My Bitcoin Problem

I didn’t get enough of them…. ?tulip-fever-movie-poster-e1505608260306

Back in the good old days, Hikvision NVRs part of an exploit that was used to mine Bitcoin, naturally, that was back when Bitcoin was used primarily to buy heroin and weapons via the darknet. Today, though, everyone and their dog is buying bitcoin like it was shares ca 2001,  and the hardware needed to mine coins today is a million times more powerful than a cheapo NVR.

First things first; why do we need “currency”. I think it’s worth revisiting the purpose, before moving on. Basically, “currency” is a promise, that someone (anyone) will “return the favor” down the line. In other words, I mow your lawn, and you give me an IOU, which I trade for some eggs at with the local farmer. The farmer then trades the IOU for getting picket fence painted by you (you then tear up the IOU).

Instead of crude IOU’s, we convert the work done into units of currency, which we then exchange. Mowing a lawn may be worth 10 units while doing the dishes is worth 5. In the sweet old days, the US had many different currencies, pretty much one per state. They served the same purpose. To allow someone to trade a cow for some pigs and eggs, some labor for food, food for labor and so on.

But pray tell, what politician, and what banker would not love to be able to issue IOUs in return for favors, without actually ever returning them?

Since politicians and bankers run the show, naturally, the concept got corrupted. Politicians and banks started issuing IOUs left and right, which basically defrauded you of your work. When you mowed the lawn on Monday, you would expect that you could exchange the IOU for a lawn mowing on Friday, but with politicians producing mountains of IOUs, you suddenly find that the sweat off your brow on Monday only paid for half the work on Friday.

This is classic inflation.

By the same token, it would be one hell of an annoyance if you mow my lawn on Monday, and now, to repay you, I would have to not only mow your damn lawn, but also paint your fence on Friday.

This is classic deflation.

What you want is a stable, and fair currency. That work you do on Monday can be exchanged for an equal amount of work on Friday.

You can then wrap layers of complexity around it, but at its core, the idea is that money is a store of work, and that store should be stable.  The idea that we “need 2% inflation” is utter nonsense. In a democracy, the government can introduce a tax on cash equivalent holdings if the voters so desire. This would be more manageable and precise than senile old farts in central banks trying to “manage inflation” by purchasing bonds and stock, with the predictable side effect that it props up sick and useless companies. The idea that you can get work done by just shuffling some papers around is an abomination in my book.

Bitcoin is an attempt at creating a currency that can’t be manipulated by (presumably corrupt or incompetent) politicians and bankers, but I think they’ve gone far, far away from that idea.

The people who are engaging in bitcoin speculation are not doing it because they want a fair and stable store of work (having discarded traditional fiat currency as being unstable and subject to manipulation). Instead, they do it, because, in the speculative frenzy, bitcoin is highly deflationary. You can get a thousand lawns mowed on Friday for the lawn you mowed on Monday. As a “stable currency”, Bitcoin has utterly failed. And we’re not even discussing the transaction issues (200K back-logged transactions, and a max of 2000 transactions every 10 minutes).

This happens because bitcoin is not a currency at all. It’s a simply the object underpinning a speculative bubble. And as it happens with all bubbles, there are people who will say “you don’t understand why this is brilliant, you see… ” and then a stream of illogical half-truths and speculation follows. People share stories about how they paid $100 for a cup of coffee 12 months ago when they used bitcoin to pay for it. But a cup of coffee in dollars cost about the same as it did 12 months ago, so while the dollar is being devalued by very mild inflation, and thus a much more stable store of work, bitcoin is promising free lunches for everyone.

People, for the most part, take part in this orgy with the expectation that at some point, they will settle the score for real currency – real dollars. Very few (and I happen to know one) will keep them “forever” on principle alone.

Furthermore, I don’t see any reason why the Bitcoin administrators wouldn’t just increase the self-imposed 21 million coin limit to 210 million of 2.1 billion coins. They already decided to create a new version, called Bitcoin Cash that essentially doubled the amount of bitcoin. That and the 1300 other cryptocurrencies out there makes it hard for me to buy into the idea that there is a “finite number of coins”. Not only that, to increase transaction speed to something useful, they are going to abandon the blockchain security, opening up for all sorts of manipulation (not unlike naked short selling of stock etc.)

And let’s not forget that before Nixon, the civilized world agreed to peg currencies to gold (a universal currency that could not be forged). In 1973, Nixon removed the peg from the US dollar and since then the number of dollars has exploded, and the value has dropped dramatically. In other words, what was a sure thing pre-1973, was suddenly not a sure thing.

This is not investing advice. You might buy bitcoin (or other crypto-“currencies”) today, and make 100% over the next few weeks. You might also lose it all. I would not be surprised by either.