The sound quality is not very good, unfortunately.
19 April 2013
Follow your heart.
Be on the business side of what you love most.
Let the money take care of itself.
The sound quality is not very good, unfortunately.
19 April 2013
Follow your heart.
Be on the business side of what you love most.
Let the money take care of itself.
Bloomberg reports (6 May 2013):
Job postings referencing Bitcoin surged 433 percent in January through March compared to a year earlier, while jobs based on 3-D printing rose 206 percent, according to Elance Inc., a service that connects employers with remote online freelancers.”
As Mark Knopfler of Dire Straits put it in “Telegraph Road“, after the homesteaders settle, then come the churches, then come the schools, then come the lawyers, then come the rules. And, as Danny Elfman of Oingo Boingo put it in “No Spill Blood“:
Who makes the the rules?
So, what are we to make of this latest announcement that US regulators at the Commodities & Futures Trading Commission (CFTC)—the people allegedly responsible for the demise of Intrade—are not going to sit passively by and watch Bitcoin, that furry woodland creature that is giving status quo dinosaurs the fits, rise in prominence?
Bear with me, while I do that glass-half-full thing that I have done so well, to the great irritation of doom-&-gloomers, for more than a quarter-century.
This is FANTASTIC news! [Gads, how I miss the <blink> tag right now!]
If the CFTC regulated Bitcoin, or more likely Bitcoin derivatives, then this would officially legitimize Bitcoin and maybe even make it possible to buy it through a licensed derivatives broker, like OptionsXpress.
Yes, pipsqueak mom-&-pop operations would not be able to experiment with disruptive financial innovations, but Bitcoin is not the only unbacked token out there. Go experiment with something that is still off regulators’ radar.
Yes, the US financial system is run by and for the benefit of plutocratic oligarchs. Go live in Chile or Panama, if that sort of thing bothers you.
The point is that people with real money to spend have shown keen interest in Bitcoin, and regulators are lining up at the front of the parade and pretending like they are in charge, rather than trying to shut it down. As long as Americans continue to elect rulers who see their role as the wielding of power over everyone else, these are the only two realistic options.
The world would be a wonderful place, if it were governed by the principle, “No Victim, No Crime,” but until that day arrives count your blessings, however meager they might be.
What would CFTC regulation mean in practical terms? No one knows, and anyone who prophesies the future is a fool, a liar, or both. The main thing to bear in mind here is that, just as there is a cost for every benefit, there also is a benefit hiding within every cost.
That, and the market always wins.
Much ado has been made about how deflationary Bitcoin is. This is mildly comical, as it conflates three independent processes, as anyone who comments on monetary matters should know. As I have pointed out before:
In general, and all other things held constant (or, as we say in the business, ceteris paribus), prices can rise for three reasons: demand increases (e.g., an auction or a popular restaurant), supply decreases (e.g., lower efficiency, war, or natural disaster), or the number of units of currency increases faster than the rate of increase of goods and services (inflation).”
In the case of Bitcoin, the number of units in circulation is always increasing, albeit at a decelerating rate, thus Bitcoin is inflationary. Granted, Bitcoin can be lost, never to be recovered, and when that rate eventually exceeds the rate of Bitcoin creation, sometime before the hard cap of 21 million is reached, only then can we talk of deflation.
For now, what we are seeing with the general run-up in value of Bitcoin relative to fiat national currencies is a combination of demand increases for Bitcoin and the debasement of fiat currencies by central bankers at a rate that is significantly higher than the rate of Bitcoin creation.
Seen from the perspective of Bitcoin-qua-money, the general fall in prices is a function of users’ preference to hold money and to put off consumption into the future. While it is tempting to call this ‘deflation’, an increase in the demand for money is categorically different from a decrease in the supply of money.
With Bitcoin, we are seeing a radical reduction in time preference—i.e., putting consumption off into the future—which is associated with low discount rates (‘interest’), low risk, and a move away from scarcity toward plenty.
The bigger story here is that if Bitcoin users can find ways to dampen the fiat-price volatility—itself, a form of risk, which reduces present value—then Bitcoin’s value could rise even more dramatically. Think of it this way: people will pay more for a safe bet, like an apartment in Luxembourg, than for a risky bet, like an otherwise identical apartment in Syria. Today, the Bitcoin market is more like Syria than many like, and so they stay away; if Bitcoin’s value were more predictable, demand could increase even more as risk-averse individuals began to see it as a viable asset.
Were this to happen, it would not lead to deflation. Instead, it would show that Bitcoin currently is undervalued.
“It’s a sad dog that won’t wag its own tail.”
In this spirit, I must share an anecdote that provides very strong support for my long-standing admonition to learn how to write software and program yourself out of a job, rather than wait until someone else does it for you, because if it can be automated, then it will be automated.
I began developing the practice utilities at Pecuniology.com in response to students’ requests for practice tests in the Managerial Finance courses that I teach. Previously, I distributed paper copies of sample numerical questions from old exams, and every time typos snuck in when I was not looking. No matter how careful I thought I was, I inevitably grabbed a version that had errors in it that were different from the version that I had distributed in the immediately preceding semester, and the cycle of duelling typos never resolved.
Over the years, the typos reproduced and mutated in a manner that had me afraid that I might wake one morning to find that they had evolved into something particularly virulent and maybe even achieve self-awareness.
Finally, a couple years ago, after having told nearly two thousand students over the better part of a decade that they should learn how to write software and program themselves out of jobs, rather than wait until someone else to did it for them, I decided to program myself out of a job. I’m not there yet, but I learned recently that I am closer than I had suspected, and that doing so has improved my teaching performance dramatically.
In a fit of frustration and in a mood to show off a bit, I followed my own advice to solve whatever problem annoys you the most, and converted those contemptible paper printouts into the first version of the online practice utilities linked to above.
During the first semester, students and I identified errors and omissions that, once corrected stayed corrected, and the flood of emailed pleas for help just prior to exams fell from a firehose to a trickle. This is in large measure, I since have learned, because I took the time to incorporate randomly generated values into the problems. In essence, anyone, anywhere in the world can create seemingly infinite variations on the questions posted, just by clicking the Reload button.
In response to the few cries for help that I do receive, I tend to post my replies in this Blog area, and respond more often than not with the URL of the post that addresses the question, along with exhortations to practice, practice, PRACTICE. When a student asks for further clarification, I edit my follow-up response into the existing post.
Shortly after I integrated those sets into my classes, I noticed a dramatic improvement in my students’ test scores and subsequently cranked up the pressure by asking more realistic (read ‘harder’) questions. For the Advanced Managerial Finance class, which we hold in computer labs, I have my students build spreadsheets that replicate each of the practice utilities and use those to answer some sample questions.
The first time that I was asked to teach Principles of Managerial Finance—one of the handful of dreaded required courses that all students in the College of Business must pass—online, I cringed at the thought of my students suffering in solitude, armed with only a textbook and the accompanying publisher-produced practice questions that are more about solving dense and clever puzzles than about preparing for a career of drafting business plans, seeking investment, and managing working capital accounts.
I envisioned each of them cowering in the dark by the light of a kerosene lantern, in a dank and fetid shack with the wind howling, panthers screaming into the night, and alligators banging their massive tails on the kitchen door—we’re in South Florida; that kind of thing can happen from time to time—as they tried to make sense of some of concepts that run exactly counter to virtually everything that their high school teachers and most politicians have told them most of their lives, like the promise of a benefit in the future is worth less than an actual benefit now, you will not necessarily be rewarded for bearing risk, there is a cost for every benefit, and the future is unknowable although it is not unimaginable. That, and we say it with algebra.
Thus were born the videos on the page that links to the utilities above. As I type this, that page is still as ugly as someone else’s baby pictures, and in one of them I had a cold when I recorded the voiceover. And, you know what? The kids love it.
I know this, because I just received my student survey results from the online section that just ended a couple days ago, and my scores are a thing to be envied. This is not because of any special treats that I hand out, as—and I hesitate to post this—I was horribly distracted this semester, and I had thought that I was largely AWOL. I half-expected them to burn me in effigy and call for my public humiliation. (I exaggerate, but only for effect.)
Granted, I make it a point to respond to email within 24-48 hours, but sometimes a four-day weekend turns into a one-week turnaround time (yes, inexcusable!). However, when I was remiss, students turned in their frustration to each other for help, and the vast majority of the time, a classmate directed the questioner to one of my videos or blog posts.
I am fast becoming the Andy Warhol of Business education, whose art is streamlining the creative process to the point where my own hand never touches the end product. And, with Direct Deposit, I don’t even have to endorse and cash the checks. (Again, I exaggerate, but not all that much.)
Here’s the kicker: I use the same exams, albeit with different numbers, in the classroom and online, and my mean scores and distributions are insignificantly different from each other! I very nearly have achieved the Holy Grail of ensuring that my online and face-to-face sections are as closely aligned as is possible.
So, to repeat, if you teach Business, especially Accounting, Economics, or Finance, learn how to write software and program yourself out of a job. Alternatively, contact me and have me do it for you. Seriously.
Anyone new to Bitcoin would do well to read Alvaro Feito’s Big Book of Bitcoin after reviewing these Khan Academy videos.
Bitcoin – Overview
An introduction to the mechanics of bitcoins and an overview of how transactions take place.
Bitcoin – Cryptographic Hash Function
What cryptographic hash functions are and what properties are desired of them.
Bitcoin – Digital Signatures
A high-level explanation of digital signature schemes, which are a fundamental building block in many cryptographic protocols.
Bitcoin – Transaction Records
The basic mechanics of a bitcoin transaction between two parties and what is included within a given bitcoin transaction record.
Bitcoin – Proof of Work
An explanation of cryptographic proof-of-work protocols, which are used in various cryptographic applications and in bitcoin mining.
Bitcoin – Transaction Block Chains
Bitcoin – The Money Supply
The mechanisms by which the supply of bitcoins is controlled.
In the USA, the Foreign Account Tax Compliance Act (FATCA) requires “US taxpayers with specified foreign financial assets that exceed certain thresholds [to] report those assets to the IRS.” FATCA also requires “foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.”
Generally, the FATCA requirement to file Form 8938 kicks in, once the total value of non-US assets under a US tax resident’s control exceeds USD 50,000.
If FATCA were applied to Bitcoin, how this might affect the nascent Bitcoin market comes down to who Bitcoin’s biggest users are perceived to be by policy makers and law enforcement officials, and how much economic activity they represent.
If Bitcoin’s user base is perceived to be predominantly weapons smugglers and drug dealers, then Bitcoin is a godsend for law enforcement agents. They just need to seize a few hard drives, identify a few account keys, and sniff the blockchain for leads. It isn’t the perfect honeypot, but it is less inconvenient that trying to subpoena bank records in n jurisdictions. Then again, maybe law enforcement agents will try to shut Bitcoin down, in spite of the fact that this only would lead to a fractured market of clone payment systems. The fat cat is, after all, out of the bag.
If Bitcoin’s user base is perceived to be predominantly anarcho-libertarian and neo-revolutionary sovereign citizens plotting the demise of the nation-state, then really, who cares? They might believe their own brochures, but they’ve been threatening darkly to rise up as one for a half-century, and they still can’t buy a vote, not least of which because most of them seem to worship money from afar. They might perceive themselves to present an existential threat to the viability of a centralized leviathan—fantasizing that they will widow their spouses and orphan their children before they surrender their home security equipment—but they are little more than a nuisance for local police, and they rarely go much further than throwing empty beer cans at their televisions. (I say this as one who sympathizes with some of their aspirations, but who has grown weary of waiting for Godot.)
If Bitcoin’s user base is perceived to be predominantly offshore money managers and accredited investors on the one hand and retail sellers and their customers on the other hand—i.e., normal business—then those for whom FATCA applies already have hot and cold running paperwork, and their software already handles FATCA; and those for whom FATCA does not apply, should be able to carry on business as usual.
Where all of this will lead, only time will tell. As Ludwig Lachmann stated throughout his career, the future is unknowable, even if it is not unimaginable. However, I remain optimistic about Bitcoin and about regulators’ responses to it and other financial innovations.
In response to the growing interest in Bitcoin, Crowdfunding, and related topics, I am developing an online course that focuses on post-Industrial entrepreneurship. This is to be a practical and fairly standard university-style course that I will host in Moodle on this website. (My plan is to devote summer 2013 to getting the first version of the course up, in time for the publication of the JOBS Act rules in the USA.)
This is a request for topics to include in the outline of the modules that focus on Bitcoin, Crowdfunding, Chilean incorporation, and other recent innovations. The idea is to go back to Adam & Eve, and to lead the student through the curriculum, as if he or she were six years old. My target market is the non-techie who is selling services or information goods, or is doing small-scale international trade. The course is to be open to anyone in the world who has access to the Internet.
By way of background, I teach Finance in South Florida, and I am a veteran of the first wave of moneypunk ‘electronic currencies’ back in the 1990s. The mood of the day now feels very much like those heady days two decades ago leading up to the Dot.Com Boom, that saw the birth of Amazon, Google, PayPal, and Yahoo!, and later Facebook, Skype, and YouTube.
Any suggestions and links to resources will be greatly appreciated, and I will be glad to acknowledge publicly anyone who likes that kind of recognition. I already have a large collection of resources, and redundancy of recommendations will be seen as confirmation.
Approximately once per decade, the market experiences a Gold Rush, a once-in-a-lifetime opportunity that, once missed, is gone forever.
Examples include the introduction of competitive long-distance telephone service in the USA in the 1980s and mobile telephones after that; two- and three-letter domain names in the late 1990s; privatization in newly democratized countries; etc.
Bitcoin appears to be such a Gold Rush, especially now that it has received the regulatory green light in the USA.
A user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person. An administrator or exchanger is not a provider or seller of prepaid access, or a dealer in foreign exchange, under FinCEN’s regulations.”
Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies
Financial Crimes Enforcement Network (FinCEN), 18 March 2013
A personal finance question that is asked on many accounting and financial professional exams is the Lifetime Savings Problem, in which one is asked how much one would have to set aside on a regular basis, beginning in one’s youth, in order to enjoy a retirement of a particular level. A typical example is:
Imagine that you planned to retire 30 years from now, and that you wanted to set up an account, into which you would make equal-sized payments each year during your working years, that would enable you buy an annuity that would pay you $25,000 at the end of each year for the 25 years immediately after you retired. Based on the expectation that your savings account should earn 9% per annum and that the retirement annuity should have a more conservative yield to maturity of 3% per annum, how much should you set aside each year until your planned retirement?”
This problem is in two parts: a) your retirement plan, and b) your savings plan to achieve that goal.
Pay into Retirement Account
Draw from Retirement Account
A financial arrangement like the ones depicted above, in which payments—called coupon payments (c) for historical reasons—are made on a regular schedule for a specified period of time (t) is known as an annuity*. Here, the retirement account is an annuity that will pay you (perhaps, you will buy it from an insurance company or a large bank), and the savings account is an annuity that you will pay into (perhaps, a brokerage account or a statutory retirement account that you manage with the help of a financial professional).
To solve this puzzle you need to work backwards, first by deciding how much you would like to receive each year after you retire and for how many years; then by calculating the expected value—the price that you expect to pay, when the time comes—of an annuity that will provide for your retirement, which value becomes your savings goal; and finally by calculating how much money you should set aside each year between now and retirement, in order to achieve that goal.
Before you can know how much (c) to pay each year into a savings account that you open in your early years, you need to know how much you want to save. In other words, the price (APV for “annuity present value”) of the annuity that you plan to buy when you retire—the price that you expect to have to pay upon retirement—is exactly equal to the amount that you need save (AFV for “annuity future value”) during your working years. Tomorrow’s present value (i.e., price) is today’s future value.
If you imagined, for planning purposes, that you could live on $25,000 (c) per year after you retire, and that you wanted to plan for a 25-year (t) retirement—on the expectation that you’ll figure out a Plan B sometime during the next 55 years, in case you live beyond Year 26 after retirement—and that you expected your retirement account to earn 3% (r) per year, then you would need to save (APV):
This means that you need to have $435,329 on the day of your retirement, 30 years from now, so that you can buy the annuity that will pay $25,000 per year for 25 years.
In order to save that amount (AFV), you plan to make equal annual payments (c) for the next 30 years (t), and you expect that you can earn an average of 9% per year (r) over that time.
If all goes according to plan, then, if you set aside $3,194 at the end of every year for the next 30 years and earn an average of 9% per year on your savings, then you should have $435,329 in three decades that you can use to buy an annuity that pays $25,000 per year for 25 years.
note: For a detailed explanation of annuities, review my “Time Value of Money” video lecture. If you have difficulty viewing the videos try using VLC Media Player, “a free and open source cross-platform multimedia player and framework that plays most multimedia files as well as DVD, Audio CD, VCD, and various streaming protocols.” [return to main text]