November 2013 Journal
WORDS is a monthly journal of Bitcoin commentary. This issue collects the November 2013 writing in the WORDS archive. For the uninitiated, getting up to speed on Bitcoin can seem daunting. Content is scattered across the internet, in some cases behind paywalls, and content has been lost forever. Thatâs why we made this journal, to preserve and further the understanding of Bitcoin.
Deflationary Spiral
By Oleg Andreev
Posted November 6, 2013
Some people worry about Bitcoin being âdeflationaryâ, that it appreciates over time. They think it would make people save more and spend less, thus reducing velocity of money and economic output. That economy would come to a halt if no one spends expecting future gains.
There is a simple thought experiment for anyone thinking this way. Imagine you find yourself in an economy where more and more people do not spend their precious coins and expect the price to grow. Everyone would give anything for a coin, but never give a coin for anything.
You, as an owner of some coins, will find yourself in a pretty curious situation. Since everyone values money so much, you can command enormous economic power. When people hear you can give them a little bit of money, they will rush to you and do whatever you say. You can build new factories, feed the poor, bring water to Africa and so on. You can change the world for the better, just like you wanted all the time. Deflationary spiral then will not lead to a global starvation and misery, but to a perfect society.
Of course, you may not be alone in this desire. Someone else would try to outbid you when buying goods and services. So you two would have to share enormous economic power. If anyone else wants to reshape the world, they will join you and compete with you. Ultimately, everyone who cares about building things will do so while everyone willing to work for precious coins will happily work and save money. And then, eventually, when their money appreciates enough, they might want to do something with a small portion of it just like you did.
Hyper-monetization reloaded: Another round of bubble talk
By Konrad S. Graf
Posted November 7, 2013
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âTis the season again when the Bitcoin exchange rate rises fast and âbubbleâ talk resumes among some journalistic and other Bitcoin skeptics. Around the height of the previous most dramatic Bitcoin exchange rate movements of March and April 2013, I posted an article called âHyper-monetization: Questioning the âBitcoin bubbleâ bubble,â which was widely circulated at the time and still referenced now. What follows is a blend of brand-new material and thoroughly revised highlights from the earlier article.
The objective was, and is, not to give advice or make predictions, but to draw on theory to develop alternative perspectives on what exactly a âbubbleâ may or may not be in relation to the distinctive case of a brand-new rising-value medium of exchange. âMedium of exchangeâ is fancy economic jargon for something one can pay for goods and services with. I define a money as the common unit of pricing and accounting in a given context (see my âBitcoin as medium of exchange now and unit of account later: The inverse of Koningâs medieval coins,â 14 September 2013).
Behind popular price-bubble discourse often lies a thinly or not-at-all veiled general debate on whether Bitcoin is a valid system. Some degree of bubble-talk functions as a pop proxy for this. In April, some Bitcoin critics were citing rapid price movements in support of the contention that Bitcoin, as such, was only a bubble. When this bubble popped, the story went, Bitcoin units would supposedly return to their âinherentâ value, which they claimed to beâŠnothing.
Of course, Bitcoin failed to oblige them once again. Yet each time Bitcoin does not fulfill this pop empirical prediction, and instead eventually goes much higher in price later on, one nevertheless hears the same prediction repeated the next time around. In contrast, there are several ways to take a much longer-term view, one that is able to both account for price manias and also acknowledge the possibility that Bitcoin could be a valid system, and an ever more reliable one in the making.
Hyper-monetization reloaded
Many observers have likened the rise of Bitcoin to an asset bubble. Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different interpretive concept to apply in addition: hyper-monetization.
I came across the term hyper-deflation, intended in a positive sense of rapidly rising value, when Bitcoinâs exchange rate was climbing fast from the low thirties to the high thirties over a few days in early March 2013. While a few specialists of a certain persuasion understand âdeflationâ to be a great thing for ordinary people, the word still has major problems. It has several possible definitions. It can refer to price-level changes or to quantity of money changes, depending on who is talking or when. It is assigned a quite negative interpretation in most conventional economics circles. Finally, it has a general public-relations problem. It just sounds depressing as a word. Whatever its real net effects on society might be, âdeflationâ just soundslike a bad thing no matter what. Which child most wants a deflated balloon?
The word hyper-monetization occurred to me as a more positive alternative to hyper-deflation, one that also provides an antonym to the catastrophic hyper-inflations that have repeatedly killed off fiat paper monies throughout history. The exact opposite of the death of an old money at the debt-dripping hands of state/bank alliance managers would be the birth of a new medium of exchange at the creative hands of the market.
The term de-monetization denotes the more general concept of a widely used medium of exchange ceasing to function as one. A total hyper-inflationary collapse is one way this can happen. Another is bimetallist legal-tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another, say gold, or vice versa. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently âsuspend redemptionâ of legal tender notes into the precious metals that had been promised in exchange for such notes (that is, note-issuer default is âlegalizedâ). Paper and account entries then remain as money, while the metals that had formerly âbackedâ them are de-monetized and trade as commodity assets, bought and sold in terms of what replaced them in the actual role of money. The rhetorical line from some well-meaning sound-money promoters that âgold is moneyâ is simply untrue, except, of course, in regard to those times and places where it actually was.
The opposite process, âmonetizationâ in this sense, denotes something that was not a money beginning to function as one. When euros took over the jobs of various European national currencies, euros were monetized and the previous national currencies de-monetized. The French franc and Italian lira do not now function as monies; they are historical relics.
Something that gains its own exchange value from scratch on the open market contrasts sharply with any such forced legal conversions. When a freely chosen unit monetizes through market processes, and does so quite rapidly, it might then reasonably be described as being in a process of âhyper-monetizationâ (for a detailed treatment of origin-of-money issues, see my recent paper, âOn the origins of Bitcoin: Stages of monetary evolution,â revised version, 3 November 2013, PDF).
A problem with the âbubbleâ bubble
Bitcoinâs high price volatility is unquestioned. However, it is unsurprising for at least two reasons. First, it is not widely understood as a technology and is in a very early stage of development. Second, its exchange value (market price) tends to react to news that highlights regime uncertainty. It should be noted that this is a type of âgovernment failureâ in that the scope and variability of policy uncertainty across multiple jurisdictions greatly increases market uncertainty.
Something else to consider in relation to the eternally-recurring âBitcoin is a bubbleâ claim is that in a normal asset bubble, certain key factors differ. To whichever height the prices of typical bubble assets such as houses climb, a given house remains the same good in a physical sense as when it exchanged for less money. In the case of a monetization event, in contrast, the actual utility of the trading unitâwhich is mainly its utility as a trading unitâmay actually**rise. This is due to monetary network effects, named in reference to the value that comes from the extent of the network of people willing and able to deal in a particular trading unit.
To imagine how this special case of medium-of-exchange utility growth might differ from an ordinary asset bubble in, for example, housing, it would be as if not only the price**s of houses were rising during a buying rush, but in addition, their actual sought-after qualities as physical houses were improving as well. Such fantastic houses might sprout new rooms with no one building them. New paint jobs might appear mysteriously overnight without any painters having visited.
For a medium of exchange, a rising general usability for facilitating the purchase of goods and services (separate from the relative value of each unit) is not directly tied to its exchange rate against other monetary units. Still, this aspect is likely to positively influence such exchange rates. Conversely, rising exchange rates, if they generate news and wider attention, can then lead to enhanced network effects through increased recognition, creating a network-growth cycle.
For those who have been following Bitcoin news closely, for months on end there have been seemingly daily announcements of new ways and places for consumers to spend bitcoins, new or improved wallet services to manage bitcoins, new or improved payment processor services to receive bitcoins, and new exchanges at which to buy and sell bitcoinsâall on a global basis. Bitcoin payment processor BitPay announced in September that it had 10,000 merchant customers, up 10x from 1,000 a year earlier. In the past 12 months, the number of wallet accounts listed at the popular Blockchain.info My Wallet service has risen 13.9x from 38,460 to 534,575. These are just two specific services and do not reflect horizontal expansion in the number of competing services or the direct use of the Bitcoin network to facilitate transactions on the part of consumers and merchants using directly controlled software without intermediated assistance from service companies.
âIsâ a bubble versus âis inâ a bubble phase
Bitcoin does have its manias and crashes. The hyper-monetization concept seems useful especially in a longer-term perspective for addressing the view that Bitcoin is nothing more thana speculative bubble. The most insistent proponents of this view elaborate along these lines: âBitcoin has no âintrinsicâ value and is therefore ultimately destined to fall to its âinherentâ value, which is zero.
However, claiming that Bitcoin is a bubble (total dismissal of the system as such) is quite different from claiming, perhaps helpfully, that Bitcoinâs exchange rate may be showing signs of being ina temporary bubble phase or mania at a given point in time. That said, every significant rise in price cannot just be reflexively attributed to a mania. There is certainly more to this story and there are many specific matters of degree and interpretation. Among these is recognizing that a young currency such as this would naturally vary in price quite a bit more as it is being discovered in waves than later after it has gained more widespread adoption.
At a theoretical level, unlike a simple asset bubble mania, the more people begin using or expanding their use of a particular medium of exchange, the more its actual utility rises, and the more valuable it actually is**in this function from the point of view of its users. The exchange value of a medium of exchange unit is related to, among other things, each holderâs expectations of being able to use the unit in future exchanges. How many people will accept the unit, how readily, and for what?
At least when it comes to the aspect of monetary network-effect growth in any season, âtis the more the merrier.
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Bitcoinâs Creative Destruction
By BTCtheory
Posted November 8, 2013
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âThe opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation-if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.â*
âJoseph Schumpeter in Capitalism, Socialism and Democracy
The process of creative destruction can be thought of as the evolution of efficiency within the markets. This can take many, many different forms with the core premise being to create new profit through innovationâwith innovation being the keyword. Creative destruction is the wedge that divides the entrepreneurs from the capitalist.
Creative destruction generally presents itself as a technologically achievement that creates a greater total utility from the new product or process over the old. It can also take place as non-technical innovation, such as the worker assembly line processes pioneered by Ford, or the development of the just-in-time production strategy. These new innovations âdestroyâ the older models through direct competition, not through using any sort of oppressive apparatuses of the law or monopolism. Disruption tends to be the contemporary word for it.
Creative destruction causes for a total increase in the utility of what is being accomplishedâit is making it better. This question of âbetterâ or âmore efficientâ is decided by free and fair markets though the greater returns that one receives. Thus, the most efficient actor or technology within a market, if not suppressed, should take the largest market share over time due the the fact that it is more efficient that all other options within the market.
Bitcoin is More Efficient On a **Micro, Macro, and International Level**
The creative destruction that will come from bitcoin is nothing short of earth-shattering. Bitcoin is more efficient on a macroeconomic, microeconomic, and international level. In almost every way it is better money than money itself.
Macroeconomic
As I explained inThe Transaction Cost of bitcoin, when you look at bitcoin as a whole monetary system, it is always going to be more efficient than fiat currencies. This is because of a number of mechanisms that bitcoin uses to automatically establish and manage its own monetary system. The needed laws, legislation, and regulation that are needed for any fiat monetary system are handled automatically by the bitcoin protocol itselfâBitcoin users do not need to pay for the legal support of the system itself.*Whereas, because of the nature of fiat monetary system, the users of these systems *must bear the cost of the legal and enforcement mechanism of that fiat money system, and that is very, very expensive.
How much do fiat money systems cost?
This is a difficult question to ask because the monetary system is implicitly part of the state, and the state is implicitly funded through taxation and seigniorage, which make is difficult to separate one from another. One cost that we can look at is counter-fitting, which costs between 200 to 250 billion dollars per year. The counter-fitting cost with bitcoin is $0.
These sort of savings are simply too dramatic to be ignored for long, and can help business dramatically reduce the cost they they incur from supporting a monetary system that is inefficient and subject to counter-fitting risks. This is not to include other indirect cost such as the actual printing, distributing, transporting, and securing of fiat money. When you compare the transaction cost between bitcoin and fiat money systems Bitcoin will alwayshave a lower transaction cost because it does not need to pay for the legal and enforcement mechanisms that fiat systems must pay for in order for them to function.
Microeconomic
Once upon a time, storing your money within a bank to offer you the security of knowing that your money was safe and secure. In addition to helping one secure their money, banks also found the opportunity to make the use of money sitting in their vaults through allowing easier access to the funds through services like checks, debit cards, and credit cards. As these services evolved, the banking system started taking more and more âconvenience feesâ for access your very own money! But what is one to do when all banks are part of the greater monopoly that makes up the various national money systems? Until now, nothingâbut now because bitcoin challenges this monopoly, and it is much more efficient than this monopoly, it is going to break this monopoly. The fiat money system just cannot competeâitâs too slow, too prone to fraud, and there are too many fees. This is in addition to inflation that has proven itself time and time again to destroy the savings of all the general public. When one see all of the benefits that bitcoin offers and understands how it works, there simply is no good reason to keep using fiatâitâs just shitty money.
When you compare the amounts that one spends on banking fees, from either a consumer or a merchant perspective, to that of using bitcoin, we again see that using the fiat banking system is much, much more expensive because one is paying people to do what bitcoin does automatically. This is why services like CoinBase can offer 0% processing fee for the first $1,000,000 of transactionsâbecause bitcoin is just that much more efficient. If any non-bitcoin services offered this kind of deal, they would be bankrupt within the month. They just cannot afford to do it because of how expensive it is to move around fiat money. Bitcoin will alwayshave a lower transaction cost than using the banking system because it does not need to pay all of the mechanisms and fees to move around moneyâthat is part of the bitcoin program.
**Internationally
The world is globalizing at an incredible rate, and is poised to continue to grow in that direction. Since 1995 there has been a dramatic growth in international trade by all countries except for industrialized one (who lost a portion of the international market to developing nations). This indicates that trade is starting to spread more evenly between all nations, instead of the industrialized nations taking up such a large potion of international trade. It is in the field of international trade that bitcoin offers some of its most powerful benefits.
Because bitcoin exist âin betweenâ national boundaries, it is not subject to many of the restrictions that fiat capital is subject to. This means that people and business that are working across boarders can choose to use bitcoin, and avoid national taxes, capital controls, and the intense oversight that is forced onto people and business from governments. Furthermore, when using bitcoin one does not need to deal with changing currencies consistently, and the associated fees and taxes that come with that.
Innovation vs. Crony Capitalism
Bitcoin is clearly a superior currency to its fiat counterparts. This is because Satoshitook all of the best features of both the internet and money and imbued them into one to create the first digital currency: Bitcoin. Bitcoin automates most of the processes that governments, laws, and the banks preform to maintain the money system. This means that the users of bitcoin do not have financially support the very large cost of maintaining a fiat monetary system. The innovative way that bitcoin secures money, protects identity, and allows for transfer to anyone with a internet connection is much more efficient than any monetary system today. With bitcoin, your money belongs to you, and you are the only one with control over it. Hands-down, this makes bitcoin win the economic argument by being more efficient, quicker, and secure.
But the economic argument has nothing to do with what we are talking about thoughâŠ. because money is NOT about money.
Itâs about politics.
Bitcoin is a massive threat to those that are already in political power and the special interest groups that pay them. We are at this interesting crossroads where we all know that bitcoin cannot be stopped, yet it clearly threatens the current financial and governmental infrastructure. What fascinates me about this is that it forces states into a prisonerâs dilemma against one another that they cannot win. The countries that have a clear, succinct, and friendly policy towards bitcoin first shall be the one to win the most economic benefits of bitcoin, and the ones that fail to do so shall lose the most. This is on top of the fact that bitcoin is superior to every countryâs fiat moneyâthere simply is no way fiat currencies can ever win over bitcoin. States will have to acknowledge and accept digital currencies as real legal tender, or they will have to suffer the consequences of using a money that is more expensive to use, subject to inflation, can be seized at any point in time, and is forced to pay taxes on it, and is subject to banking fees. At the end of the day, bitcoin is just better money, and it will take over the financial system because of that.
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Next: The Creative Destruction of Bitcoin
Transactional Currency and Store of Value
By Oleg Andreev
Posted November 14, 2013
Some people say Bitcoin is not a good âstore of wealthâ because of its volatility. Since itâs not âbackedâ by anything, it is only good as a âtransactional currencyâ. That is, to do some work, earn some bitcoins and then spend them in Walmart. The price does not matter as long as itâs stable enough between the moments of receiving and spending it.
Some other people say that Bitcoin is bad as a currency. It requires electricity, internet connection, itâs not good at micro-transactions, itâs not instant, itâs hard to exchange to and from government currencies, and itâs complex to understand for regular people. But as a store of value they say itâs okay. It can be safer and cheaper to store than gold, itâs hard to confiscate it, every year it was only growing in value.
Some others even say that Bitcoin growth hurts its use as a currency because people are not spending enough, but âhoardingâ money in expectation of even bigger value in the future.
At least one of these groups must be wrong and, unfortunately, all of them do not understand economics at all.
For something (gold, paper, seashells) to become a medium of exchange, it must have some value and market acceptance (in addition to physical ability to transfer ownership, of course). Where does this value come from? People who do not want to hold an asset for a relatively long time do not care about itâs value, thus they do not have any effect on it. Only those who wish to hold an asset will decide what is the fair price for it. They are doing so for one of two reasons: either as a hedge against uncertainty in the future (who knows what youâd need to pay for next month), or as a bet that this asset will outperform alternatives (like Argentinians who buy dollars because their pesos are depreciating way too quickly).
The more people want to hold an asset (regardless of the price), the more liquid it is. Therefore, if someone offers you a payment in this asset, you are more likely to liquidate it, so you are more likely to accept it. Again, regardless of the price.
However, the supply of Bitcoins is very limited and long-term investors compete very hard for its current production. This means that every single new person who wants to hold some number of bitcoins, would have to not only outbid other newcomers, but also the existing holders and their time preferences. Growing demand for a good in a fixed supply have to raise the price.
This has two interesting effects.
First, growing price acts as an indicator of liquidity of Bitcoin. Since it is impossible to control the price of Bitcoin (there are multiple sovereign exchanges in multiple countries and a lot of private trade outside the exchanges), price canât grow by a decree of a fixed group of speculators. Therefore, growing price means growing number of holders. Which means, growing number of people that will gladly accept Bitcoin from you if you do not intend to store it, but only receive as a payment from someone else.
Second, in a positive feedback loop, as more people are seeing liquidity of Bitcoin, they are getting more likely to hold Bitcoins for a little longer than usual. Either expecting a better value in the future, or as a more safe and easy way to store some cash. This, of course, increases number of people willing to hold bitcoins and thus increases the price even further.
In the end, to become a currency, Bitcoin must have value which only comes from speculators holding it for various reasons. The more people are holding it, the better currency it is. Hot potato that no one wants to hold will never be a medium of exchange because itâs value does not exist.
Of course, there are some physical limits on usage as a currency. Gold is the worst currency: itâs heavy and hard to check and expensive to move and store. Paper bills are much better but still do not fly over the oceans. Banks and clearing houses even better, but historically were very expensive due to risks of fraud, devaluing, fractional reserve lending etc. Bitcoin is much better comparing to what we had. Itâs much cheaper to verify the authenticity, itâs faster to fully confirm than credit cards (chargebacks within 90 days) or bank wires, it requires very little infrastructure to work (the internet, laptops and smartphones are widely deployed) and it has some useful features that other assets will never have. Therefore, Bitcoinâs biggest barrier to become a widely used currency is simply number of hands that hold it. And as we see, it is getting into more and more hands very rapidly, just like Facebook or Twitter were attracting more and more people â almost exponentially.
You can own Bitcoin, you canât own your dollars.
By Oleg Andreev
Posted November 18, 2013
People are always wondering how safe is buying Bitcoin if there are constant heists on exchanges and no website has perfect reputation. They draw analogy with the banks: which organisation can I trust to handle my money?
The right answer is: with Bitcoin you donât need to hold your money on an exchange for longer than a minute. You wire your government currency to an exchange (bitstamp, coinbase, bitcoin-central, btc-e, kraken, btcchina), buy some bitcoins at a current price and move them hell out of there to your personal wallet. The exchange can be hacked next day, but it wonât matter to you. You are not storing money there anymore. Your private keys are only stored in your encrypted backups and only you know the password. As long as the applications you use are not infested by viruses or backdoors, and you have enough of separate physical backups, you are pretty safe. PS. Donât use Windows!
Another question people ask: why canât I simply use my Visa card like I do with the rest of my purchases? Or PayPal. The answer is because this money is never owned by you and all transfers are reversible. Bitcoin transaction is confirmed by the network and buried in the blockchain in 10 minutes. Visa transaction is reversible within 90 days. There were people who tried to sell Bitcoin (ultra-liquid asset that you can own) for PayPal (highly controlled asset that is owned by a chain of banks and payment processors). People grab your bitcoins and call PayPal to reverse a transaction (âsomeone stole my password!â).
People who start learning about Bitcoin should understand one thing. You donât own your usual money. You may own paper bills to some degree, although, government does devalue them all the time by printing more of them and restricting movement of large enough sums. Your bank account you donât own at all. Even wire transfers may get reversed, although, rarely. All your transfers are basically promises from one banker to another. The entire banking system is a complex network of mutual promises not backed by anything except desire to not break the law (yet another system of promises to reward or to punish). And these promises are being broken or revisited all the time on every level. Laws and regulations are not consistent even with each other, not only with every particular decision.
Bitcoin, on the other hand, is like air-thin gold on steroids: you can fully control your transfers and the entire network forces everyone to follow very strict rules to ensure validity of all bitcoins and the rate of their creation. The shitty C++ code of BitcoinQT (original and the most used client) is infinitely more compact, rigid, logical and consistent than all regulatory environment with millions of account managers in the entire financial system.
You can also own gold, but that ownership comes with huge costs and risks. Someone needs to guard the vault, transport the vault, verify the purity of the bars and coins. All of this makes it impossible to use gold in the global economy. Which is precisely why we arrived at the modern all-controlling banking system â it grew up out of the necessity to reduce costs of handling gold by entrusting it to the biggest vaults. To use gold as money you have to trust someone to store or transfer it for you. So you are back to the current very fragile system.
The only money you can truly own today regardless of the amount is Bitcoin.
Bitcoin and Gold
By Oleg Andreev
Posted November 23, 2013
Bitcoin will eventually replace gold as a globally recognized âstore of valueâ. Gold prices will go down 90-95% to the levels supported by the use in production as âreservation demandâ for gold would essentially disappear.
When Bitcoin becomes the world money there will be little reason to own gold. Bitcoin is as limited, as fungible and as non-counterfeitable as gold. Itâs even cheaper to verify, store, transfer and divide.
Gold is always as difficult to protect as it is to confiscate. Itâs symmetrical. Thatâs why throughout history only the strongest were accumulating gold. Pirates were robbing merchants, kings were robbing pirates. In the end, massive amounts of gold are owned by the biggest governments and banks. Small folks can only reliably own as much gold as they can keep in their own hands. (In 1933 US government confiscated most of the gold owned by population as an âemergency measureâ in a declared attempt to save failing economy: http://en.wikipedia.org/wiki/Executive_Order_6102)
Bitcoin is asymmetrical. Itâs much cheaper to personally own it and keep safe, than it is for someone to come and confiscate it (regardless of the amount you have). If you buy some bitcoins from 100 random people, thereâs no one except you to know how much you have. Thereâs no big shiny vault to attract thieves, no bank account for TLAs to peek into. You can perfectly back it up in 10 places, split the encryption key to 10 of your closest friends and even put some money in a âbrain walletâ that has no traces anywhere at all.
A friend of mine, Steve, noted that gold-backed economy logically evolved into the mess we are now. Libertarians who advocate return to the gold standard do not realise that the gold standard was the reason of accumulation of gold in few of the worldâs biggest banks and everyone else getting worthless IOUs positioned as âsovereign currenciesâ. Gold is heavy and expensive to handle: only the wealthiest can afford to save a lot of it. And equally to take it by force from less powerful.
Bitcoin changes all of that. Like cryptography, which gives everyone possibility to have privacy, Bitcoin gives everyone equal possibility to save money and use money as they please. Without worrying if someone takes it from them, or censors their transactions. Rich and poor can have equal protection of whatever they earned.
Yes, if someone is against you personally, they will find a way to get you. But massive-scale theft and controls become way too costly. Inflation and QE robs savers without knocking on their doors. Capital controls and bank bail-ins need a discussion with just a couple of bankers, not millions of actual depositors. Taxation happens automatically on the level of the banking system as itâs used both for storage and transfer of money. When everyone personally holds bitcoins, itâs much easier to protest against taxation if itâs unfair or ineffective, itâs possible to avoid capital controls and itâs impossible to redistribute wealth by printing more money.
Bitcoin economy is not a revolution in a sense of violent redistribution of wealth in a âfairerâ manner. It is a leap forward by forgetting about how much was destroyed or stolen and focusing on how much can be preserved and protected. Itâs a truly peace-making tool for the whole humanity. People who think about Bitcoin as only a money-moving tool, or a get-rich-quick scheme grossly underestimate it. It enables much more than what the web gives. The web gives us freedom to exchange information. Bitcoin gives us freedom to exchange everything.
Arguments for Litecoin are fraudulent
By Oleg Andreev
Posted November 27, 2013
TL;DR: thereâs no important difference between LTC and BTC and only one of them can win over another, because, other things being equal (which they are) people want to invest in the most liquid money: that is, with the biggest number of folks willing to hold it. LTC canât be âsilver to bitcoinâs goldâ, because both LTC and BTC have exactly the same risks and costs. Either LTC wins over BTC, or BTC over LTC.
Iâll elaborate.
Litecoin/Bitcoin/Shitcoin are all long-term bets. I myself donât speculate on daily basis, most of us bet for value of these things in the multi-year time frame. So letâs focus on that.
1) In long term security is not measured in âblock interval timeâ or number of blocks. Itâs measured in amount of money to be spent on double spending. Today hashrate of Bitcoin is many-many times more expensive than that of Litecoin. So one block confirmation in Litecoin is not just 4x less secure, but hundreds times less secure: you need smaller investment to fork the chain, than with BTC. So anyone who brings up security argument is lying to you.
2) Litecoin is not âfasterâ either. For the same level of security as in BTC, you have to wait hundred times longer (see #1). Instant transactions are the same and also less secure than in BTC: zero-conf, with less nodes and less connectivity between them to limit double-spend attempts. Anyone bragging about âLTC being fasterâ is a liar. It can only be slower due to less number of nodes and currently lower hashrate, not faster. LTC can only be faster if BTC is being abandoned and people switch to LTC.
3) âScrypt protecting against concentration of power due to ASICsâ is bullshit. If LTC wins over BTC, there will be ASICs and whole factories making chips and plugging them in on-site right away. Just like it will be with BTC or ShitCoin or else. Long-term LTC is either dead or is full of chinese ASICs, like BTC. Anyone arguing otherwise is a liar.
4) âScrypt more secure than SHA256â is bullshit in the context of mining. If thereâs a better optimization in SHA256, itâll be like a better hardware. But this can equally happen to Salsa in Scrypt too. If the breakthrough is significant, all BTC stakeholders will vote for adjusting the protocol to fix the problem, not lose everything by panic selling. Huge price of BTC is a great motivator to find the weakness in double-round SHA256 and mine faster. Every day it doesnât happen is only a practical proof itâs as good as it can be (just like Scrypt or whatever), everything else is unfounded FUD.
5) âMore fair distribution of wealthâ - this is unfounded FUD. For average Joe, LTC is less widely accepted, so its concentration, however âfairâ it was, is still higher than in BTC. And who knows how much of early mined BTC are lost forever (we know thatâs a lot) or were sold during 2011 bubble and slow price rundown the same year. I bet very few were sticking to their holdings that time and thus were taking huge risks âfairlyâ.
6) âDiversificationâ (based on all points above) - newbies who donât know economics are made to think they diversify by investing in some altcoins. But the risks and costs are all the same for all coins. If Bitcoin is completely broken, most likely altcoins are broken for the very same reason. Otherwise, all Bitcoin holders will simply agree to upgrade the protocol. Especially so as Litecoin is on the same codebase.
The only real argument about LTC and BTC is that thereâs no functional difference between them. LTC could only be 4+ times costlier to miners due to faster blocks and more âdecentralizationâ of individual miners (slower connectivity, faster blocks => more orphans). If LTC was released before BTC and took off, everyone would be using LTC no problem. The only thing that matters here is liquidity, number of holders of money. If people are betting it is BTC with more hands, they send a signal to others about that by holding too. This moves all the âcryptoinvestmentsâ into BTC in long term. If people see that LTC is gaining more hands, then everyone will converge on LTC. LTC and BTC cannot coexist together, it makes no economic sense both for miners (who want to invest 100% in the most valuable currency in long term) and for users (who want money only because itâs widely exchangable for many goods at any later dates).
Right now thereâs a lot of excitement about Bitcoin and not many people understand economics. Some folks are lied to and âdiversifyâ into altcoins, which gives them short-term bubble. But in years to come, when they see, that Bitcoin has bigger adoption, theyâll move their savings to BTC and then all altcoins will crash. Or for some mysterious reason BTC will not be viable and people jump to LTC en masse and abandon BTC.
Financial Insurrection
By BTCtheory
Posted November 29, 2013
How can one be compelled to accept slavery? I simply refuse to do the masterâs bidding. He may torture me, break my bones to atoms and even kill me. He will then have my dead body, not my obedience. Ultimately, therefore, it is I who am the victor and not he, for he has failed in getting me to do what he wanted done.
-Mahatma Gandhi
The most powerful weapon that we have is refusal. Our obedience within this system of State-sponsored capitalism, where we are made debt slaves for wanting a better education, getting sick, or having a home, is far from a fair systemâit is criminal in everything but name. If we are to stop this kind of abuse we first must refuse to participate in this kind of abuse.
For the first time in human history, we have the option of rejecting and refusing this economic system, and replacing it with something betterâwith digital currencies. By using digital currencies over dollars, we can refuse debt that is usurious, and challenge the stateâs monopoly on the issuance of money. This places within our hands the ability to directly challenge the legitimacy of the State, as money is law; and if we can make their money be questioned, we can destroy this monster.
Refusal
The first step is refusal. Bitcoin offers us a way to refuse the debt bondage that this system has bequeathed to us, and allows us an avenue toward negotiation, if we choose to negotiate. By simply refusing to pay our debts, while keeping our savings and the money we earn in bitcoin, we can fight back.
Defaults are painful, and as we saw in the 2008 crisis, it can call the whole system into question. If enough people started defaulting on the $1.2 trillion dollars of student debt that is owed to the Federal government, we can force them into negotiating a jubilee. Through defaulting you can use direct action to make it clear that this debt is usurious and will not be paid. There is more power in showing your willingness to not pay them to make a point, than there is to paying them and begging for the terms to changeâthey will not.
Rejection
The second step is rejection. Bitcoin is a direct challenge to the financial system and the legitimacy of the State itself. We can unilaterally reject participating in their economy by rejecting their money and the taxes that accompanies that money. By rejecting the fiat money we can take direct action to the economic system itself. We can refuse to have the humble amount we contribute to this economy to be taxes, and to prop up this government. There is no longer a need for my money to go towards war, or any institution the State uses to oppress people. I do not approve of it, and I will not let them use my hard earned money for such evil purposes. To surmise why we should do this, I offer a quote from Henry David Thoreauâs Civil Disobedience:
If a thousand citizens were not to pay their tax-bills this year, that would not be a violent and bloody measure, as it would be to pay them, and enable the State to commit violence and shed innocent blood. This is, in fact, the definition of a peaceable revolution, if any such is possible.
The peace revolution that Thoreau speaks of can now be ours. Through refusing to use fiat money and using digital currencies instead, we can make a stand, while also protecting ourselves from the inevitable economic collapse that is coming.
Rejection of this system is something that is inevitably going to happen. The State cannot winâtheir money is designed too poorly, they run their economy too inefficiently, and they have only managed up to this point because of their monopoly on the mode of exchange and legal violence. Through challenging government monopolies on money, we will make the inefficiencies of the current system of global finance clear. We will destroy the capitalist of the world of flesh and steel with a newer form of capitalism that is more efficient, more secure, and simply put, better. When the world comes to realize this, there will be a great reckoning that will culminate with insurrection.
**Insurrection
The final step is insurrection. Digital currencies are a revolution in the area of economics, and they will be an inseparability part of global economy one day. Bitcoin offers a world with no gate keepers, no permission seekers, and no restrictions on the world we choose to build. Digital currencies operation on the maxim of the protocol: what the protocol commands is supreme, and the federation of the protocol is what allows for it to work. There is no way to cheat this system because it is out of the hands of individual men and facilitated by the program itselfâthere are no middle men needed. Through cutting out both the State, and the banks from all economic transactions, the cost of maintaining the State and the financial system does not need to be carried by us. Our financial system does not need us to pay fees to criminal banisters, or taxes to a tyrannical governments to use our own moneyâjust an internet connection.
It is impossible for fiat money to compete with bitcoin over an extended time span. Fiat money cannot hold its value over a long time period, which is why the purchasing power of a dollar today has lost 95% of its value since 1913. The supply of dollars is inflating constantly, and particularly with the rounds of quantitative easing that we are seeing throughout the world today. Because the supply of fiat currencies are increasing today, and because there is nothing of commodity value backing fiat currencies, there is no way it can compete with Bitcoin. As it becomes more and more apparent that the dollar is losing its value while the value of Bitcoin is rising rapidly, people are going to start questioning the legitimacy of the dollar itself. It is at this point, when the dollarâs value starts to be questioned that the legitimacy of the government itself can be questioned. This is where we revolt, this is where we gain our freedom and destroy the monster that has sought to keep us under absolute despotism in the name of safety and security.
Revolution
Since the failed uprisings of 2011, it has been clear that State-sponsored capitalism is failing. There has not been a time in recent history where people have worked harder, received less, and have so little opportunity. This is not from the failure of the State to protect its citizens, but the inherent structure of what States will do when they enter into alliance with oligarch enterprises. We all see the criminality of this for what it is. We know that they are thieves, criminals, liars, but up to this point they have been too powerful, and there has been too few alternativesâone simply had to participate despite ones unwillingness to do so.
But now there is an alternative. A mode of exchange that is economically superior which has the features of privacy imbued into the money itself, and is organized in a horizontal, decentralized platform. A money with a known fixed supply that cannot be changed, that is controlled by no state, and no individual actorsâjust the Network itself. A totally transparent money which allows for you to see all the transactions in the network, while still protecting the identities of individual users. And itâs practically instantaneous to use, and no permission required from a bank or from a governmentâyour money belongs to you.
What is to be done still remains to be seen. What is known for now is that there is a powerful new economic tool that fundamentally changes the way that we view money and the mode of exchange. This challenges the fundamental features of the State today, and the money that they print. I for one am convinced this is how the revolution will start, because people will always seek to become more free, and now there is no one to stop you from breaking free from the chains of financial tyranny any longer.
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Next: Capital Exit, Capital Strike