I lay out the following hypothesis: that government is the primary cause of the capital concentration that Marx blamed on capitalism. I aim to test this by studying the facts of the present day and of history, so this hypothesis may turn out to be wrong or in need of modification, according to the evidence presented. I also make the following corollary claims:
The hypothesis holds for the United States government of the present day and all similar mixed-market representative democracies.
The hypothesis also holds for governments of all types, past and present.
It is not private property, but the violation of private property, that causes the highest capital concentration.
Is intellectual property really property? (Part 3)
Continuing on part 1 and part 2 in our series on intellectual property, today we look at why the social value of patents is greatly overestimated.
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.
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.
Government supports large businesses against small businesses (with federal contracts)
This is strong evidence that the government directly increases concentration of capital by supporting large businesses vs. small businesses.
What now Bitcoin?
Bitcoin & other cryptos have taken a sharp nosedive of ~33% from peak. Although it may rally short-term, let’s take a look at the internals of what’s going on and where this is all heading.
People are parking Bitcoin profits on Bitfinex (biggest bitcoin exchange) into tethers, the fake token people think has 1:1 USD backing (but doesn’t). Tether will push the printing press into overdrive to try to pump Bitcoin price once again.
If this fails, there will be a run on Tether as people try to realize profits in USD. This can’t be done — the money isn’t there. At that point, holders of Tether have only one choice: buy crypto, anything, and try to transfer out to exchanges that support USD withdrawals (Bitfinex does not).
This could be the biggest spike crypto has ever seen. It’s uncertain which cryptos will spike most. For example, Bitcoin has well-known transaction problems, so would not be the transfer mechanism of choice. Probably Bitcoin Cash would be preferred, since that is relatively fast, cheap, & supported on GDAX (USD exchange).
That would mean the evisceration of the Bitfinex exchange and a sharp drop in aggregate trading volumes. The owners may opt for a big gamble to retain their profits — look for claims of a huge “hack” on Bitfinex. This lets the Bitfinex operators steal customer funds before the collapse, Mt Gox style. An alternate scenario is a “hack” on Tether to prevent a run on Tether in the first place. This actually happened about a month ago, 30 million Tether stolen, from a 3/4 multisig wallet (likely inside job). Something of this magnitude may trigger government involvement.
If the crypto in Bitfinex does make it into the other exchanges, you’ll see the huge spike I mentioned. But, since Bitcoin price will now be un-tethered from the Tether printing press, it will be very short lived and collapse once former Bitfinex customers try to realize USD profits. Then Bitcoin could fall way below the levels we are seeing today.
Economics of merge mining
A common argument for the unique value of bitcoin is its hash power, meaning the amount of computational power (miners) dedicated to mining bitcoin. But, with merge mining, another blockchain can potentially capture the entire hash power of bitcoin with no impact on bitcoin’s network. That means that, although independent cryptos may eventually be swamped by a bitcoin monopoly, the value of bitcoin will be diluted by other chains piggybacking on its network.
The way bitcoin is mined is by miners “hashing” the existing blockchain with a random number. Hashing is a one way function that takes in some content and spits out a result. If the result meets certain “difficulty criteria”, it is accepted by the network and the miner is rewarded a coin. It is impossible to ever derive the original content from the result, which is why it’s called one way.
Merge mining works by combining the random number guesses from one chain, with those from another chain. The result will be valid on both chains. If it meets the criteria for both chains, the miner will get rewarded for both. The miner loses nothing by mining both, but gets more reward.
The economic effect of this is to increase the miners available to mine alternative chains. Since profits go up, the number of total miners goes up, which will push profits for a particular chain down. This should mean lower transaction fees for any particular chain. It also means that no chain holds a monopoly on being a transaction mechanism.
The lack of a potential monopoly means that bitcoins should be treated as a competitive payment mechanism, instead of as a monopoly. Many coins will be able to process payments, with the same hash power, even if most miners mine the bitcoin chain. Some may be superior to bitcoin in their payment processing capabilities.
Bitcoin’s dubious utility value
Bitcoin fanbois point to bitcoin’s utility as a payment network. But, unlike Visa, holders of bitcoin don’t get any of the mining revenues, so there is no revenue stream on which to value a bitcoin.
Participants do need to have bitcoin to transfer funds, but they don’t need to hold it for longer than the transaction itself. Since bitcoin is limited to ~3 transactions per second, and average confirmation times are several hours, depending on network congestion, there is no need for more than a few bitcoin to accomplish all payments across the network. As an example, assuming 1 bitcoin per transaction, 3/sec * 3,600 sec/hr * 3 hr/confirmation = 32,400 bitcoin to execute all payments on the network.
Also, since bitcoin can be divided into satoshi, hundreds of millionths of a Bitcoin, there is no need to hold a particular amount of bitcoin to accomplish a transaction. The bitcoin itself just represents the transaction record, not the value of the contract, just as a record in Visa’s database represents the transaction, and is not in and of itself valuable, beyond the market price of the transaction mechanism (about 1%).
Even if holders of bitcoin shared in the mining revenues, the competitive mining market produces a flat fee per transaction, not a percentage fee, which allows the transfer of massive fortunes for a tiny fraction of a percent. It would be a much worse value proposition, for investors, than Visa.
The fiat price of a bitcoin arises from an artificial restriction on bitcoin supply & mining, and people’s expectation that these restrictions will entice others to buy their bitcoin in the future at a higher price. The “greater fool” theory. But this is separate from bitcoin’s utility as a payment network.
It is no different from other speculative phenomena such as Beanie Babies, baseball cards, and other artificially restricted commodities. People misinterpret the restriction as an ipso facto justification for a high price. Once all available cash & credit has poured into the commodity, there are no further buyers, the mania ends, and the price drops to the utility value of the commodity. In bitcoin’s case, its utility value is close to zero.
Price increase brings in more dumb money USD to buy BTC, skyrocketing price further
Arbitrage bots sell BTC for USD, profit
Tether sells BTC for USD
Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD
Tether pockets USD, prints more tethers …
What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)
Tether prints tethers to buy bitcoin
BTC-USDT price skyrockets
Arbitrage bots buy BTC-USD
No more dumb money = no more USD arbitrage profit
Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices
Now there is arbitrage opportunity the other direction
Buy BTC-USD, sell BTC-USDT, sell USDT for USD
Tether now has to redeem tethers for USD
The bigger the gap, the more tethers they have to redeem
If they stop printing tethers, the BTC-USDT price collapses
If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD
If they keep printing, the gap widens and they have to redeem more and more tethers for USD
At that point, the game is up and Tether will have no incentive to continue redeeming tethers. The tether market collapses. You can redeem 1 USDT for 1 cent. BTC paper profits are wiped out. Tether is left with >600 million USD in the bank.
The phenomena to watch out for in this scenario are:
Increasing gap between BTC-USDT and BTC-USD prices
Increasing volatility of USDT-USD price, followed by collapse
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.
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.