Sunday, April 27, 2014


I recently read the archives of the blog Bitcoinism after a friend pointed me there. I found it to be an original and very worthwhile discussion of topics all up and down the Bitcoin stack, but also found it to be too quixotic for my liking. It kinda reminds me of the time back in 1995 after we bailed out Mexico and Chris Whalen mentioned my name during Congressional testimony while calling for an audit of the ESF. Lol, I mean, do you really think Bitcoin's going to equalize the masses, or that government agencies are going to open up their books to the public just like that!? Keep tilting at those windmills fellas!

Anyway, after reading Bitcoinism's archives, what I realized was that Ranvier's (Bitcoinism's author's) agenda for Bitcoin differs sharply from my own. He seems to view it as a democratizing force that could be a means to tear down concentrated, established powers that are presumably exploiting us typical well-meaning humans.

Following the lead of Russ Roberts on the other side of the Potomac, who provides the most intellectually honest forum I've had the pleasure of observing, I thought it would be a good idea to lay bare my own biases and my agenda for Bitcoin, insofar as that's possible. Hopefully this will bring additional light to the rest of my posts and why I choose to emphasize this or omit that detail.

So, what is my agenda for Bitcoin? I believe that the only thing Bitcoin can achieve, assuming it wants to be something more than an illicit underground payment system, is to be the inner core of a global monetary system that possesses only one significant differentiating feature from our current fiat-Dollar system: that its supply is on a predetermined path to 21 million units and that it relies on a system of "one node one vote" to enforce it, rather than on a byzantine FOMC to control the supply responsibly.

I might have just alienated all of my libertarian readers with that declaration. No doubt, like Ranvier, you want much more form Bitcoin. Privacy. Social justice. Empowering the unbanked. Freedom from state ownership/enslavement. I confess I only partially sympathize with such goals, but regardless of whether I do or not, I suggest that Bitcoin will neither be the central instrument of nor even the platform of such Change.

Let me start with a brief discussion of (1) why I think a "fixed" money supply is a good idea, and (2) why I think Bitcoin could deliver that. Then I'll come back and address why I think ambitions beyond that, if potentially admirable, are misguided.

My model of money is basically Austrian. I also firmly agree with Moldbug's posit that "any quantity of money is adequate"(as long as it's sufficiently divisible), as well as his claim that the foremost quality needed in modern money is to be a desirable form of savings. That is, the need for pricing information between various commodities that has been historically solved by monetary standardization is becoming less and less relevant because the Internet can give us exchange rates between any two commodities in milliseconds.

With Bitcoin, the supply is fixed by its Zeno's race to 21 million and the assumption that its network will not be co-opted by Dilutionists. With gold, the supply is fixed by the limited distribution of atoms with 79 protons on or near Earth and the assumption that it will always be cost-prohibitive to create such atoms out of its more abundant cousins. Holding both of these assumptions true, either commodity has the initial markings of an ideal savings instrument.

In contrast, fiat currencies as well as cryptocurrencies such as Dogecoin that have opted for non-convergent supply paths will always tend to "leak" value to money "creators" that savers would presumably prefer to keep for themselves. As such, it seems unlikely that savers will choose such a monetary commodity. Notwithstanding, I acknowledge it's possible that such leakage might be acceptable if the transaction costs of hermetically-sealed moneys are greater than those of leaky commodities. For example, the savings instrument of choice for many Argentines is the only-somewhat-leaky USD, which is clearly less leaky than the Argie peso, but much leakier than, say, gold.

Given that Bitcoin network transaction costs are quite small, it, like gold, appears to be an ideal form of "hard money", with the added benefit that the centralized clearinghouses gold would require appear highly vulnerable to government attack, whereas Bitcoin's distributed nature seems to make it more robust. That said, I'm quite concerned about the very real possibility of a government-led 51% attack. The only explanation I have for why that hasn't occurred already is that USG is too ignorant and internally dysfunctional for any unit to recognize Bitcoin for the threat that it is, set aside the relative pittance of $50 million-ish, and ask Bitcoin to step out of the car please Sir. But I'll come back and analyze that further in a future post.

As far as all the other various ambitions for Bitcoin, I don't think we'll see much if anything. Bitcoin will not bring about a decentralized utopia, whatever that would look like. I expect that layers of service will be built atop Bitcoin to yield the exact same level of financial privacy (or lack thereof) as with the current banking and credit card systems. Insofar as the unbanked class gains access to the Internet but presumably remains unbanked somehow, they'll still be relegated to a Bitcoin "slum" without verified identities, and I don't see how Bitcoin payments will be significantly more convenient than whatever currency they have on hand in most cases.  Bitcoin micropayments too, are clearly uneconomic, and require an off-blockchain solution, which probably means a centralized solution, which means that Bitcoin offers little to nothing on that front.

In sum, Bitcoin is interesting because it offers a hard money global payment system, and so far appears robust against governments sending troops into specific locales to destroy and seize assets, which is something that cannot be said for gold.

Attempts to steer the Bitcoin protocol, its mining infrastructure, and the businesses atop it in a direction premised on destroying hierarchies and providing social justice are, according to this blogger's bias, misguided at best and will be fatal for Bitcoin at worst.


  1. Speaking of bias -- here's mine.

    Those that were early adopters of bitcoin stand to make an absolute killing if there's really a restandardization. Assuming $2.7 trillion total in circulation (M1) and a fully diluted bitcoin count of B21 million, a bitcoin wallet of approximately B500 thousand would equate to $64 billion.

    It seems extremely unlikely to me that those in power would concede that much wealth to a group of early adopters who, essentially, bought a lottery ticket. I think this is a significant hurdle when one considers the likelihood of bitcoin supplanting the USD.

    Please tell me if you think my math is wrong. Interested to hear your thoughts.


  2. To the point of speculating what the market cap of Bitcoin would become under restandardization, I'm truly not sure what a reasonable target would be. Starting with my Bitcoin-as-Primary-Dealer-Network analogy, the ~$4 trillion monetary base would be the proper figure. Alternatively, one could look at gold's current market cap, even without its being a formal monetary standard. I've never come across an estimate of that looks completely legit, but I think it's somewhere in that ballpark as well. But arguably, neither of them has fully displaced the other as the one true monetary commodity, and if Bitcoin were to ever win, its market cap would be somewhere above either of them, or perhaps both combined. And possibly much much higher if one buys into the idea that the USD supply should be measured how Moldbug describes it, folding in the sum of all sorts of USD-denominated assets (subprime loans etc.) that have realistically become USG liabilities.

    I concur with you that it's unlikely that those in power would concede much wealth/power to Bitcoin early adopters, all else equal, but if none of them are savvy enough to kill Bitcoin dead before it achieves critical mass, and if an ambitious prince in waiting sees an opportunity to ride Bitcoin into a position of real power, those (we?) lottery ticket holders might luck out.