Tag Archives: blockchain

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 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!

Steemit logo

Steemit, a fresh breath of hot air

This post is an edited collection of my responses to James Corbett’s presentation on the social bookmarking site Steemit.

A new social bookmarking site, Steemit, has been taking off recently, in libertarian and anarchist circles, promising decentralized, uncontrolled publishing via blockchain technology.  However, on closer analysis, Steemit does not look decentralized at all. It looks like a standard social bookmarking site, with the added feature of paying for tokens to increase your post/comment ranking. It seems like interest groups with deep pockets could easily game the ranking system, moreso than other sites. In fact, this operation seems more like a scheme to sell digital currency than a publishing platform.

As for the blockchain, besides the nice buzzword, I’m not sure what it solves in terms of preventing censorship, besides providing a public cache. This function is performed now by image-hosting sites, private websites, archive.org, as well as the social network platforms themselves. The big problem is discovery and ranking, how people actually communicate and find out about stuff, which Steemit is still very vulnerable to.

It’s very odd that Steemit requires a Facebook or Reddit account to function, with plans to add SMS verification, but no stated plans to remove these restrictions. I’m not sure what permissions they ask for, since I haven’t signed up, but it certainly opens the possibility of those social networks reading your Steemit posts and punishing you on their platform. In any case, it’s a big hint that this is not a decentralized system and is doubly strange because most platforms do not have such a restrictive requirement. A truly decentralized system would not have a spam/fake account problem, except as DDoS, since it would not rely on a central index.

Steemit does not look like any better of a solution than Facebook or Twitter at this point, except to the extent that you trust the people running it more. The links to the User Agreement and Privacy Policy are broken and there is no ownership information about the company on their website. Caution!