Bitcoin: currency, commodity or consensual hallucination?

If ducks collateralise Duckaroos - what collateralises Bitcoin? Nothing. What central bank or government stands ready to bail Bitcoin out? None. If the US economy props up the US dollar, is there a diversified, productive and growing economy propping up Bitcoin? Nope.

The value of a Bitcoin lies in consensus. Today we agree that a Bitcoin is worth around US $7000 and so today it is. If I stop believing that and and wish to be rid of my Bitcoin then someone will buy it from me for the price they believe it is worth. Bitcoin will be worth nothing only when last person on earth believes it is worth nothing.

Consensus works here because participation is voluntary whereas your participation in the fiat currency of your nation state is compulsory. “Legal tender” does not mean it is only lawful to accept fiat currency as payment (you can accept ducks, shells or Vegemite jars if you like) it means that it is unlawful not to accept the national currency to settle an account. 

The value of a paper dollar is enforced by the state whereas the value of crypto is left up to us to decide, or to opt out completely. Voluntary participation, freedom of choice, value through consensus – these things are what libertarian dreams are made of.

With no anchor the good ship Bitcoin drifts, flounders, floats, it soars and subsequently it is less useful as a currency than the good old Duckaroo which is pegged to and stabilised by the price of a duck.

But it was not meant to be so.

Bitcoin was actually designed to be a useful global currency with stability based on supply and demand economics. As more Bitcoin is spent on goods and services the more transactions are processed by computations that create more Bitcoins that satisfy the increasing demand.

This process intentionally becomes more difficult as it progresses requiring increasingly more time, computer power and energy to create new Bitcoin. The total number of coins that can be created is capped at 21 million to ensure that supply should not exceed demand.

So you can't do with Bitcoin what Uncle Donald does with Duckets. You can't mint at will the fresh coins you need to asset- strip your neighbours farms and enslave the townsfolk by constantly diluting and therefore devaluing their hard earned dollars. This is why nation states are not too keen on the whole idea of a decentralised global currency and why libertarians are.

But this is academic. If you are holding Bitcoin you bought last year at 15,000 dollars you might well find your purchasing power has halved in less than a year due which is a hell of a lot worse than your national inflation rate - unless you live in Venuzuela.

Why is it so?

Because Bitcoin's creators did not account for rampant price speculation for profit which has made crypto what it is today – a mardi gras of highly volatile speculative assets.

Very few people purchase goods and services with Bitcoin and other crypto-currencies though millions of speculators trade them on exchanges everyday. Slow transfer speeds and occasionally high transaction fees contribute to Bitcoin's lack of viability as a useful currency – but you could also blame both of these factors on volatility from price speculation which can cause dramatic spikes in network congestion.

Like gold, Bitcoin has (so far) failed as a currency but succeeded mightily as store of value with a total market capitalisation of around 170 billion US dollars. One whole Bitcoin is generally considered to be worth at least 6000 and has been worth as much as 20,000 US dollars. Not bad for a consensual hallucination.

Could Bitcoin replace gold as the global store of value – a safe haven for wealth under threat of war and economic collapse?

Not likely. The only thing that could replace gold is a metal more precious, more beautiful and desirable. Gold represents the romance of greed and the history of lust. It has been valuable across the globe for thousands of years. Ask anyone if their life savings were to be converted to Bitcoin or gold which would they choose – I will bet you that 99.9 percent will choose gold.

You don't need a computer to buy and sell gold. Or even a bank account. There are no whales manipulating the gold price. Bulgarians cannot hack your gold. You don't have to explain gold to anyone as every man woman and child on this planet knows what it is.

Bitcoin is an alternative to gold as a store of value to be sure. The rise and fall of the Bitcoin price in the last year was driven largely by frantic buying in Japan, China and South Korea - countries that were threatened most by North Korean aggression and the possibility of war.

In September 2017 the Bitcoin price was coming down from an all time high of nearly 5000 to less than 3000 dollars when North Korea launched a missile over Northern Japan and Bitcoin shot up 30 percent in the next 24 hours. The bull run that followed took the price of a Bitcoin to nearly $20,000 in December.

As for gold, is it a co-incidence that its price has been falling steadily since April this year when an inter-Korean summit between South Korean President Moon and North Korean supremo Kim Jong-un saw peace officially break out on the Korean peninsula ?

Both these assets will live long and prosper as a hedge against tomorrow. Both will benefit from rumours of war and impending doom.

So if Bitcoin and gold are such great stores of value could they, like ducks, succeed as collateral for a currency instead of being a currency itself?

Stay tuned as a these questions will be (sort of) answered over the coming weeks when we unearth digital gold and mint crypto currencies of our own.

Will Bitcoin save us from tomorrow (and John McAfee's dick)?

I got into trading crypto currency, such as Bitcoin, early in July out of curiosity and to flex my libertarian muscles and maybe pick up some anarcho-capitalist street cred along the way. I bought a couple of grands worth of coins then sat back to watch with interest as the whole market fell about 40 % in 48 hours. Luckily, we libertarians are made of the sterner stuff as laissez-faire capitalism requires a certain amount of sangfroid.

The price of a Bitcoin was down to US$1900 and market confidence was at an all time low. When the price started to climb eccentric cyber-security millionaire and staunch libertarian John McAfee tweeted that if Bitcoin didn't go to $300,000 in three years he would “eat his own dick on national television.”

Meanwhile, I was busy getting my shirt back without losing my pants in the process - thrashing about like a noob and down to my socks and underwear until the steady upward march of Japanese coin called NEM got me back in the black at the end of August - just in time for the Bitcoin Fork.

Bitcoin soared to a record high just short of $5000 US dollars and Bitcoin investors were given a free bonus coin called Bitcoin Cash which settled at $300 apiece. Had I traded my NEMs for Bitcoin I would have doubled my money in a few days. Then the good ship NEM started to sink and I was getting a little hot and bothered, so I called it a day, cashing out of the market and back into my life.

So as much as I would love to tell you a greed-is-good story of my triumph over the crypto markets - it is instead one of survival on the harsh and unforgiving anarcho-capitalist frontier. But I was there - I saw the First Bitcoin Crash, the Bitcoin Fork, the Second Bitcoin Boom. I saw alt-coins glittering in the darkness by the Poloniex Exchange.

And all the while I thought about Mr McAfee's dick.

We know how a Bitcoin went from $4 to $4400 in 8 years - it was through a process known as hodling. Investors bought 'em cheap and hodled 'em close. As the price went up they bought some more and hodled them through the good times and bad. These brave hodlers became the Bitcoin billionares - they get to fly on Space X and marry Miranda Kerr.

So how might a Bitcoin get from $4000 to $300,000 and save us from watching an old man perform such an obscene and intricate task three years from now?

Well, because of supply and demand.

Because Koreans love cryptos. They are buying up all the coins in the world and driving the second Bitcoin boom. While Americans are selling off their Bitcoins to realise some profit the Koreans are buying them up like there is no tomorrow.

Because cryptos, like gold, are a hedge against tomorrow, against the prospect of war and the chaos and expense of a re-unified Korean Peninsula. And since there is no end in sight to their 70 year old cold war they will continue to invest and the market will continue to grow and the price of a Bitcoin price will go up and up and up.

Imagine fleeing a war zone with only what you can carry. Your cash is worthless your valuables can be stolen - but you carry in your head a password to a crypto wallet. Open a bank account in any country you find yourself in then access the internet and you have funds. You may even be pleasantly surprised to find your funds have grown by several hundred percent. 65 million such people are permanently or temporarily displaced on this planet.

Because the Chinese are very keen on cryptos too. They too feel the heat from their Korean neighbours and uncertainty about the health of their economy. But more importantly they love making a profit even a small one. If I make a hundred dollars profit in a week it's nothing to me – but to a salaryman in Hubei that's a huge win. He can throw a party for all his friends and family in his favourite restaurant and bask in the glory of his good fortune. There are 1.5 billion such people in China and the one child policy is no-more.

And because it is all a game. The trading coins in the crypto market is an exciting global online computer game that you can play anywhere and anytime with only a smartphone. If you are good at it you are rewarded with dollars and you don't need to know anything about finance to play. There are 2.5 billion computer gamers in the world and a billion of them are in Asia. How many of them aspire to playing games for a living? Much has been said about the re-distribution of wealth through the gamification of work in our post-industrial future. I say it's happening already – but due to the stealthy nature of crypto you just can't see it.

Because the informal economy, not just the worldwide black market but the entire untaxed, unlicensed, and unregulated cash economy is worth an estimated 10 trillion dollars and rising. Imagine if all it needs is an unregulated, untraceable, untaxable currency for it to surpass it's only serious rival - the US economy. Well folks, it's here and it's happening.

When cryptos become a serious threat to the stability of conventional markets governments worldwide will try to regulate the crypto market or shut it down entirely a la the War on Drugs. Important to this is that not all cryptos are decentralised. Coins such as Ethereum, NEM and NEO are corporate products that reside on servers in Switzerland, Japan and China respectively. All can be shut down overnight leaving the value of the coins left standing like Bitcoin, Monero and Dash to rocket to the moon.

And because fiat currencies (the stuff in your wallet and bank account) do collapse. You buy stuff in Zimbabwe with US dollars and get your change in rand, yuan or cannabis if you are lucky enough to have cash at all. The Venezuelan economy is kaput and their fiat is literally worth less than toilet paper. Which currency do the think the 31 million locals will favour, the soaring Bitcoin or the worthless bolivar?

Most importantly because the blockchain, the technology which makes these coins, works. The crypto market is worth about US$145 billion dollars and grows by at least a billion dollars each day as God only knows how many millions of users furiously trade more than 850 coins 24 hours a day across 66 exchanges. The networks have handled everything that has been thrown at them and just kept humming along for the last 8 years. Conventional markets also are booming as confidence in the technology that gives access to those markets drives investment from people like you and me, and that guy in Hubei.

And finally, and this pertains to you my friends, because of the prohibitive cost of housing in cities all over the world. You are about to retire and enjoy the life of a grey nomad but you have three daughters about whom you worry will rent for the rest of their lives. You cannot buy them each a house so they will need money – lots more money than you will will ever have. So before you pack the Winnebago you invest $13,000 and buy them a Bitcoin each – a hedge against tomorrow. And if in 2020 they have not $900,000 between them, well – you all can console yourselves watching John McAfee eat more than just his words.

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