Bitcon . . .? By Eric Peters

Call Eric Peters Bitcoin skeptical. From Peters at ericpetersautos.com:

One of the problems with “crypto” is just that – no one seems to know exactly what it is.

Or at least, no seems able to explain what it is.

Somehow, a digitized online representation of a “coin” has immense value, though what gives it any value is difficult to understand. It is not backed by precious metals. It is not issued by a bank.

It’s just there, on the screen.

The willingness of a sufficiency of people to accept that it has value is what gives it value. Dirt could work on this principle. To be fair, crypto is not materially different from U.S. dollars, which have value chiefly because people accept them as having it.

The pieces of paper themselves, have no more intrinsic value than the digitized representation of a “coin” online.

And that of course is the primary danger of both. They have value only because someone (speaking figuratively here) assigned it to them and because others agree to that estimation of value, which isn’t moored to anything, really.

We all pretend the “dollars” – or “coins” – themselves are things of tangible value. That works just as long as it does. Which probably won’t be for very long.

Now, the pieces of paper issued by the private cartel of banks that control their supply are “backed” by the “full faith and credit of the United States,” for whatever that’s worth. And it is probably worth something. Not much, given the value of a “federal” dollar has declined by more than 90 percent since the “federal” reserve began issuing these pieces of paper more than 100 years ago. The value of “crypto” has generally tracked in the opposite direction, a phenomenon that has made it very attractive to people trying to figure out a way to staunch the seemingly unstoppable bleeding out of the value of their money. It’s tempting to transfer “dollars” into “coins” when “coins” seem to hold rather than hemorrhage value.

Continue reading→

8 responses to “Bitcon . . .? By Eric Peters

  1. The writer gets it exactly backwards. Yes, you can go down to the local store and buy an orange with cash. But it won’t really be anonymous. There will be cameras and surveillance on the way to the store, at the store, and on the way back. And it is almost impossible to make a large purchase with cash.

    Cryptocurrencies offer greater anonymity. Yes, there is a record of every transaction, but that record is not *necessarily* tied to you. Different currencies have different levels of security. Most cryptocurrencies are not actually encrypted. However, the transactions are tied to wallets and not people. Certainly, you can be sloppy and lose that anonymity — there are all sorts of places where you can make a mistake — but the potential is there for the careful.

    Further, of course, privacy is not a toggle. It is not either zero or 100 percent. Each act that one takes to increase privacy is an incremental step, and the acts work together.

    I think of cryptocurrency as a little like VPN for money. VPNs are great. Everybody should use them. But they aren’t foolproof. You can leak stuff. ISPs can do traffic analysis. Etc. But it’s better than *not* using a VPN. And chained VPNs are better than single VPNs. Similarly, cryptocurrency is a useful tool. But it isn’t foolproof. It is, however, better than nothing.

    Because no single privacy habit is perfect doesn’t negate the effort or the cumulative effect of concerted multiple actions to maintain privacy discipline.

    Liked by 1 person

  2. hh475: No, my likely friend, the author has it exactly right. Should you choose to the article that follows, I previously penned it in response to one posted on SLL that was touting the benefits of “crypto.” Perhaps you will find it useful?

    CRYPTO CURRENCY TO REPLACE THE PAPER DOLLAR?

    Well, perhaps. There is a reason, however, it is not called “crypto money.” It is not “money” – any more than the dollar is actual money.

    Aristotle defined the necessary attributes of money over two-thousand years ago. He argued that a proper money must possess, durability, portability, and divisibility. It must possess “intrinsic” value and be a stable “store of value.” These attributes are timelessly-essential because they are driven by human nature and Reason. Why?

    Individual awareness and opinion, together with the judgement upon which said opinion is presumed to be based, precipitates value(s). This, in turn, precipitates whatever action(s) might be taken, in response, to gain or keep said values.

    To the extent such judgement is in accord with the facts of reality, the actions taken in response will then be confirmed as rational (consistent with gaining or keeping said values). When viewed not individually, but collectively, such actions constitute a market – THE market, for ANY presumed value. The market for money is no different.

    I am reminded of a common mistake made by many advocates of freedom, who properly see both the utility and privacy aspects of crypto-currencies as of great potential value. They fail, however, to appreciate the context in which said potential utility and privacy arises.

    Such advocates correctly identify the coercion and injustice that flow therefrom, that an absence of freedom precipitates. They then embrace a “market” response to it. In error, they elevate said response to where it becomes THE solution, as opposed to it being but a contextual solution – one existing because of the context in which the thought-to-be solution deals with temporal facts. Temporal, because of the temporary absence of what would otherwise be “the natural order of things. “Natural” being the “order” (context) when freedom prevails.

    The so-called “black market” is a perfect illustration of this phenomenon. It is a “market” response to a temporary absence of freedom surrounding a specific commodity, product, or service. Said black market representing a “disfigured” one driven into existence by legal sanctions/prohibitions. Consequently, upon a return to the “natural” free market, said black (disfigured) market would immediately end!

    Gold and silver became, and have remained, as money because of individual awareness, opinion, and judgment – actions then taken by billions of individuals over 6000 years of recorded history. Just as importantly, the actions taken by others in response, is equally relevant. The former group acting in concert with their freedom to do so, the latter seeking to institute impositions on that freedom.

    Because they best represent Aristotle’s timeless reasoning, gold and/or silver in one’s possession need no other values in one’s possession to be recognized and accepted as an “intrinsic” (contextually) value – specifically, as a stand-alone medium of exchange. Conversely, Crypto-currencies require the existence and “certainty” of a profound technological infrastructure., just as paper money requires paper, ink, and of crucial necessity, a printing press and the legal sanction for its use.

    Should I have the freedom to exercise my opinion, judgment, and remain free to pursue my values in response, I know which form of money of the two on which I will ultimately depend. To rely upon to best represent, secure, and protect the time and effort that constitutes the term of my life.

    During freedom’s hiatus, I may be forced to act differently, but upon its return, I will once again demonstrate through opinion, judgment, and actions, why Aristotle’s insights – now of over two-thousand years, remain timelessly instructive.

    For Bitcoin, or any other crypto-currency, to serve as a substitute for actual “money,” – such as did paper when it began its substitution for same, it will have to, at a minimum, be easily convertible into, ………………. wait for it, the money of Aristotle.

    Failure to be able to do so, it will eventually undergo the same fate as every other “currency” in history has undergone. An inescapable fate when said replacement was not convertible into actual money “on demand.” What actual money?

    The “only” money that results from the exercise of individual awareness, opinion, and judgement – i.e., FREEDOM.

    Dave

    A couple of final points and essential perspectives.

    The true meaning of the gold standard is not gold, any more than the value of a piece of paper money is the value of the engraving. The true meaning of it is a convention – and the faith of that convention must be kept, not in gold, but in credit!

    This is (was!) the modern function of gold – to limit the amount of “money” (currency and credit – in whatever cloaking device!) that may be willfully, irresponsibly created and set free.

    Gold is the “accidental” (independent awareness, opinion, judgement) figurehead in which the convention was embodied. It might be almost anything else, except that after long experience it was found that gold served better than anything else, as the figurehead.

    For crypto’s, or any other cloaking device to become actual money, is, I am afraid, impossible. Unless, of course, it was immediately convertible into gold (or silver) on demand.

    Then, of course, it would be seen for what it is. Just another “currency.”

    Respectfully,

    Dave

    Liked by 2 people

  3. OK. So, let’s try that with a real world problem.

    I live in the US. I run a anonymous virtual server registered to a random person in Ankara Turkey leased anonymously from a company in the Netherlands with a domain registration assigned to a random person in the Ukraine. This cost me a total of 60 Euros worth of bitcoin to set up, and 10 Euros a month to maintain, and was done using anonymous wallets. It took me 30 minutes to set this up, and it is *very* difficult to trace it back to me, if possible at all, without using social engineering and similar efforts.

    I *also* have an 1857 Gold Indian Head dollar in my closet. But for the life of me, I can’t figure out how to turn that into an anonymous server in the Netherlands. How would you do that?

    Like

  4. hh475: By virtue of offering the example and asking the question, it is apparent you have missed my fundamental point.

    In answer to your question however, in today’s “absence of freedom,” it would be impossible to do without selling the Indian, and then using the proceeds to achieve your goal.

    In the full glare of freedom, I have no idea what type of currency you, me, and the market, would determine as “best.” Whatever it might be, it’s value would still ultimately be determined based on its relationship to money compliant with Aristotle’s timeless criteria – unless impeded by subsequent legal sanction/prohibition.

    in that event, just as is now the case, it would be determined by the market but taking into account said “impediments.”

    Liked by 1 person

  5. hh475: Sorry for the incorrect link above. The correct one I, apparently, cannot copy. The article is from a new provider to which I subscribe titled “Doomberg.” In lieu of the link, here is the entire article with apologies to Bob for such a lengthy addition.
    Dave
    Dollars Ex Machina

    Doomberg
    Jan 25
    “When your outflow exceeds your income, your upkeep becomes your downfall.” – Jim Rohn

    In late 2016, we were approached by a brilliant entrepreneur with an interesting investment opportunity. We mask the full details here to protect anonymity but believe us when we say this person has a knack for being incredibly early to imminent megatrends at the bleeding edge of technical and social disruptions. His pitch involved a company he and some colleagues were starting that had something to do with “bitcoin,” which he described to us as a form of “crypto currency.” We knew precious little about bitcoin or crypto currencies back then, nor did we understand what the newly formed company intended to do, but in a classic “bet the jockey, not the horse” move, we agreed to participate in the seed round at the minimum investment level. We immediately marked this equity investment to zero on our personal balance sheets.

    In the following months, we engaged in a series of philosophical conversations about crypto currencies with our friend to learn more. Concurrent with this quest for knowledge, the paper value of our modest investment began to soar, which had the understandable effect of increasing the urgency of our research. We distinctly recall drawing two circles on a piece of paper. In the circle on the left, we wrote “real economy,” while in the circle on the right we wrote “crypto universe.” We drew two pipes between the circles – one flowing into the crypto universe and the other flowing back to the real economy – and labeled both pipes with “fiat currencies.” While we understood how fiat currencies from investors could flow in, we failed to grasp what could be occurring within the crypto universe that would create more fiat currency for investors to take out at a later date. There seemed to be many brilliant people excited to be working in the space and using a technical language foreign to us, so we concluded that our inability to understand this rather pertinent issue was a fault of our own making.

    Then bitcoin went bananas in late 2017.

    They say we are shaped by our experiences, and as bitcoin went parabolic it certainly impacted us. Watching our modest foray into a little understood technology skyrocket in paper value several hundredfold left a jagged mark as it crashed with the rest of the crypto market back to where we had always kept it marked – zero. Along the way, we did make a few half-hearted efforts to get the outflow pipe turned on – life-changing fortunes are worth bending over and picking up, after all – but since we could not get an answer to our foundational question, we never held out much hope of converting paper into reality. There would be no lambos for the green chicken team.

    It is through this tortured lens that we read with some interest a recent article by Sohale Mortazavi, published in the socialist magazine Jacobin. Sporting the provocative title Cryptocurrency Is a Giant Ponzi Scheme, the author pulls no punches in stating what he really thinks of the entire space. What caught our eye was his observation that cryptos aren’t merely a zero-sum game – in fact, inherent in the design of the entire system is a negative-sum occurrence in which the outflow pipe of fiat currencies available to investors must always be smaller than the inflow pipe (emphasis added throughout this piece):

    “The majority of cryptocurrency mining is now conducted in commercial mining farms, essentially huge warehouses running thousands of high-powered computer processors day and night. The electricity expended mining Bitcoin and other cryptocurrencies is rapidly approaching 1 percent of global usage, which is famously greater than the total electricity consumption of many smaller developed nations.

    Given that cryptocurrencies don’t produce anything of material value, this enormous waste of resources renders the whole enterprise a negative-sum game. Investors can only cash out by selling their coins to other investors — but only after the miners and various cryptocurrency service providers take the house’s rake. In other words, investors cannot — in the aggregate — cash out for even what they put in, as cryptocurrencies are inefficient by design.”

    There’s simply no arguing that if one uses fiat currencies as the determining scorecard, the crypto universe is a Ponzi scheme. The structural costs of mining – which must ultimately be paid for using fiat – aren’t the only thing that shrinks the outflow pipe for regular investors. Outright theft of fiat deposits, whether via hacks, rug pulls, or illegal front-running by lawless market “participants” are a substantial drain on the total fiat floating around in the crypto universe.

    Before the bitcoin maxis fill our comments with well-worn whataboutisms, we readily concede the real economy is filled with government-backed Ponzi schemes, legal or otherwise. Take the US Social Security system. New money will forever be needed to pay off old promises and absent the US government’s ability to print unbacked fiat, the entire edifice would collapse. But those systems are blessed by the state, and – by and large – the crypto universe is not. More critically, we believe precious few crypto participants today are in it to support their belief that the final chapter for fiat currencies has been written. They’re in it as a trade and are hoping to leave the crypto universe with more fiat in their traditional banking accounts than they entered with. Most won’t. If you don’t know who the sucker is at the digital poker table, you are probably a HODLer.

    Just how much fiat is sloshing around in crypto universe? Because of the fraudulent sleight of hand of fiat clones called stablecoins, crypto investors routinely mark their books in fiat currencies like the US dollar, when in fact they should be marked in the underlying stablecoin, like tether. Bitcoin is not worth 36,000 US dollars, which is about where it is “trading” today. It is worth 36,000 tethers, the dominant underlying stablecoin in which it transacts.

    On a recent appearance on the Crypto Critics’ Corner, which published yesterday, we discussed this issue at length (the hosts of the show, Bennett Tomlin and Cas Piancey, can be followed on Twitter here and here, respectively). If one assumes the total value of the crypto universe is marked at $2 trillion, and if the total amount of hard fiat (pun intended) in the system is the equivalent of only a few tens of billions of US dollars, then the leverage ratio of the crypto universe is enormous when measured in fiat. In a true market panic, which may or may not be unfolding as we publish this piece, we suspect many investors would be stuck holding the bag without recourse. These are largely unregulated markets where hacks, thefts, and total exchange collapses are routine.

    Our focus on mapping the fiat currency moving in and out of the crypto universe leads us to update our readers on two of the highest profile names in this space: Michael Saylor, CEO of MicroStrategy, and Nayib Bukele, President of El Salvador. We had previously written about Saylor’s adventures with bitcoin here, and Bukele’s here. Both are facing renewed pressure as the crypto markets wobble, both are on the hook for substantial debts denominated in US dollars, and both risk potentially losing control – as unlikely as that might seem now.

    For Saylor, we (and many others) have described the dangerous game he is playing, having issued $2.2 billion in dollar-denominated debt to buy bitcoin. This includes $1.7 billion in two convertible notes, which were then subsequently primed by the issuance of a $500 million senior secured straight bond above them in the capital table. The weakest of the convertible notes has a conversion price of $1,432 per share, and with MicroStrategy’s stock trading near $370 a share overnight, the convert option is deeply out of the money. As of yesterday’s close, the bonds are trading in distressed territory, catching only 62 cents on the dollar for a 9.6% yield to maturity.

    As first pointed out to us by Mike Green on Twitter, Michael Kao – a convertible bond expert – has been speculating for many months that Saylor could lose control over MicroStrategy in the event of a deep drawdown in bitcoin’s value. Kao argues persuasively that Saylor’s fiduciary is not just to his shareholders, but also his debtholders, especially if the company enters a zone of insolvency. MicroStrategy owns more than 124,000 bitcoins, worth over $4 billion at today’s prices. Note that Saylor doesn’t own these bitcoins, the company does – making Saylor’s personal conviction less relevant. The company’s board might decide to turn off their laser eyes in a time of true crisis despite Saylor’s current position as board chair. If the company liquidated its bitcoin into a downdraft, we suspect we’d find out just how much fiat exists in the crypto universe rather quickly. MicroStrategy’s bondholders can’t be paid back in tethers, after all.

    Liked by 1 person

  6. So, the short answer is that gold is useless for solving my problem unless I sell it and buy bitcoin. So, for today, cryptocurrency has an important use that has no other practical substitute — which is in and of itself a kind of “intrinsic value.”

    It’s interesting that you list all these properties of “money” versus “currency,” but then throw it all away at the end. You mention intrinsic value, stability, etc. But then note that gold, in fact, has *none* of these intrinsically.

    You write:

    “The true meaning of the gold standard is not gold, any more than the value of a piece of paper money is the value of the engraving. The true meaning of it is a convention – and the faith of that convention must be kept, not in gold, but in credit!

    This is (was!) the modern function of gold – to limit the amount of “money” (currency and credit – in whatever cloaking device!) that may be willfully, irresponsibly created and set free.”

    Well, OK. right back atcha.

    The true meaning of bitcoin is not bitcoin, any more than the value of gold is gold. The true meaning of it is convention — and the faith that the convention must be kept, not in bitcoin but in credit.

    This is the modern function of bitcoin — to limit the amount of “money” (currency and credit — in whatever cloaking device) that may be willfully, irresponsibly created and set free.

    One of the primary differences between bitcoin and dollars, for instance, is that it is physically impossible (for now) to simply print a bucket more bitcoin. The structure of bitcoins disallows this. In fact, one of the big *problems* with bitcoin is its unyielding stability in terms of number of transactions (called the bitcoin scaling problem).

    But, as you note, it is fundamentally a matter of convention, not true intrinsic value. Bitcoins are “money” if and when culture decides it is. No more, no less. A significant portion of culture is buying into the convention right now.

    The stuff you quote about the dangers of speculation in bitcoin are no different than the dangers of speculation in anything. If MicroStrategy went out and bought it’s total market capitalization in gold, that would be wacky, too. Bad judgment involving speculation isn’t bad judgment because it happens expressed in bitcoins. It’s because big bets are always a problem.

    As far as “intrinsic value” goes, bitcoin has intrinsic value in its *utility.* The reason people like bitcoin is because of the reason it was made — the ability to perform the kind of transactions that I perform. The fact that it’s impossible to provide and alternative to bitcoin for the purposes for which bitcoin was developed is a demonstration of its intrinsic value.

    That value may be inflated or deflated at any given time because of speculators, just like any commodity, but the value remains as long as the algorithm holds. Bitcoins will likely be worthless in a couple of decades when quantum computing breaks the blockchain algorithms. But again, as with all sorts of commodities, values change over time. When that happens, people will transition out.

    Liked by 1 person

  7. hh475: A number of entirely valid points.

    Again, unless or until human nature changes, or change occurs in either the proportions or contents of the physical elements that currently exist, the “currency” that offers the greatest utility to freely-acting human beings will be the one to dominate – be it paper, bitcoin, smitcoin, or “illusorium.”

    Those same freely-acting humans will also, when they individually determine the necessity to do so, will freely want to “convert” their bit/smit/rock/illu into gold money, or something subsequently thought to possess even greater “intrinsic” (contextually) value. One that is concurrently durable, portable, divisible, and remains a “store of value.”

    Have enjoyed the exchanges.

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.