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.
They 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.
Patents not necessary for innovation
Most patents are not litigated. That would be insanely expensive. What ends up is a policy of mutually-assured destruction, where big companies build up patent portfolios as a defensive measure. But this could be accomplished with a voluntarist patent system, where you lose protection of your patents, if you violate anyone else’s.
Most intellectual property is not patented. It is squirrelled away as trade secrets. It lies in the particular operations and tradecraft of millions of businesses. That means most of the innovative power of the economy is not dependent on the government-run patent system. Then we have to question whether the patent system itself is necessary.
Huge costs of patents
The supposed benefits of patents to innovators are the justification for the system. But the costs to innovators and startup businesses are overlooked.
Patent trolls build up massive patent portfolios and litigate against any startup in a particular field, even without merit, as the cost of defending is extremely high. This creates huge uncertainty in entrepreneurship and requires a lot of capital to start up. It is another example of government-mandated capital concentration.
Innovators are more likely to get hammered by a lawsuit, than to benefit from a patent that takes millions to grant and to defend. This means patents are not necessary for innovation and they actively discourage it. This obviates the very reason patents were created in the first place.
The costs greatly outweigh the benefits of the current patent system. And it certainly is not any better than a voluntarist system, that does not rely on violence for enforcement, but only mutal respect of participants’ intellectual property.
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
Some 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
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!
This is a continuation of the series on why capital concentration is the result of government, not of the free market.
Occupational licensing is one of those nasty abuses of the citizenry that should outrage both the right and the left, yet it’s still rampant in this country. It is a perfect example of government protecting the bigger and stronger, and stomping on the weaker. It hurts low-income entrepreneurs the most and has no rationale that is not already fulfilled by private, voluntary rating systems such as Google and Yelp.
Local and state governments make money through licensing fees, occupational schools make money from mandatory classes, and incumbent businesses are protected from competition. Who are the losers? Hard-working poor people who are ready and willing to provide valuable services but are threatened with jail and fines if they do so. Consumers also lose, by paying higher prices than they would in a free market.
Next time on this series: the financial industry.