BITCOIN OR BITCON?

Let me make it very clear:  I am an avid supporter of cryptocurrencies, of which Bitcoin is arguably the most dominant at present.  I own bitcoins, and consider every retreat or crash in the bitcoin price as a buying opportunity.  I do not speculate. I buy and hold for the long term.  I encourage my friends and colleagues to buy bitcoin and take the time to explain to them how it works (not easy when dealing with a non-tech friend).   I am, as they say, “in it for the ride”.

That said, I also warn my friends that we are in uncharted territory here.  And as any pioneer will tell you, uncharted territory is fraught with danger.

Bitcoin supporters frequently point out that the great flaw in fiat currencies is precisely the word “fiat”.  A fiat currency is a currency that has no intrinsic value.  It has value because a government says it does, i.e. the government has issued a fiat declaring it to be so, and then, when the citizens accept the government’s fiat (which they usually do having little or no alternative), the currency becomes legal tender.  Given the questionable integrity of governments one must rightfully have grave concerns about the reliability of such a currency.

Furthermore, because governments and/or their central banks control the fiat currency, they can inflate or deflate that currency’s value at will, by either reducing or increasing how much of that fiat currency is in circulation, either by withdrawing some from circulation (literally burning notes or pressing delete buttons) or putting more into circulation (printing more or typing a one followed by a couple of zeros on a spreadsheet).  The quantitative easing (QE) programs of many governments since 2008 is an example of the printing side of this equation.  Markets are literally being flooded with money – trillions! - created out of thin air, with the result that the inherent value is decreasing.  The current currency devaluations have led to the current global “currency war”.

Like a nuclear war, a currency war carries the danger of mutually-assured destruction (MAD).  As one country devalues to give its currency competitive advantage in the global markets, so another country devalues its currency even more to counter and negate that advantage.  A global  tit-for-tat reaction is triggered and countries find themselves locked in a race to the bottom.  At some point a tipping point is reached and then…chaos.  Hyperinflation or severe deflation or stagflation, massive economic turmoil and even war.  Citizens wake up in a post-apocalyptic  economic wasteland.  Once financially sound families find themselves , through no fault of their own, in queues at soup kitchens.

The global economy is currently experiencing  a currency war led, most notably, by the USA and Japan, with the European Union and the UK hot on their heels.  Make no mistake, these are big guns, and they are firing wildly.  There will be blood.  You can run, but you cannot hide.  Or maybe you can.

Bitcoin supporters, having pointed out the above, claim that Bitcoin offers a way out. Follow the literature, the tweets and the soapboxes and you will hear the following:

·         Bitcoin is not issued by government fiat.  As such it is not controlled by any government or central bank anywhere in the world. Bitcoins are issued by a computer protocol in the cloud, which has (so far) proved itself impervious to hacking or manipulation.

·         Consequently the Bitcoin money supply cannot be inflated or deflated at the whim of a government, or anybody else for that matter.

·         The Bitcoin protocol is programmed to issue only around 21 million bitcoins by the year 2140, at which point no more will be created.  In other words, the money supply remains fixed thereafter and the value of a bitcoin determined solely by unfettered supply-demand market forces, i.e. the value of a unit determined by perceived value.

·         Bitcoins are stored with the people who own them, and can be transferred peer-to-peer.  This means that banks and central banks are removed from the equation with an attendant drop in transaction fees and general “bankster corruption” and, very important – central bank manipulation of value is negated.

This all sounds good.  And it is.  But show me the gain without risk and I will show you La-La Land.

Much has been written regarding the inherent (and very real) risks attendant upon the storage of your bitcoins, the reliability of your bitcoin client wallet, and the vulnerability of bitcoin exchanges to state regulation and even shut-down (using the criminal use of bitcoin as an excuse).   This author is of the conviction that these are issues that the profit motive will incentivise some clever people  to solve in due course.

But the issue that is seldom addressed or discussed is ironically one that lies at the very heart of Bitcoin’s apparent strength – that it is not a fiat currency.

No-one really knows for sure who created the Bitcoin protocol in the first place.  There is a name – Satoshi Nakamoto – but whether this is one individual or a group, a pseudonym or the actual name, nobody knows…for sure.  And I mean for sure.

So here you have a currency that has been created, not by a government, but by a mystery. Citizens can call a government to account, even storm its Bastille (or White House) if they choose, but how do you call a mystery to account?  More important:  How do you know for certain, as in one hundred percent certain…and let me repeat that:  ONE HUNDRED PERCENT! – that the apparently impervious Bitcoin protocol really is just that…impervious…especially to manipulation by its creator/s.

Yes, avid Bitcoin supporters will tell you that no-one, not even the mystical Satoshi Nakamoto can alter the protocol, and they will inundate you with techspeak, but say what they might, the Bitcoin protocol was written by a person, or persons, and as such cannot, by definition, be declared to be “untouched by human hands”.  And we all know that where human hands can go, well…things don’t always turn out for the greater good.

One thing that characterises a zealot is confirmation bias – the inclination to exclude any evidence that negates his or her belief structure and focus only on the evidence that confirms it.  There are many Bitcoin zealots.  I am not one of them.

Yes, I believe that cryptocurrencies are the future of money.  Yes, I believe that cryptocurrencies offer a place to hide from the vagaries of central banks and governments and the corrupt practices of banks. And yes, at the moment Bitcoin is the crypto to beat.

But there are also deep uncertainties involved, and only time will tell whether I used my devalued fiat currency to buy bitcoin…or a bitcon.

WHAT THE CHINESE HOUSEWIVES AND THE LITTLE DWARVES KNOW THAT THE PAPERGOLDBUGS DON'T

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One could not watch the events in April surrounding the massive naked shorts issued on gold, the sharp plunge in the price, and the subsequent gold rush for physical gold,  without shaking one's head at the astonishing levels of delusion demonstrated by the guardians of paper fiat. What did they think was going to happen when, like gangsters,  they put out a contract on gold and whacked the price overnight? People cheering in the streets?  Accolades and praise?

Perhaps they were expecting  a general panic and rush for the door.  Certainly they did not expect the Chinese housewives to lead a charge, not for the door, but deeper into the room to grab all the physical gold they could like so many little dwarves.  But that’s the thing about dwarves – they like gold.  The kind you can touch and bite and rub.

There is a form of cognitive bias referred to as ‘attribution bias’.  This describes a cognitive bias in which individuals see their own responses as the reasonable response to a situation.  In other words, you think that everyone else sees the world in the same way that you do. 

Attribution bias becomes a real problem when reinforced by ‘groupthink’,  especially when the group that is doing the groupthinking also thinks that it is cleverer than the rest of humanity.  And when there is no-one in the group to play devil’s advocate, to shout, “Hey, the emperor has no clothes!”, then you get the kind of reversal of expectation that the masters of the paper fiat universe suffered in April.  

Clearly the little dwarves did not get the message the masters intended : “See, your gold is worthless!  Get rid of it now before it loses even more value!”

Indeed, the masters of the universe must have felt a little less masterful when the sheer volume of physical gold being snapped up all around the globe, especially in the East and near-East, drove the price right back up, with one crucial before-and-after difference:  more real gold was now in the hands of the little dwarves than there was before.  I can actually hear those masters contemplating the aftermath of the gold rush and sighing (with a certain John Cleesesque on-the-out-breath tone):  “Right…” as they turned back to their drawing boards.

What these mighty masterful morons don’t get (and maybe this is a side effect of million dollar bonuses) is that while the little dwarves might not be clever, they do have common sense.  And common sense tells you that something that has retained its status as a store of value since homo sapiens replaced bartering with coin, that unlike paper money cannot be printed at will by a central bank or government, stands an infinitely better chance of continuing to store value than pieces of paper that have been around for less than a century, especially when the reliability of those pieces of paper as a store of value is faced with a very clear and present danger . 

While ordinary, non-economist-type folk  may not be able to articulate their sense of that clear and present danger using the opaque language of econospeak, they nevertheless know, down in the very marrow of their bones (where common sense lives), that the danger is very clear and very present.

Perhaps the little people know only to well that, unlike the masters of the paper fiat universe,  they will not be bailed out when  the dollar, the pound, the euro and the yen are  used for confetti  at weddings.  They know this, not as an intuition or a suspicion; they know it for certain, because when the dung hit the fan in 2008, instead of being bailed out, they saw their taxes being used to bail out the very masters that had caused the problem in the first place, while they, the little people, lost their homes and their jobs. And a few years later, when the government of a  certain little island in the Mediterranean needed more cash, they saw that government simply reach into the savings accounts held in its banks and steal the cash.

So when the banksters  issued that contract on the price of gold and it got whacked, rather than mourn and lament the price’s  passing, the little people cheered and charged.  You could almost hear them from around the globe:  "Get gold!  As much as you can.  The kind you can touch and bite and rub.  And then dig a hole in the cellar of your house and bury it like a squirrel buries acorns for the winter."

Because that’s another thing those little people know:  Squirrels might not be clever, but they have a lot of common sense.

QUANTITATIVE EASING CAN MAKE YOU SOBER

If it is an irrevocable law of physics that energy cannot be created out of nothing, then it is also irrevocable that money cannot be created out of thin air.

Money is "stored energy" -  it stores work.  When you spend money you unlock energy, e.g. the work  that went into making the candy or clothes or whatever,  for which you exchange the money.  So when you simply print money with no reference to any work done,  the energy that is stored in all the “good”money that was created with reference to work will have to spread out to cover the “bad” money that was simply printed with no reference to work, thus devaluing the “good” money. 

To use a metaphor:  If you turn one bottle of whisky into two bottles by watering it down, the whisky that you then will have will not be as potent (energised with alcohol) as the whisky you had in the original bottle of undiluted whisky.  While you may have two bottles of whisky, you will have to drink twice as many shots to get the same level of inebriation achieved before you watered the whisky down.  

If you were to buy this watered down whisky in a bar, you would be paying twice as much to get the same level of inebriation that you got when you were served whisky that had not been watered down.  In other words:  the same amount of money now only buys you half the pleasure (if inebriation is your pleasure).    Subsititute  “pleasure” with “standard of living” and you get my point. You will be paying twice as much to maintain your standard of living (getting as drunk as before) or you will be spending the same amount as you used to spend, but you will be living at half your previous standard (leaving the bar half as drunk).

This would not be a problem if your income doubled every time the purity of the whisky was halved.  Yes, you would eventually need a very large wallet, even a wheelbarrow, to carry the cash needed to pay for your whisky, but at least you would still leave the bar as drunk as before.  But, and this is a big but:  Will your income double each time the purity of the whisky is halved?   Ay, there’s the rub.

Economists argue extensively about the why’s,  the  if’s,  the how’s  and the when’s  regarding the relationship between income and cost of living.  But ask yourself this:  Does it feel like your salary is keeping pace with the cost of living?  If your answer is yes, then you are as happily inebriated as you were before;  if no, then you might want to consider to what levels of  sobriety all the money that the central banks of the  largest economies in the world are printing will drive you in the coming years.