Dec 302013

A Proof-of-Snark (POS) protocol deters denial of service attacks and other service abuses such as spam on a network by requiring some original snark from the service requester, usually meaning a sardonic summary of the request, typically in the form of dry or biting understatement.

POS was developed by an individual or group of individuals using the pseudonym Frito Pendejo, who developed SnarkCoin, the premier, best-in-class, end-to-end proprietary, turnkey cryptocurrency solution.  Rather than lose first-mover advantage by taking time out to draft a white paper, Frito set up an invitation-only portal on the dark web, so that insightful and forward-thinking SnarkCoin early adopters could get in on the ground floor and access the distributed P2P parallel financial system that is used by high net worth Family Office hedge fund managers to finance high-yield, midterm debentures used to securitize sovereign debt.  (Those who have not received invitations can buy their way in with bitcoins, and those who cannot afford the initialization fee can pool their resources with others’.)

A key feature of POS schemes is their asymmetry; the snark must be appropriately difficult for the requester to formulate but easy for service providers to verify as original. This idea is also known as a Smartarse Comeback Function (SCF) and in academic research as a Non-Repeating Sardonic Rejoinder Protocol (NRSRP).

The benefit of a POS system over a Proof-of-Work (POW) system is twofold: i) the difficulty of POS validations becomes more difficult organically, and ii) POW is already integrated into the Bitcoin protocol, and developers of so-called altcoins are running low on buzzword-compliant distinguishing characteristics to differentiate technically clever, though commercially pointless or ethically dubious, alternatives.

Granted, Proof-of-Stake (PoS) fulfills the requirement of being different merely for the sake of being different from POW, as does the discovery of new prime numbers, but these are already taken, and promoters must refresh their channel so that their downstream can use innovative terminology with increasingly sophisticated investors.

As with a POW system, a POS system avoids the double-spending problem by collecting transactions into blocks and adding a reference to the current final block in the database (blockchain). The verification nodes (straightmen) then verify that each transaction is permissible against the current database and then generate a sardonic summary of the block of transactions (snark) with the caveat that the snark must be unique.

sidebar: It is imperative that the snark be sardonic and not sarcastic.

Sarcasm is any statement that is the exact opposite of what one means, e.g., “SnarkCoin and Proof-of-Snark are great ideas!” whereas sardonicism is a true statement that conveys irony, e.g., “It was only a matter of time, before someone came up with something like SnarkCoin.”

Also, understatement must be strictly enforced, as overstatement is inherently untrue, e.g., “SnarkCoin is the worst idea in all of human history!”  Much better would be, “SnarkCoin, eh? Probably from Florida.”

It is critical that the summaries be true, otherwise they do not summarize the blocks with which they are associated, placing the system at risk.

To accomplish this, the POS protocol has an additional layer—the snarkchain—that collects embedded hashes of the snark associated with each block, using the Supernumerary Meta-Hash Embedding Protocol (SMHEP) that calculates the SHA512 fingerprint of the original snark, then calculates the MD5 hash of the first hash, then the TIGER192,4 hash of the meta-hash, followed by HAVAL256,5, RIPEMD320, FNV164, GOST, and finally ROT13, for no point other than to satisfy Frito’s paranoia and desire to show off.

As snarkcoins are not mined like bitcoins, but instead manifested, a straightman can be rewarded for being the first to issue original snark, with transferable warrants that are redeemable for snarkcoins or can be exchanged OTC for altcoins or even bitcoins.  In this way, straightmen have an incentive to validate transactions and to invest in increasingly powerful AI hardware and software to issue snark that is not already memorialized in the snarkchain.

By issuing warrants, which convey the right but not the obligation to acquire snarkcoins, straightmen avoid the fate of Bitcoin miners, who receive actual bitcoins for their efforts and have been declared to be money transmitters in many jurisdictions.  SnarkCoin straightmen’s warrants represent unrealized conditional value, and thus are non-taxable off-balance-sheet transactions, notwithstanding the income tax is voluntary.

POS provides an incentive for early adopters to become straightmen, as the snarkchain will contain only the Genesis Snark initially: “I am my first transaction.”  From there, low-hanging fruit can be added, like “One would expect this kind of thing,” “I’ve never seen /this/ before,” or “This block is valid.”  However, over time, it will become very difficult to issue summaries that both are recognized as snark by the underlying protocol and do not repeat previous snark.

In this way POS is superior to POW, in that the difficulty adjusts organically, whereas with POW the difficulty of the computation must be adjusted by some arbitrary rule as the amount of computing power available grows.

Dec 292013

Paul Krugman, who won the 2008 Nobel Memorial Prize in Economic Sciences for his work in Economic Geography, was at it again in December 2013, in yet another of his anti-Bitcoin rants in the Opinion pages of the New York Times: “Bits and Barbarism” (22 December 2013).  It is unclear why something with a total value of about 5% of Carlos Slim’s personal portfolio so upsets him, but Bitcoin has a hold on his imagination that borders on obsessive.

Normally, I prefer not to create any incentive to drive traffic to the trolling of attention-princesses, but this one is so rich with absurdity that it calls for point-by-point rebuttal.

Krugman begins by conflating goldbugs with bitcoiners, and then mocking them, as a neoprog welfare statist might conflate collectivist neocons with individualist libertarians as ‘right-wingers’.  Specifically, he sees anyone who is concerned with the prospect of inflation in the foreseeable future as an environment-destroying throwback to the days of swashbucklers and buccaneers.

“But gold prices, while down from their recent peak, are still three times what they were a decade ago…” in very large measure due to the inflationary policies that Krugman has cheered on.  On the one hand, he ridicules the notion that inflation is a problem, and on the other he provides evidence of 11.6% annual inflation, using the USD price of gold as a proxy.  For both to be true, he must believe that 10-15% inflation is nothing to worry about; pity the pensioner on a fixed income.

“Bitcoin is a digital currency that has value because… well, it’s hard [for me] to say exactly why [without directly addressing what it is that gives it value]…”

Like government fiat and gold, bitcoins are fungible, durable, portable, and divisible.  Like gold and unlike government fiat, bitcoins are scarce.  Unlike both government fiat and gold, bitcoins are transmittable from any computer or smartphone with Internet access, and one can digitally sign documents with a bitcoin wallet and embed a hash of the signed document into the bitcoin blockchain.

Unlike gold, which has very little intrinsic value beyond jewelry—The Bling Theory of Value—Bitcoin provides a decentralized financial infrastructure that is immune from the kinds of political manipulation that have led to housing bubbles, hyperinflations, and other asset bubbles since government fiat replaced gold-backed national currencies in the early 1970s.

“…but for the time being at least people are willing to buy it because they believe other people will be willing to buy it.” This, of course, being the defining characteristic of an asset, as opposed to a consumption good.  With this statement, Krugman tacitly dismisses all financial markets along with global wholesale trade and distribution.  After all, my local grocers are willing to stock their bins with fruits and vegetables because they believe other people will be willing to buy them.

“It is, by design, a kind of virtual gold.”

The passage in Satoshi’s paper to which this assertion refers reads:

The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.” (p.4 §6)

The operative phrase here is “is analogous to“.  It is a metaphor; a model, as it were.  As an economist, Krugman should understand that models are simplified extractions of reality used to render the salient points of a complex concept rhetorically more palatable.  One might as well dismiss the entire body of Krugman’s work on economic geography because he did not possess the huge tracts of land that so occupied his imagination, but only brooded over from afar.

“And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.”

That is not how gold is mined.  One mines gold with shovels, pickaxes, and other sundry bits of base metal.  As for Bitcoin ‘mining’, the new bitcoins are rewards for being the first to solve a fiendishly difficult mathematical puzzle after confirming a batch of recent transactions. It is a game of skill, and not a scavenger hunt.

As for his mental excursion to Iceland, it is very difficult for the Icelanders to export the abundant hydrothermal energy with which that land has been blessed and cursed.  Unlike oil, it is not easy to transport steam by supertanker.  Better to convert it to electricity in place and use it to produce aluminum and bitcoins for export.  Far from being a waste of energy, it is an ideal use of a resource that otherwise might lie fallow.  Krugman’s argument screams in favor of concentrating bitcoin transaction confirmation—aka, ‘mining’—in Iceland!

“The third money pit is hypothetical.”  Here, ‘hypothetical’ is a polysyllabic term that means something akin to ‘cherry-picked’.

“[Keynes] went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press.”

By this logic, why bother with the printing press?  Why not simply adopt sand or seawater as money, both of which can be had in the seemingly limitless quantities of government fiat?  If Krugman truly does not see the difference between a good that is durable, portable, divisible, fungible, and scarce from one that can be produced in seemingly unlimited supply, then it is very difficult to see how he managed to pass undergraduate Economics 101.

“Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations.”

Keynesianism prevails predominantly in the USA and the UK, and it is not very influential elsewhere in the world.  Krugman’s lament is provincial and suggests that he believes that the USA’s 4% of the world’s population is representative of the great mass of humanity.

With regard to his swipes at gold, he seems to operate under the misconception that national currencies are still backed by gold.  Otherwise, why obsess about it so, in a discussion of money in general and bitcoins in particular?  (Never mind that bitcoins have no connection, other than occasionally metaphorical, with gold.)

Whether Keynes would be amused to learn how little has changed since the severing of national currencies’ ties to gold in the early 1970s is a matter of speculation.  However, Krugman is right that modern inflation rates would have been unthinkable a half-century ago.

In 1971, Pres. Nixon initiated a 90-day price freeze in the USA, in response to inflation rates that had risen to a high of 6% per year, and seemed to be stuck at a devastatingly high rate of 4% per year!

“So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold…”

If Krugman disapproves of gold mining, then he should not join with others to tear up the highlands of Papua New Guinea to add to his and their dead stock of gold.  As to why, the answer is so simple that even an economist should understand it: expected benefits exceed expected costs.

“…even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?”

The answer is so simple that even an economist should understand it: expected benefits exceed expected costs.  More to the point, though, why does this bother him so?  One similarly could argue against collecting comic books, listening to what passes for popular music these days, or spending one’s days writing attacks on Bitcoin. Aside from traffic to his New York Times Opinions, what does Krugman gain from misrepresentations? Alternatively, what does Bitcoin threaten that is precious to him?

“[I]nflation in advanced countries is clearly too low, not too high.”

Apparently, Krugman does not live on a fixed income, and he does not have to deal with the erosion of the currency’s value.  Four decades ago, an inflation rate of 4% per year was justification for a price freeze in the world’s presumptive bastion of capitalism.  Today, Krugman brushes off 10-15% per year as clearly too low.

If Bitcoin succeeds as the foundation of a global financial system that is accessible to anyone in the world with a smartphone, even with its tendency to increase in value over the long run, it will repudiate the foundation of Krugman’s Keynesian faith, and that is what all his trolling and ranting seems to be about. Otherwise, just let us run our little experiment in peace.

Invest accordingly.

Prof. Evans

Dec 112013

In response to my earlier “The Miami Century,” a reader asks:

I would appreciate your view on Bitcoin / cryptocurrencies and the US regulatory framework and law makers. Most innovation in finance during this decade most likely takes place in virtual currencies and related areas. Do you see any major hurdles for Miami coming from the regulators and law makers?”

The short answer is that the future is unknowable, but it is not unimaginable. No one knows what the future holds, but it would be odd for US regulators to let Bitcoin develop further, if their plan were to shut it down.

If Bitcoin really is the Next Big Thing, as I called publicly 19 March 2013, American regulators and legislators are going to be loath to see this market migrate to Panama, Singapore, and—Heaven help us all!—China.

The USA is home to the New York Stock Exchange, Space X and Virgin Galactic, Microsoft and Apple, Facebook, Google, Amazon, Linus Torvalds, and Silicon Valley; and the Americans like it that way.

They’ll want Bitcoin and crowdfunding to be centered here, as well.

US officials’ three main concerns in this context are tax evasion, money laundering, and terrorism financing.

  • Tax evasion could be put to rest by changing the focus of taxation from things that are easy to hide—e.g., income, virtual assets, offshore trusts, etc.—to things that are hard to hide, like cars, gasoline stations, ports, wholesale consumer goods, buildings, and land.
  • Money laundering similarly could be put to rest by ending the War on Drugs, and the pendulum seems to be swinging in this direction.
  • If one believes the actual statistics on this, terrorism is less of a real-world concern than lightning strike, slipping while bathing, or texting while driving. Considering that the vast majority of successful home-grown terrorists in the USA have been white guys, people in the USA are growing weary of jumping at every brown shadow.

For this reason, I am watching the 2014 Congressional elections and the 2016 general election in the USA very closely. I expect that the news will be either very, very good or very, very bad for Bitcoin. That I remain in my native South Florida after having lived all over the USA, in Western Europe, and in the Caribbean over the past embarrassingly many decades, is evidence of my cautious optimism.

With regard to Miami specifically, for good or ill, we South Floridians have a well deserved reputation for having a healthy disdain for Anglo-Saxon formalisms. If Bitcoin is going to flourish anywhere, this is one of the most likely regions in the world. We are not great engineers, but you should see us move people, cargo, and money around!

We already have a strong and growing Bitcoin market between here and Argentina, Brazil, and Venezuela, which have currency controls. It is increasingly common for Latin American programmers, graphic designers, and website developers to ask foreign clients to pay them in Bitcoin, so that they can carry their savings with them, when they come up here to visit friends and family and to go shopping.

TL;DR: Invest in South Florida Bitcoin startups that focus on international trade, and make sure that the principals speak Spanish, update their passports, and have filled their vaccination cards, in case you want to relocate them in a hurry.

Invest accordingly.

Prof. Evans

Dec 102013

In many ways, a US resident could see the 19th Century as the New York Century with its transcontinental railroad terminals and Ellis Island, the 20th Century as the California Century with Hollywood and Silicon Valley, and the 21st Century as the South Florida Century with its transcultural population and strategic location.


Miami is closer to dozens of foreign capitals than it is to Washington DC, geographically and metaphorically. No other region of the USA is as tightly woven into the fabric of the integrated global economy. Even the Home Depot stores in South Florida have export departments!

Only five major languages are spoken natively in the Western Hemisphere—English, Spanish, Portuguese, French, and Haitian/Antillean Creole—all of which are spoken wildely in Miami, often in the same sentence.

South Florida has no majority ethnicity or majority native language.

Metropolitan Miami is the seventh largest metropolitan area in the United States, and the fourth largest urbanized area in the USA, behind Los Angeles, New York, and Chicago.

Florida has no personal state income tax.

Miami is home to NAP of the Americas, one of the largest Internet landing points in the world, and it is one of the top five best-interconnected cities in the world, ahead of San Francisco, Chicago, and Washington DC.

For passengers, cargo, and money, South Florida is one of the world’s premier logistics hubs.

Miami’s financial district is home to the offices of more than 100 international banks.

The second-largest tourist attraction in the state of Florida, after Disney World, is Sawgrass Mills: a shopping mall west of Ft. Lauderdale that attracts shoppers from Latin America, the Caribbean, and Europe.

Of all the port complexes in the USA, only Miami/Ft.Lauderdale is a net exporter in terms of value. South Florida imports goods for local consumption, for both residents and the millions of tourists who pass through every year, and exports cars, machine parts, electronics, tools, and other high-value-added goods and services. All other ports in the USA are net importers.

Port Everglades in Ft. Lauderdale is home of the second-largest free trade zone in the USA and the largest exporter.

Port Everglades and Port of Miami vie annually for the top two positions as the world’s first- and second-busiest cruise ports.

Miami is home to EarlyShares, the equity crowdfunding portal, and it has a very active Bitcoin user base. Bitcoin startups in South Florida include Bitcoin Intel, Bitcountant, Coingig, and Conscious Trader. Companies based in South Florida that are embracing Bitcoin include SoftTouch and Tiger Direct.

Bitcoin’s highest and best use is in small-scale international trade. South Florida firms tend to be small and medium-size enterprises (SMEs). For every Silicon Valley / Wall Street Ten-Bagger with 10 million customers and countless broken hearts strewn about its feet, one will find 10 thousand South Florida SMEs with 1,000 customers each. This environment is ideal for Bitcoin entrepreneurs.

Added to this, Miami is at the interface of a region with more than a half-billion individuals in Latin America and the Caribbean who do not have easy access to capital markets, credit, or efficient banking services, and of the eight-million-pound gorilla of capital markets in the USA.

Already, Wall Street bankers have begun relocating in such large numbers that the Palm Beach County government has an office with full-time staff dedicated to helping them find neighborhoods with good schools. If Bitcoin and crowdfunding entrepreneurs follow them, South Florida could become the ‘Silicon Valley / Wall Street’ of transnational entrepreneurship.

Invest accordingly.

Prof. Evans

Aug 252013

Mohandas Gandhi famously noted in the context of revolution, “First they ignore you. Then they laugh at you. Then they fight you. Then you win.”

In late 2013, Bitcoin has entered the “…Then they fight you…” phase of its existence, and the modus of many detractors takes the form of a barrage of rhetorical ‘what if’ scenarios accompanied by unsubstantiated assertions offered as if they were tested and proven conclusions and prophesies for which the pundit has nothing to lose if his or her prescience is astigmatic.

One typical example of this is Ari Zoldan’s “Bitcoin: Society’s Boon or Bane?” on the Huffington Post website.

According to Betteridge’s Law of Headlines, when a headline ends in a question mark, the answer is, “No.” With a total value in circulation that is less than 2% of Carlos Slim’s personal portfolio, or ¼th of the World Trade Center’s reconstruction cost, Bitcoin poses no threat to the US dollar, fiat currency in general, gold as a reserve asset, or the nation-state. Similarly, Bitcoin will not free the oppressed any time soon, neuter military adventurers, democratize despotic regimes, or make all of your wildest dreams come true. (You have to vote for Pedro for that to happen.)

Bitcoin is a protocol. It is not a revolution, a philosophy, or a political movement.

To ascribe motives to Bitcoin is to heed the public statements of vocal activists to a degree in excess of their importance. My experience over the past few years is that, among Bitcoin users, for every anarcho-libertarian fanboy motivated to bring Sauron crushing to his knees, there is an apolitical yuppie out to make a quick buck and a social democrat out to help the poor of the world gain access to the global marketplace. When one adjusts for the value one’s Bitcoin holdings, I suspect that the apolitical yuppies are in the lead with the social democrats not too far behind and the fanboys in their mothers’ basements.

In spite of this, some individuals take the time to write “J’accuse…!” screeds that, left unchallenged, might confuse the naive and those unfamiliar with Bitcoin (much as the authors themselves seem to be). To wit:

“Bitcoin would have an extremely deleterious effect on our society if its broader economic role were to increase to substantial levels.”

This prophesy of doom is based on the premise that people are predominantly evil and that ubiquitous surveillance of their transactions is all that stands between the status quo and chaos. Given that ‘our society’ is dominated by corporatist governments and firms, this statement is technically true. Widespread use of Bitcoin among the global middle class just might—one day in the unknowable future—erode the influence and power of ‘Quantitative Easing’ (aka inflation), large multinational banks, the World Bank and IMF, and OECD finance ministers among the 83% of humanity that lives in the Middle Income countries.

Whether this is ‘good’ or ‘bad’ is a matter of personal taste and beyond the scope of this essay.

However, this would be relevant only if Bitcoin’s “broader economic role were to increase to substantial levels,” and hedge fund managers, investment bankers, NGO executives, etc. did not adapt to the new reality, which is exceptionally unlikely.

“Bitcoin is a completely anonymous, decentralized currency. It runs on and is monitored by its massive online public network.”

<double-take /> Either Bitcoin is completely anonymous, or it is not. Given that it “is monitored by its massive online public network,” then by definition it is not, as anyone who actually understands how it works can illustrate with a piece of chalk on a sidewalk (pavement). (In the meantime, refer to The Big Book of Bitcoin, which isn’t really all that big.)

Every Bitcoin transaction that has ever been confirmed is recorded for anyone, including law enforcement professionals, to review and analyze. Granted, the identifiers are strings of random characters that begin with the digit ’1′, but each uniquely identifies a Bitcoin account. Should investigators’ Big Data software tie a particular Bitcoin account to, e.g., an exchange or an individual, then all other accounts that transact with that account can be traced. While this might be tedious, it easily can be automated, and it does not require the securing of warrants, jurisdiction-by-jurisdiction across the globe, as is the case with tracing payments through the international banking system.

“Bitcoin could potentially harm our society in three particular ways: by significantly increasing crime, by causing a drastic decrease in social development investment, and by destabilizing economies due to lack of government control and regulation.”

Such scattershot assertions should not be ignored, lest those who are unfamiliar with Bitcoin assume that they have any merit. Let’s take each in its turn.

Significantly Increasing Crime

Several categories of crime exist, including violent crime, political corruption, property crime, financial fraud, administrative crime (e.g., tax evasion), and victimless crime. (Money laundering, like conspiracy, is a derivative meta-crime that requires an underlying crime. Without an underlying crime, neither money laundering nor conspiracy exists.)

“Bitcoin could readily serve as an easily accessible global network for drug dealing, gambling, bribery, insider trading, and money laundering. In the words of Timothy B. Lee, a Forbes contributor, Bitcoin could very well become ‘the new Swiss bank accounts’.”

Notwithstanding how easy it is for investigators to trace the flow of Bitcoin transactions, Zoldan’s tacit assumption seems to be that defending oneself from confiscatory taxes, political oppression, and the threat of violence when corrupt local bankers identify large account holders to organized criminals (a problem in many parts of Eastern Europe and Latin America) is a bad thing, and that the Swiss respect for personal privacy is thus also bad.

However, those who live in glass houses should not throw stones, as the USA is the world’s biggest tax haven for non-US residents. To castigate Switzerland in this context is hypocritical, unless one is prepared to repudiate direct foreign investment into the USA.

Furthermore, Timothy B. Lee is generally supportive of Bitcoin, and to cite this statement out of context is disingenuous. The full passage from his Forbes article dated 1 April 2013, “Bitcoin Is a Bad Currency but It Might Be a Good Platform for Financial Innovation” reads:

So far, Bitcoin innovation has largely focused on legally dubious activities like gambling and drug sales. Bitcoin is ideal for this because its lack of intermediaries makes it hard to regulate. In the long run, Bitcoin may become the new Swiss bank accounts, letting people park wealth offshore where the authorities can’t get their hands on it.

But while legally questionable activities are the lowest-hanging fruit for Bitcoin, there’s no reason to think those are the only possible applications. I’ve pointed to international money transfers as one promising application for the technology. There are doubtless others I haven’t thought of.”

So, yes, criminals can transact in US dollars, euros, and laundry detergent. And the point is…?

[I address this red herring in more detail in a separate post, "Bitcoin Reduces Crime".]

Causing a Drastic Decrease in Social Development Investment

“Bitcoin is virtually impossible to tax. There is no way for governments to know who owns what, who is paying whom, what is being sold, who is buying what, and how much income a Bitcoin owner has… This could mean the end of programs like Medicare, Medicaid[,] and social security [sic].”

I address this red herring, as well, in “Bitcoin Reduces Crime.” The problem of taxing what is easily hidden is not a problem with Bitcoin, but a problem with applying policy designed for a 19th Century capital/labor economy based on large, centralized organizations and physical plant seated in nation-states to the 21st Century knowledge/service economy based on ever-changing, headless, transnational networks.

Rather than cling to outmoded tax codes, like a monkey with its fist caught in a hollowed-out coconut, policy makers should shift their focus to things that are very difficult to hide, like roads, land, buildings, physical imports, and cars.

And, with that, I just saved Medicare, Medicaid, and Social Security. Send your donations to:


Destabilizing Economies Due to a Lack of Government Control and Regulation

“Because Bitcoin’s currency is completely decentralized with no particular individual or body in control, governments would no longer regulate and control the economy.”

Never mind the Panic of 1907, the Great Depression in the 1930s, the end of the gold standard in 1971, the OPEC oil price shocks in 1973 and 1979, the gold bubble in 1980, Black Monday in 1987, the Savings and Loan Crisis in the early 1990s, the Long Term Capital Management bailout in 1998, the Dot.Com Crash in 2000, and the Crash of 2008, and seemingly countless financial crises worldwide in the 20th Century.

If anything, financial crises have been worse and come at higher frequencies as government control of the economy has increased.

“Although the economy is currently not doing particularly well and currency issues certainly do exist, there still remains the possibility of governmental regulation and control of the economy to try to improve the circumstances.”

Granted, and although public health is a major concern worldwide, the unexpected discovery of a cure for cancer, the eradication of cholera, malaria, and tuberculosis, and the successful cloning of a strain of mammoths that tolerate the heat could lead to improved living conditions and something fun to look at. However, passing off hypotheticals as foregone conclusions is not the same thing as analysis.

“Bitcoin has no central authority or controlling governing body to monitor and regulate the currency according to the economic climate.”

And yet, Bitcoin community members rose to the occasion during the February 2013 Fork, and interest has continued to grow, in spite of two breathtaking bubbles, endless fearmongering, and soul-crushing regulatory uncertainty.

To promote central authority as a financial panacea so soon after the Crash of 2008, three rounds of Quantitative Easing, the PIGS Euro Crisis, and the Cyprus Bank Holiday wouldn’t have been my first rhetorical choice in this context.

“For many people, Bitcoin has a negative image due to its being a hotbed for criminal activity. It is popularly perceived by many to be a crime-ridden market for illegal dealing. Also, the sheer oddity and innovative design of Bitcoin can easily frighten a more traditional and conservative investor.”

Then again, a more traditional and conservative investor would not have bought an Apple ][, trusted PayPal in its early days, or used a credit card in the 1950s. By their nature, traditional and conservative investors wait until early adopters have tested the waters before they jump in. Considering that Bitcoin really hit the mainstream only six months ago (early 2013)—although I was lecturing on Bitcoin internationally two-and-a-half years ago in early 2011—these are still early days. Give us another six months before you completely write us moneypunks off.

"The very idea that it is literally 'backed by nothing and not regulated by anybody' will certainly scare off many people."

Granted, but in a world of 7 billion humans, 'many people' are scared off by many things. Believe it or not, some people outside of Arizona, Florida, and Texas are scared of certain types of Constitutionally protected personal and home security devices.

"Felix Salmon, a financial journalist, also agrees that Bitcoin is a bubble. He writes that 'Bitcoin is less a currency and more a highly volatile commodity.' The extreme change and fluctuation in market value could cause high rates of inflation and deflation, which would adversely affect the economy."

Felix Salmon also has written:

[B]itcoin is a combination of two things: it’s a very interesting payment mechanism, and it’s also a highly stupid and speculative store of value… This is an asset that senators want to ban, an asset which is probably illegal under US law, and an asset that is mainly known for its ease of facilitating money laundering, tax evasion, and the purchase of contraband material.

For the record, over the seven weeks between when Salmon wrote those words, and I wrote these, the Reserve Bank of India has taken a hands-off approach to Bitcoin, the German Finance Ministry has declared Bitcoin to be ‘private money’, and the USD price of Bitcoin has increased by about 33%. [For more on Bitcoin regulatory issues, click here.]

“As Salmon poignantly notes, Bitcoin is fundamentally based on mistrust, as it was designed to evade governments and central banks. This is a significant obstacle in Bitcoin’s growth, as economies, and in particular currencies, revolve around trust.”

That unbacked fiat currency requires a great deal of trust, in order for users not to lose faith in it, is a fact that holders of US dollars, which have lost 98% of their value in terms of gold since 1971, euroskepctics, and Cypriot bank depositors can attest to, although many of them come to rather different conclusions from Salmon’s and Zoldan’s.

But, just in case these prophesies fail to come true, Zoldan fires off a quick hedge: “Nevertheless, if Bitcoin ultimately does become a global economic force, it would then possess the power to significantly disrupt and deleteriously affect our society.”

So, there we have it: Bitcoin cannot work, but if it does, then it is evil. Let’s check back sometime in early 2014 and see how all this worked out. Who knows? Maybe Salmon and Zoldan are right.

Invest accordingly.

Prof. Evans

Aug 252013

When individuals discuss crime, they often behave as if this category were homogeneous and that every act deemed to be illegal by authorities were morally wrong. However, given the differences among local and national statutory codes, not to mention legal traditions—Common Law, Code Napoleon, Shari’a, Chinese Law, Canon Law, etc.—what is criminal in one location often is legal in others. Likewise, what is criminal at one time often is legal at other times in the same jurisdiction. Morality should not be so mutable.

Nonetheless, many individuals conflate ‘crime’ into a single syllable and act as if its meaning were universal. One sees this particularly in discussions about Bitcoin, in which pundits—who have nothing to lose if their prophesies are inaccurate—predict that Bitcoin specifically and cryptocurrency in general will increase the likelihood and severity of crime. Below are several reasons why such prophesies could be grossly in error.

Crime comprises several very different categories, including violent crime, political corruption, property crime, financial fraud, administrative crime (e.g., tax evasion), and victimless crime. When one looks at each of these sub-categories in turn, one could argue that widespread use of Bitcoin might reduce crime in some instances and have no impact in others.

Acts of pointless violence generally are not financially motivated. Bands of disenfranchised youth out looking for trouble most commonly are looking for trouble and not Bitcoin private keys. Even if Bitcoin wallets on mobile phones became targets of thieves, this already is a problem in areas where smartphone apps enable mobile access to users’ bank accounts. It would be difficult to blame Bitcoin, per se, for mobile phone thefts. The same can be said for murder, rape, road rage, and most other violent crime. Bitcoin neither facilitates nor hinders such acts.

In many parts of Eastern Europe and Latin America, one major problem is that bank employees identify large account holders to organized criminals, who then target the wealthy. With widespread Bitcoin use, kidnapping for ransom becomes more difficult, as kidnappers cannot map an individual to his or her Bitcoin holdings easily, especially if the potential target distributes the wealth across a large number of Bitcoin accounts (a common practice among Bitcoin users that is much easier than opening multiple bank accounts). Likewise, bank robberies become less common when individuals conduct most of their transactions online.

Bitcoin wallets enable users to create accounts that require more than one signature to initiate a transaction. Such multi-signature accounts are rare among banks, and most commonly used only by some businesses, but almost never by households. Bitcoin has the potential to reduce embezzlement, if not eliminate it entirely.

By far the most common source of financial crime in commercial settings is theft from merchants in the form of credit card fraud, identity theft, and to a lesser degree shoplifting. Theft by merchants is rare, and it is dealt with relatively easily through the courts. Bitcoin turns transactional risk around 180 degrees. Bitcoin is 100% free of chargebacks, which represent a huge cost to merchants and credit card processors. Merchants can reduce their chargeback risks to 0% by switching to Bitcoin and converting it daily to dollars using a service like BitPay

With regard to fraudulent lending practices by unscrupulous consumer, mortgage, and commercial lenders, Bitcoin’s net impact should be negligible. Whether lending paper bags full of cash or sending cryptocurrency to borrowers’ smartphones, loan sharks will ply their trade, and the threat that they represent is orthogonal to their choice of medium of exchange. Likewise, sub-prime mortgages led to the Crash of 2008, before the first Bitcoin test-transaction even took place.

As for dire predictions of things like international arms merchants, those already are a problem that cannot be attributed to cryptocurrency. As discussed below, Bitcoin’s open recordkeeping should be anathema to those who populate the shadowy underworld.

With regard to administrative crime, tax evasion could be eliminated tomorrow, if authorities taxed things that are difficult to hide, like roads, cars, physical imports, and real estate, rather than things that are increasingly easy to hide in a global knowledge/service economy. The specter of income tax evasion is the reddest of herrings and a smokescreen for policy that has passed its expiration date and is ill-suited to a post-capitalist society.

Political corruption is generally large-scale or small-scale. Large-scale corruption in the form of political influence, pork-barrel projects, crony contracts, etc., already is widespread and unlikely to increase or decrease as a result of widespread Bitcoin adoption. Small-scale bribes to police officers, border guards, customs agents, low-level bureaucrats, etc. currently are paid using local government fiat. Given that very few are calling for the elimination of cash, in order to combat petty corruption, calling for restrictions on Bitcoin for this reason is inconsistent.

One area where those who are unfamiliar with Bitcoin sometimes try to claim victory is the trade of information goods, the production of which involves victims, including child pornography, snuff films, etc. However, this is where Bitcoin’s greatest strength for good reveals itself. Remember, every Bitcoin transaction is memorialized indelibly in the transaction record—known as the blockchain—at the heart of the Bitcoin protocol. For trade in this kind of product or service to flourish, it has to avoid attracting the attention of investigators (i.e., remain small in scale), and all parties to the transactions must maintain a very high level of financial hygiene, which is a lot to ask of any target market. The likelihood that some sleazy pervert would slip up somewhere is non-trivial, and investigators or vigilantes would be able to follow the chain of transactions backward and forward in time until they could connect the transaction chain to an identifiable person.

Even if the supplier maintained a separate account for each transaction, he, she, or they would want to spend the Bitcoin eventually, and the only way to get rid of it anonymously would be to dribble it out as small face-to-face transactions for cash. In other words, Bitcoin is ill-suited for large-scale organized crime rings, except those run by individuals who are very technically adept. Even if Bitcoin were eliminated somehow, such individuals should have little difficulty coming up with alternatives. Again, the problem is not with Bitcoin, per se.

This leaves the elephant in the living room: victimless crime, including recreational drugs, moonshine, gambling, prostitution, etc. While anti-Bitcoin activists point to Silk Road and other similar sites, they ignore the fact that drugs are easy to acquire even in prison, ‘escort’ agencies advertise with impunity in US cities and accept payment online via credit card, gambling is legal in many jurisdictions, and all without cryptocurrency. To allege that Bitcoin is going to enable more individuals to engage in activities that injure no one is to complain about something that is difficult to construe as a problem worthy of state action rather than public education and social activism.

While it is true that one can use Bitcoin for illegal purposes—as one can use US dollars, euros, and laundry detergent—many of those purposes are illegal only because someone in power has declared them to be. In a democratic republic, when large numbers of individuals routinely violate a victimless crime statute, this suggests that the statute is in error and not the people. With regard to activities that injure others, Bitcoin and other blockchain-based cryptocurrencies should be seen as a boon to investigators.

None of the foregoing should be misconstrued as glibly ignoring human tragedy. Quite the contrary, widespread Bitcoin adoption could facilitate investigation where the jurisdiction-based international banking system does not. Those who criticize Bitcoin as a financial medium for criminals do Bitcoin users and crime victims a grave injustice.

Invest accordingly.

Prof. Evans

Jun 282013

Much talk about Bitcoin centers on the claim that it represents some kind of existential threat to the US dollar (USD) specifically, fiat currency generally, and maybe even the nation-state as a social institution and organizational structure. Considering that the total value of Bitcoin in circulation today, in June 2013, is approximately USD 1.25 billion, or 2% of Carlos Slim’s personal portfolio, one might easily conclude that Bitcoin fanboys are drunk on their own fumes and perhaps getting just a little bit ahead of themselves.

Deflating Inflation Fears

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).”

If it fulfills even some of its potential, then Bitcoin could mitigate USD inflation, by increasing the economically relevant supply of available goods and services via the reduction of transactional friction, especially across borders and among the unbanked.

As things stand, a consumer in Suburbia is restricted to local merchants who will accept fiat cash and equivalents, stored-value cards, or cards tied to the banking system, on the one hand, and to online merchants who will accept stored-value cards, or cards and online derivative services tied to the banking system, on the other hand. That’s pretty much it.

Many of the payment systems that are tied to the banking system are either expensive or impossible to use across borders. This means that the supply of goods and services available to the Suburbian consumer is constrained by legacy and political inefficiencies in the international banking system.

The World’s Second-Largest Economy

With virtual currencies generally and Bitcoin specifically, consumers in Suburbia can buy goods and services from suppliers in Outland that hitherto have been out of reach, meaning that they effectively do not exist from the Suburbian perspective. While this might seem trivial to a Suburbian whose entire economic life is spent, as it were, in Suburbia, it is a daily headache for Outlandish suppliers and consumers, who comprise a rather significant economic force.

G’won… Click on the video!

For example, it is very difficult for local hotel operators in much of Latin America and the Caribbean to accept credit card payments directly from foreign guests as deposits prior to travel. This means that the foreign guests will tend to stay at hotels run by large international chains, putting the local hotels at a severe disadvantage. If a hotel operator in Latin America or the Caribbean accepted Bitcoin, even if only for the initial deposit, then anyone in the world could make reservations easily, and the effective worldwide supply of hotel rooms would increase.

This same story can be told for as many goods and services as one can imagine: coffee from small-scale roasters in Central America, small-label hot sauces from sub-Saharan Africa, local distilled spirits from the Caribbean, textiles from Southeast Asia, crafts from pretty much everywhere, personal services, software development, graphic design, world music, etc.

Before one dismisses the total value of small-scale global trade, one should consider that during the 2012 presidential campaign, Pres. Obama raised tens of millions of dollars in small-sized contributions, and that 83% of the world’s population lives outside the OECD. This same e pluribus magnum power of large quantities of small transactions is the driving force behind crowdfunding, which also can be facilitated globally much more easily with Bitcoin than with legacy options.

In the video above, Robert Neuwirth refers to the worldwide informal economy as the world’s second-largest economy. And, they don’t have bank accounts, credit cards, or access to capital markets, but they do have mobile phones, many of which can run Kipochi, even if they do not have smartphones that can run a Bitcoin wallet.

Ponder that for a moment, before reading further.

Somewhere in Nairobi, some street vendors are carrying more powerful financial technology in their pockets than 90% of the Suburbians reading this have in their whole houses.

Fear, Uncertainty, and Doubt

Bitcoin could essentially conjure into existence for Suburbians the goods and services produced by 5.75 billion potential trading partners in Outland that currently might as well be in some parallel universe. In so doing, the USD/stuff ratio (i.e., price level) could fall, even if the numerator (USD money supply) continued to grow at historically unprecedented rates, so long as the denominator (cool stuff from Outland) were allowed to grow even faster.

That’s right, widespread Bitcoin adoption could mitigate inflation! Those who claim the opposite assume that Bitcoin will supplant the USD for existing transactions, and that the two payment media will vie for shares of a fixed-sized pie, like two dogs fighting over a bone, which is silly. Chinese refinery operators are not going to buy Saudi Arabian oil with Bitcoin any time soon, as the percentage savings would be less than trivial. The USD will continue to function where legacy systems work well, and Bitcoin could open markets that have never existed before, if allowed to.

One concern that one comes across with distressing frequency is that tax collection might be made more difficult, if large numbers of Suburbians started transacting in Bitcoin, but there are alternatives to income taxes that can be as progressive as policy makers want them to be, including a national land tax based on assessed value, luxury goods taxes, automobile taxes based on sale price, etc., and tax collectors still can demand that all taxes be paid in local fiat and charge a conversion tax on Bitcion exchanges into the local currency. These suggestions should not be mistaken for a paean to the social welfare state, but merely as evidence that the taxation critique of virtual currencies is a red herring. Similarly, concerns about money laundering and terrorist financing are overblown, especially given the existence of Bitcoin’s publicly available blockchain, which records every Bitcoin transaction that has every been cleared and every Bitcoin user—including law enforcement and taxation agents— has access to.

Setting aside the red herrings, straw men, and other knee-jerk overreactions from luddites, the real issue is how Bitcoin can grease the wheels of small-scale global commerce, thereby removing the vast amount of friction from transactions across borders… which could ease inflationary pressure on the USD.

There’s Nothing to Fear but Fear, Itself

Should bankers be afraid of Bitcoin? Absolutely not! They can earn from the exchange into and out of Bitcoin, serve as escrow agents for Bitcoin users who prefer not to keep their holdings under a proverbial mattress, they can facilitate Bitcoin loans, use Bitcoin as a reserve asset, etc.

Should regulators be afraid of Bitcoin? No more so than any other commodity. In fact, perhaps even less so, seeing as how commodity markets are largely unregulated; it is the commodity derivatives markets that are regulated, and Bitcoin is a commodity, like gold, oil, or wheat, and not a derivative, like an option or a future. Now, if people start issuing options and futures contracts on Bitcoin, the of course regulators will have quite a lot to say.

Should law enforcement agents be afraid of Bitcoin? Hardly! The blockchain that memorializes every Bitcoin transaction for posterity can be read into a database and sifted every way imaginable using Big Data techniques. Also, it is remarkably easy to set up a sting operation with Bitcoin, which already seems to be happening.

Should tax collectors be afraid of Bitcoin? Perhaps, if their goal is to tax Bitcoin-denominated transactions that do not intersect with the banking system. However, anything that touches the banking system directly is recorded in accordance with banking regulations, and anything that touches the banking system indirectly is likely to drag the tax evader’s fingerprints through the blockchain, which is available to all without a subpoena.

Welcome to the 21st Century

Bitcoin is part of a larger transition away from the capital/labor economy to the service/knowledge economy. Welcome to the Age of Decadence, where disruptive innovations in engineering, entrepreneurship, and entertainment are announced with mind-boggling frequency. If government legislators and regulators clamp down on the work of frighteningly intelligent and disobedient young men and women, then that work will go to where it is tolerated, even if not embraced, per se, thereby impoverishing the populations that the governments are supposed to serve, protect, and represent.

Skype and Twitter are making a joke of national telephone monopolies. Remote collaboration tools are making a joke of immigration restrictions, and thus labor regulations. Free and open source software and hardware development tools are making a joke of patent and copyright regimes. The only way to stop or even slow this process would be to disconnect your country from the Internet, and, seriously, do you really want to do that?

Some legislators and regulators will try to shovel back the tide, and their people will be held back, as were the people of the USSR, Ghaddafi’s Libya, the military dictatorships that once reigned in Latin America, and Burma, Cuba, and North Korea today. Other legislators and regulators either will embrace or at least tolerate the inevitable change, and their people should fare well. Yet others will strike some middle path, with varying results.

What US officials in the Federal Reserve, the US Treasury, the Department of Homeland Security, the Internal Revenue Service, etc. do is anyone’s guess. It is obvious from my comments here what my hope is, and I continue to live in the USA.

If there are any Hortons in Congress… yop.

Invest accordingly.

Prof. Evans

May 062013

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.”

Invest accordingly.

Prof. Evans

May 062013

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?
Someone else.”

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.

Invest accordingly.

Prof. Evans