Bitcoin broken

Bitcoin is a ponzi scheme

All “cryptocurrencies” based on artificial limits are inherently pump-and-dump schemes.  If they were true free market currencies, the money supply would grow with demand. Instead, they are artificially restricted.  Why?  To create the illusion of limited supply and therefore expectation of future scarcity and speculative profit.

Bitcoin price chart 2017They are fiat currencies, based on nothing but this speculation.  The Bitcoin price chart shows this.  Bitcoin fanboys point to the skyrocketing price as a badge of honor, but all it shows is that it is a speculation, not a store of value.  It has no price stability, and cannot be considered a “currency”.

In the short term, the price will keep going up for various reasons.  Mining is getting more expensive and less profitable, driving out miners and restricting supply.  Use as a pseudo-anonymous money transfer scheme is increasing on the dark web.  A method of circumventing Chinese capital controls.  An investment vehicle for Chinese with not enough local investment options.

But eventually, people will realize NOTHING holds up the value of Bitcoin.  No petrodollar, no USG taxation.  And it will collapse, as will the rest of the currencies that will inevitably fork off this one.  This is even ignoring the major security and regulatory issues that plague Bitcoin.

Currency is a form of social credit.  It’s an implied debt, that someone will pay off with goods & services in the future.  This should be the basis of any cryptocurrency, not arbitrary and artificial limits on supply, and fancy math for its issuance.

bitcoin balloon

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
 
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
 
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
 
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
 
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.
bitcoin unlocked

Alt-coins are vulnerable to attack

The strength of a cryptocurrency is the share of global processing power it can muster in service of its ledger.  An attack by a significant computational resource (botnet, mining pool, government supercomputer, etc.) could potentially reverse recent transactions or cause a fork of the currency.  The reason the global share matters is that computational power is fungible, and may be used in service of any cryptocurrency.

The less computational power dedicated to mining a crypto, the more vulnerable it is to attack.  Alt-coins that do not command as much hash power as Bitcoin would be first in line.

Processing power over time is governed by the price per computational unit and by the price of electricity.  For example, a spike in electricity prices or transistor prices would increase mining costs, and therefore transaction fees, possibly disrupting the usability of the currency.  A sudden drop in electricity prices or transistor prices would reduce mining costs, increasing the chance of attacks on a currency’s ledger.

Such attacks could be orchestrated, not necessarily to steal the underlying wealth of currency holders, but to accomplish secondary effects beneficial to the attacker.  For example:

  • A large investor in a particular crypto may attack a competing (smaller) crypto intruding in the space.  This implies a first-mover advantage in the cryptocurrency space and stratification of crypto, with one per defensible economic niche.  Eventually, the market may consolidate into one global crypto.
  • Momentarily disrupt the functioning of a crypto at a critical moment in its development, for maximum PR effect, to spread fear & uncertainty to potential investors and adopters.
  • Momentarily disrupt recent transactions to create uncertainty for retailers accepting the currency & consumers using it.
  • Permanently disrupt or fork a smaller currency.

You would only need to bid on computing power for a short time to cause a major disruption.  Miners are very sensitive to transaction fees, so would quickly respond to any change in market demand.  Furthermore, cloud mining operations, and cloud computing in general, provide an easy way to quickly spool up computing power for a short time, disrupt the target crypto, and spool down, thus minimizing costs.

Alt-coins based on a permissionless, global blockchain are very vulnerable to this type of attack. Eventually, even Bitcoin itself may come under attack should there be a revolutionary development in computational hardware, exploited by a group of early adopters, or a government willing to throw massive fiat to kill it once and for all.

Bitcoin electronic currency

The Bitcoin mirage

This post is an edited collection of my responses to James Corbett’s interview of Ken Shishido on Bitcoin.

Bitcoin was an interesting experiment in digital currency, and there will be many more, with improvements. It is definitely not a real currency though. The recent Bitfinex hack, wiping out 36% of account balances, on top of many previous hacks, show it’s less safe than even a fiat bank account.

Ken Shishido’s recommendation to put into Bitcoin “what you can afford to lose” is a reminder that it’s a speculation, not money. Still, it’s definitely worth keeping an eye on developments with blockchain technology and new Bitcoin-like instruments that perhaps address the past issues with Bitcoin.

Bitcoin, exchanges, and security

Hacker in hoodieSome make the distinction that hacks have targeted exchanges or warehouses, not Bitcoin itself.  While the distinction between Bitcoin itself and exchanges or warehousers is important, the average person trying it out won’t necessarily understand this or its security implications. To them, the end-to-end process constitutes the solution, and most likely that will include an exchange.

You can get Bitcoin either by mining or by buying them on an exchange. Since mining is now incredibly expensive and technically challenging, the vast majority will buy on exchanges, which is a security risk, even if you don’t warehouse your bitcoin. In addition, most retail merchants accepting Bitcoin immediately liquidate receipts into dollars, making much of the market value of Bitcoin dependent on exchanges.

Even if you avoid exchanges altogether, you are still affected by these hacks. Since Bitcoin’s value depends so heavily on exchanges, a loss of confidence leads to a massive loss of value in the currency itself. This indeed happened after the Bitfinex hack.

There are also issues with the security of storing Bitcoin yourself, of transmitting them, the questionable privacy of a public transaction ledger (blockchain), and many other issues that the average person frankly will not understand or have the time to study. For the average person, the most secure currency is paper dollars, or gold/silver as a small inflation hedge.

There’s a lot of potential in cryptocurrency, both on the central bank side and the peer to peer side. I just don’t think Bitcoin is a particularly good solution, except maybe in certain use cases like international money transfers, that are plagued by high fees. But it’s a lot less than its hype.

Inflation Hedge vs Paper Money

One hundred billion mark note, Weimar Republic

One hundred billion mark note, Weimar Republic

In comparing Bitcoin to fiat or paper currency, Bitcoin advocates point to the inflationary history of paper money and its control by central banks. However, most modern currencies do not hyperinflate. Zimbabwe, Venezuela, the Weimar Republic, etc. are outliers due to unique political circumstances. Of course, that may change and eventually the US dollar will hyperinflate and collapse. But the key word is “eventually” – it may not happen for a very long time (or it may happen next year).

There are three things working against a dollar collapse, no matter how much they try to destroy it: 1. the oil market is priced in dollars, 2. it is required to pay US gov’t, fed./state/local taxes, 3. it is legal tender for the private US economy. So we’re talking about a backstop of many trillions of (current) dollars in value, something no other currency or country can match. So it’s unlikely to “collapse” anytime soon.

If we talk about collapse, Bitcoin lost 80% of its value in 2015, then recovered a bit, then recently lost 25% of its value. That’s a much bigger loss of value than is likely in the dollar, whose deprecitation is pretty stable over time. Bitcoin’s price may stabilize later on, but it’s not ready for prime time and definitely not a stable store of value.

Anyway, let’s be real. For most people these currency hedges don’t matter, because they don’t have much money to begin with. Liquidity is more important, to pay the bills, so dollars (or your local currency) are best. If you do have a lot of money, then sure, have some small hedges with precious metals, a little with Bitcoin, maybe some art, etc. They all carry their own risks. There is no such thing as a risk-free store of value.

UPDATE 08/19/2016: Bitcoin.org has warned that the code for Bitcoin itself may be hacked by government agents.  Not even the currency itself is entirely secure!

A Hungarian man sweeps paper money out of the gutter

Answers To: “The problem with the Fed is that it’s private”

I hear this argument in most critiques of the Federal Reserve, so it definitely needs to be addressed.

Talking to an anti-Fed person, you may have heard something like “The Fed is terrible, it controls all our money.  And did you know it’s private?!”

The implied or stated proposal being that government should take over the money-printing.  But it’s not the fact that the Fed is partially private that’s the problem – it’s the fact that it’s partially government!  What’s bad about it is that we’re all forced by law to use their currency.  It is a legal monopoly on money, for which there is no ethical justification.

From a voluntary ethics standpoint, no one should be forced to use or not use any money, or prohibited or compelled to issue money.  But even from a utilitarian view, a government takeover of money would not be a very good safeguard against monetary inflation.  Historically, governments have debased their currencies as a means to finance their grand schemes, variations of bombs or bread.  Can you imagine what Congress would do without the admittedly weak restraint of the Fed?  They’d spend into oblivion, even more than now, and destroy the dollar in the process!

The real answer is – eliminate the Fed’s legal monopoly on money.  Let them be a private bank competing in a free market.  Of course, they probably would go out of business, but hey, that’s free market capitalism!

bitcoin balloon

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
 
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
 
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
 
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
 
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.
bitcoin unlocked

Alt-coins are vulnerable to attack

The strength of a cryptocurrency is the share of global processing power it can muster in service of its ledger.  An attack by a significant computational resource (botnet, mining pool, government supercomputer, etc.) could potentially reverse recent transactions or cause a fork of the currency.  The reason the global share matters is that computational power is fungible, and may be used in service of any cryptocurrency.

The less computational power dedicated to mining a crypto, the more vulnerable it is to attack.  Alt-coins that do not command as much hash power as Bitcoin would be first in line.

Processing power over time is governed by the price per computational unit and by the price of electricity.  For example, a spike in electricity prices or transistor prices would increase mining costs, and therefore transaction fees, possibly disrupting the usability of the currency.  A sudden drop in electricity prices or transistor prices would reduce mining costs, increasing the chance of attacks on a currency’s ledger.

Such attacks could be orchestrated, not necessarily to steal the underlying wealth of currency holders, but to accomplish secondary effects beneficial to the attacker.  For example:

  • A large investor in a particular crypto may attack a competing (smaller) crypto intruding in the space.  This implies a first-mover advantage in the cryptocurrency space and stratification of crypto, with one per defensible economic niche.  Eventually, the market may consolidate into one global crypto.
  • Momentarily disrupt the functioning of a crypto at a critical moment in its development, for maximum PR effect, to spread fear & uncertainty to potential investors and adopters.
  • Momentarily disrupt recent transactions to create uncertainty for retailers accepting the currency & consumers using it.
  • Permanently disrupt or fork a smaller currency.

You would only need to bid on computing power for a short time to cause a major disruption.  Miners are very sensitive to transaction fees, so would quickly respond to any change in market demand.  Furthermore, cloud mining operations, and cloud computing in general, provide an easy way to quickly spool up computing power for a short time, disrupt the target crypto, and spool down, thus minimizing costs.

Alt-coins based on a permissionless, global blockchain are very vulnerable to this type of attack. Eventually, even Bitcoin itself may come under attack should there be a revolutionary development in computational hardware, exploited by a group of early adopters, or a government willing to throw massive fiat to kill it once and for all.

growing stages

WANTED: Liberty entrepreneurs

Money is a dirty word in the liberty movement.  Ironic, for a pro-free-market and free trade ideology.  But when theory becomes reality, many recoil at the idea of bloggers doing sales or advertising.  Why?

Spending time to make content or technology means taking time away from other activities, whether business or leisure.  That time has to be compensated.  Yet some act like entitled socialists, expecting this work to be provided for free!

To be fair, some monetization strategies are obnoxious or spammy.  But all that means is we need better monetization options.  Better technologies.  Better feedback and suggestion from audiences of what works and what doesn’t.

For the liberty movement to survive, much less thrive and change the world, it must be economically self-sufficient.  If you can’t feed yourself, you can’t change the world.  If our activities in pursuit of liberty are not profitable, but only financial drains, we will never grow and advance.

We need more business models around advancing liberty.  We need more content, more media platforms, more technologies.  With the fake news media collapsing before our eyes, there has never been a better opportunity than now.  There is so much pent up demand and very little supply.

We need more liberty entrepreneurs.

Not just from an economic perspective, but from a psychological one as well.  It can get depressing focusing only on what the poweful are doing to us.  Who wants to be on a constantly losing team, with a victim mentality?  It’s time we recognize our own power, take responsibility, and become agents of change.

I am working on several media technology projects with a group of liberty-minded developers and creators.  Want to join the effort?  Email me at apollo at apolloslater dot com and let’s get to work!

South Park - La Resistance

“Fake news” hysteria is a huge opportunity

It is an auspicious time for independent media.  The Fake Media’s “fake news” hysteria has capped off this year’s apotheosis of undisguised propaganda.  Now we learn that the US government will directly fund domestic pro-government propaganda in the press and on social media, with $160 million.  Let me explain why this is amazing news for independent media.

The media world has supply and demand, just like any other market.  There is a demand out there for real information and it is up to the media to satisfy that demand.  The more the media avoid this, and publish lies and hoaxes instead, the more business opportunity there is to fill the void.  This is how Fox News became such a cable news powerhouse.  Due to the “fake news” hysteria, the big platforms Facebook, Google, and Twitter are censoring alternative voices.  This creates an opportunity for a Fox News of social media (perhaps many!).

The government’s funding of propaganda reflects a fundamental misunderstanding of media.  It is treating the internet as an “enemy weapons system“.  But media consumption is not a win-lose, zero-sum game.  All this does is crowd out existing journalism and reduces the supply of real information.  But the demand remains the same.  That means there is now an even greater business opportunity for free speech advocates than before.

We have a real, tangible, action plan to dismantle the establishment’s hold on power: Start new media platforms and especially new media technologies.  Let us create independent media content, independent social networks, independent ad networks, independent video sharing, … independent everything!  The opportunities are boundless.  I myself am working with a group on such a project in the media tech space.  If you are interested in learning more about our effort, please email me at apollo at apolloslater dot com.

Vive la resistance!