematical basis that would be more weildy.
So let's get this done. Here's an animated introduction to Bitcoin, with an alpaca.
Your first step with Bitcoin is to choose a wallet. Your options are a web-based wallet or a wallet on your computer. As Bitcoin.org puts it:
Web wallets host your bitcoins. That means it is possible for them to lose your bitcoins following any incident on their side. As of today, no web wallet service provides enough insurance to be used to store value like a bank.
So you want a wallet on your computer. Your options are Bitcoin-Qt, Multibit, Armory, or Electrum. Use Multibit. Armory runs on top of Bitcoin-Qt, and the first time you start Bitcoin-Qt, it synchronizes to the network, basically reading the entire history of transactions so it can work properly. This synchronization takes a long time, which they don't much talk about at the Bitcoin-Qt website, but over at Armory:
This will take a painfully long time the first time (potentially 24 hours!), but it should only be a few minutes on subsequent loads. You will see a green checkmark in bottom-right corner of Bitcoin-Qt when it is ready.
My computer has been grinding on this for 40 hours and counting, and in the meantime the rest of the system is on its knees. Even the login screen is taking a long time to work. Multibit, which I installed on my laptop, seems to work without all this trouble. I also threw Bitcoin Wallet down on my Android phone, and it synced in twenty minutes. I don't know why there's such a big difference—I assume that the transactions will take longer to process, but I haven't tested that yet.
Next, learn how to secure your wallet. Basically, what goes for computing in general goes for bitcoins—backup, backup, backup. With that, you're ready to go. When someone wants to send you money, generate a key from your wallet and send it to them. He puts that key into his wallet, hits Send, and the BTCs transfer.
In the interest of science, let's try this out. Perhaps you'd like to tip me for this overview—get in touch and we'll arrange it. Also, I'm offering three drawings for sale at US$40 each, a third of what I would usually charge for them, but you have to pay in BTC. Currently that's .2667 BTC (looks like the much discussed BTC bubble let out some air, and it's now at $US150). I reserve the right to cancel the sale if the market completely spazzes. Shipping is included unless you're outside my continent, in which case we'll work something out.
Since I'm on an alternative currency kick this week, I'm offering this piece for sale as well.
The price is one 50x1g Gold CombiBar. Also a substantial discount on the price in US dollars.
The precious metal we've valued for millennia—now in the format of chocolate. What's not to like?
After several hundred thousand rounds of Words with Friends (I'm signed on as yearofmonkey—come at me, bro), I finally purchased my first game on the Droid. I saw it demoed at PAX East and decided to take the plunge. It's Usagi Yojimbo: Way of the Ronin. I was collecting Usagi back in the '90s, so this is a lot of fun for me.
The game is true to the characters (although I hope Usagi stops scowling at some point) and the swordfighting action is lots of slicey goodness. Unfortunately, it's a touch glitchy. Every now and then an NPC head appears behind his body instead of in front of it, and one time the controls disappeared. I'm currently stuck on the Level 5 boss fight because he jumped in the air and stayed there, and Usagi can't shoot his bow upwards as directed. I'm hoping that Happy Giant gets some fixes in soon.
Meanwhile, the Museum of Fine Arts, Boston is in on the action.
- Download your free copy of the game here.
- Then visit the MFA’s “Samurai!” exhibition between April 14 and August 4, 2013.
- Find the passcode near the exhibition exit. It unlocks a free level of the game and Usagi’s special armor, inspired by the real thing in the show.
- Type the passcode in the “Extras” menu in the game.
- Start playing!
Stan Sakai comes to the museum on May 11.
I've been asked to make regular appearances on Beyond the Horizon Radio, which airs Friday nights at 8PM GMT-5. You can listen in here. There's also Facebook page and a Twitter feed. DJ Bluestreak spins the tunes and interviews, while Ken and I provide color commentary and smartass remarks. Topics include technology, gaming, and whatever else is on our minds, with an emphasis on Star Citizen, which just overfunded a $500,000 Kickstarter campaign to $2 million and has $8 million in backing.
Quote of the Week
"Think lightly of yourself and deeply of the world."—Miyamoto Musashi