Merchants are already currency speculators. They just don’t know it yet.

Along the Bitcoin success roadmap, among the regulatory potholes and IT growing pains, lies an essential piece in the puzzle: merchant acceptance of Bitcoin.

Although the author disagrees with those who claim that Bitcoin must be widely used and accepted to gain universal traction (case in point: the $7T of extant gold which nobody seems to own nor use to buy things), he does agree that a digital currency such as Bitcoin would undoubtedly benefit from merchant adoption as well.

The main selling point that companies such as BitPay and Coinbase use to convince new merchants to accept magic internet money is that they can remove the dreaded volatility factor, and conveniently convert any proffered bitcoins in the form of fiat currency such as dollars, euros, or yen.

When asked why they prefer to go through these financial intermediaries instead of accepting bitcoin outright, most companies reply that they are in the business of “x” and not currency speculation. “x,” of course, can be anything: selling tires, installing electrical outlets, transporting goats. Regardless of the industry, business owners prefer to stick to their personal expertise, which does not include speculating on currency.

This week, the Venezuelan government tacitly admitted that its currency is in free fall. Close to triple figure inflation year-on-year is dissolving the savings of the country while simultaneously wreaking political and financial havoc.

This example reminds us that merchants are not just goods and services output machines, but rather, that they are traders. The engine of economic activity is the trade, whereby one individual who can produce something at a lower marginal cost offers it to another, in exchange for something of perceived value.

In reality, all merchants are also currency speculators as well. Given a relatively stable currency, a merchant may have the luxury of forgetting this essential half of the equation, and convincing him or herself that the money they accept is some kind of universal constant. But a quick page turn back into recent history reveals the plight of merchants as they struggle to survive, forced to be shrewd in both their business practices as well as the medium of exchange which they choose to accept in return.

The author recalls visiting Zimbabwe in the early 2000’s, and finding himself in need of a camera battery. Having already accumulated a stash of Zimbabwean dollars at the official rate (which was about 4x more expensive than the black market rate), and being currency agnostic, he found a vendor in the streets who was willing to sell him the necessary battery, but who discounted heavily the price in USD, even beyond the black market rate. He was so terrified of the value loss he would incur from accepting Zimbabwean dollars, that he was willing to take what appeared to be a financial hit, but in reality, allowed him the self-indulgence to simply go home at the end of the day, rather than speculating once more by converting his Zimbabwean dollars into something with a greater potential to preserve value (Rice? Bread?). He certainly didn’t want to hang on to it too long. The cost of goods in stores at this point was being updated multiple times per day.

Our favorite camera battery seller in Zimbabwe didn’t want to be a currency speculator. But chances are that if he moved to New York he’d make a better Wall Street analyst than bodega vendor. Such is the plight of the merchant, who must spin what often feels to be an ever-increasing number of fragile plates.

Bringing this back to the developed world, the message might fall flat at first, but the fact that people who sell things must also decide what is an acceptable exchange medium is all-embracing. To the merchants of the world, take note. You are already speculating on currency. You accept it, you save it, you spend it, and if you are lucky you put aside some for your daughter’s education. You should care about the inflation rate, whether 2%, 200%, or -5%.

You may not want to hold bitcoin today, but keep a close eye on your currency of choice. You are a currency speculator whether you like it or not, and you owe it to yourself to be proficient in money matters. In time, you might even find it prudent to keep 10%, 20%, or more of the bitcoin you accept. You may not be a hedge fund, but this choice is potentially in your interest and – more importantly – certainly within your purview.

The issue of currency is a current event, and how much is issued is your concern too.

Bitcoin is already backed by gold… sort of

Common among economic misunderstanding is the concept of “backing.” Somehow, the word “backing” signifies a final, and perplexingly, in my opinion, acceptable point.

Among all things that ever occurred in the history of the world during the entire existence of humans, the only thing which could ever be, or needed to be, backed, was a promise.

Somebody could accept a favor and “back” it with the promise to pay their debtor back in the future, in the form of something valuable to the lender. A coconut for a crab, or vice versa, perhaps.

Fiat currency is so pervasive today, that many people have little perspective on the concept of value. Historically, we are in uncharted territory. Never before have so many nations been so intricately tied together by a global monetary system. And yet, to the layman, the one who toils aways to make a living for a family, this seems normal.

It is not normal.

The main chink in the Keynsian armor is that monetarists ignore a central concept known as the subjective theory of value. If you read a modern macroeconomic textbook on the matter, you will encounter this term, but it tends to be buried and ignored. However, the implications are significant.

Why should anybody call for the “backing” of anything? The answer lies in a subtle observation of the subjective theory of value. For instance, if you make hats, you may very well be as excited about your 100th cap as you were about the first, for your own consumption, but you probably weren’t. In essence, the value to which you ascribe your 100th is light years behind the value that an undoffed individual might enjoy.

In such a world, where un-had things are better than many-had things, one might search for a more objective measure of value. After all, if the value of all things is subjective, how can we trade amongst one another without resorting to barter? When two individuals wish to trade, it helps to employ a medium of exchange which deviates as little as possible compared to the whims of their endeavors.

And what is the number one factor that determines objective value? There are many contenders, but the absolute winner in the equation is scarcity.

When the US was on a gold standard, the implication was that any individual could walk into a bank, proffer about $20 worth of paper currency, and receive gold in exchange. This was the gold-backed currency of yestercentury. But why was gold chosen?

Despite what many gold enthusiasts may claim today, it had nothing to do with gold’s industrial uses. In fact, the lack of industrial uses contributed to its status as a store of value. Sure, you can wear gold, but more people hid it away in safes than plastered it to their wrists.

Gold is scarce. However, even this term is often misunderstood. Because gold is highly divisible, scarcity isn’t really the best term to use. Gold is limited, or at least highly limited. What you know when you hold a gold coin in your hand is that is may indeed lose value, but not because somebody made more of it over the weekend. In you hand you hold a piece of hard work, labored over precisely because gold is limited.

So why is Bitcoin backed by gold? Admittedly, it isn’t. “Backing” requires a “backer,” somebody who will redeem a promise with a limited item, a token of posterity, an objective measure of value, or at least, as close as you can get to such a thing.

This is why those who claim that Bitcoin is backed by nothing are misunderstanding why backings occur in the first place. The only thing that can be backed is a promise, and the best backing possible is a universally accepted, limited, measure of value. Bitcoin is no such promise. It is gold unto itself. Bitcoin is the backing.

And for the adventurous mind, pairing gold to Bitcoin is quite easy. With a total valuation of about $8T of gold, and a total valuation of $7B of Bitcoin, Bitcoin comes out at about ~1,000x undervalued. That puts Bitcoin around ~$500,000 per coin if you equate 1 ounce of gold to the equivalent portion of outstanding bitcoins.

Of course, this valuation is crazy. After all, the world would never adopt a frictionless, honest, and limited store of value as their backing article of choice if it happened to be digital too… right?

When will the hash rate level out?

What goes up must come down.

Despite the vicissitudes of the bitcoin price during the last 5 years, the hash rate of the network, the measure of brute force levered against the protocol to secure the fidelity of the consensual ledger, has risen by about 15% per month.

Bafflingly so, the hash rate continues to rise. Currently, the network is uncovering north of 50 million gigahashes per second. To put it in more digestible terms, collectively, Bitcoin miners, rather than seeking a needle in a haystack, are applying the equivalent of the power of the world’s 500 most powerful supercomputers to blow-torch a haystack the size of mount everest in their quest to uncover a needle-sized block reward.

There is a relevant term known as the “miner’s fallacy” which posits that a purchase of mining equipment is inferior to an outright purchase of bitcoin if the expected mining potential of a “rig” is less than the quantity of bitcoins which can be obtained for the same price. Nevertheless, the arms race of acquiring mining equipment entices both the adept and the average. In short, most miners will lose money.

However, the miner, although stuck with his rig (if he received it in the first place), now faces a new economic reality. Despite any disparity between buying bitcoin or mining equipment, the decision which determines whether to not to mine boils down to a simple equation: mining revenue vs. electricity cost.

This implies that an individual who spent 1,000 BTC on a 1TH mining outfit, who may only see 50 BTC over the course of his rig’s life, will continue to mine, provided that his monthly electricity cost is less than his BTC earnings (denominated in fiat). 

Only recently has the increased network difficulty risen to a level which pinches this ultimate barrier. Over the last 12 months many individuals have rued their acquisition of mining equipment instead of simply buying the world’s favorite crypto currency, but have continued to mine because it brought in more money than it costed.

It is difficult to call the top, but it will come. At current bitcoin prices we are certainly close. Electricity costs per kilowatt hour trend ever closer to the pooled mining rewards. The author personally knows an individual who plans to shut down a 30-rack of 10 GH mining units in the next 3 months. After all, they are noisy, and hot.

Absent a rise in the price of bitcoin, the attrition of borderline mining rigs will accelerate. Whether this manifests as a gradual decline or an acute one, its effects should be interesting to witness. Although the Bitcoin community has become accustomed to relatively fast transaction confirmations, it should prepare itself for the possibility of a steady march downwards in hashing power. Even though the difficulty will adjust accordingly, it will do so more slowly than it adjusts upwards.

That said, a downward trend in hashing power, although imminent, will probably be temporary. After all, we’re on a trip to the moon.

For Bitcoin to succeed, the money that people use must rot. Coincidentally, it will.

Many people focus on the benefits of Bitcoin to the merchant and the customer as reasons for the ultimate success of the world’s favorite crypto currency.

Technically, it’s true, that by using Bitcoin properly, people can save money on transaction costs whether buying a sofa at Overtock.com or sending money to relatives in Mexico.

But practically, it’s not enough. Over time, a more efficient method of payment should find purchase, and succeed on its own merits, incrementally, but surely. 1% on revenue is a lot of money, particularly for intermediaries such as Amazon who play within the single digit profit percentages. Going from a 4% margin to a 3% margin is a big deal. And yet, somehow we are still uninspired.

The last 5 years has seen an explosion is payment processing innovation. From the handheld convenience of Square to the fee-less email transactions between Bank of America accounts, the world is making it easier and cheaper to send and receive money.

But the payment mechanism of Bitcoin is only half of the equation. The singular advantage that Bitcoin has over its contemporaries is that it uses a new and honest currency.

Regardless of how convenient, or fast, or fee-less, that companies can strive for, they are all at a large disadvantage: the currencies that they use are faulty.

Almost poetically, all of the world’s fiat currencies are already nearly 100% digital. There is little more than simple ledger accounting taking place as people sweat and toil to earn a higher number in their bank account, and equally so as it diminishes with each purchase of a car, or a roll of paper towels.

So as far as payment networks are concerned, Bitcoin faces stiff competition. Most of the infrastructures in place are expensive precisely because they haven’t had any competitive pressure to be inexpensive, but that tide has turned, and the consumer is benefiting from a collective race to the bottom of transaction fees.

The magic of Bitcoin won’t be truly recognized until these currencies start to misbehave. I speak specifically of the US dollar, the Euro, and the Yen. Even if prices remain constant, consumers are being robbed through inflation. Individual productivity has gone up dramatically over the past 50 years, and yet wages struggle to follow suit. Absent inflation, the prices of the common goods we all buy would have gone down: milk, petrol, electricity, copper. To the average consumer, this would have been a good thing.

Inflation hides the benefits of increased productivity and punishes the people who work every day to live, save, and provide for themselves and their families. Unfortunately, and insidiously, it steals from their wallets without taking out any bills.

Bitcoin may fail, but if it doesn’t, it won’t be because of incremental and steady progress due to its low-cost payment network. If Bitcoin succeeds, it will be amidst financial and monetary crises, providing a safe haven for those who have finally woken up and realized that the money they work for is shiny on the outside, but rotten to the core.

Like ashes in the fire, the illusion of debt-based money can disintegrate very quickly.

 

I’ve got a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich.

Bitcoin is always more fun when it’s down in the dumps. When the price languishes for weeks on end and people start to question whether they should bail on the whole crypto-whatsit-mathingy, it is often the best time to take observations.

Prices are determined on the margin. What that means is that the price of something – anything – is relayed to the world in the market place, but that it is only a function of the interplay between buyers and sellers. Precisely, most salable items are not on the market, but they are still subject to the public perception contingent on prices paid for their contemporaries.

People don’t like hoarders. I’ve never understood why. A hoarder is a person you can trust; somebody with self discipline who is willing to sacrifice satisfaction today for greater satisfaction later. Hoarders are careful and risk averse. They don’t often bother people.

Today, price is important, because despite the echolalia of the “price is not important”-ists, price is both a trivial and profound matter. To most, the prices of items are somewhat… disgusting. Most people are consumers. To the entrepreneur, to the manufacturer, to the importer, to the investor, to the venture capitalist, the price of an item is a singular signal, an unobscured view into the substance of a good, a window to opportunity. The price doesn’t lie.

Because the price doesn’t lie, it makes fiddling with prices counterproductive. When central banks set targets for interest rates, they fix the price of the most valuable good on earth: money. With their help, prices can deceive even the most cunning mogul. 

Bitcoin is down in the dumps, relatively speaking. Obviously it depends on your timeframe whether you are looking at a 60% haircut or a 10,000% gain. To anybody who cares about the price, I encourage you to laud the hoarders, the people like me. Since 2011, I have managed to accumulate a portion of coins, lose 20% through terrible trading (for anybody who thinks it is easy, it’s not, and I was genetically engineered to be a trader), invest another 20%, 90% of which will be written off at a loss, and keep the rest.

This brings me to my psychological disorder. The coins I have, I cherish. I respect them. Other than a supremely alluring investment opportunity, few things can wrench my “bitties” from my hand.

Some criticize the “buy and hold” Bitcoiners. After all, they are riding on the backs of the entrepreneurs. They are enjoying a free lunch at others’ expense; they should be reprimanded for it, and it’s a shame. But the critics forget that the bitcoin price is set on the margin. The only reason that the companies being started have any chance of success is because people like me are willing to keep their coins off the market, safely tucked away – in some cases, indefinitely.

I have a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich. That new Ferrari: I can afford it. The 10,000 square foot house on the waterfront: I can afford that too. But instead of buying these things, I’m going to take one for the team. To those of you who do not suffer from the same irregularity, rest easy. I’m making you rich, and you shouldn’t be ashamed about it.

We hoarders are a bit weird, but very determined, and – most importantly – abundant.

We’re still here

When I first discovered Bitcoin in 2011, it changed my life. Some people tend to use that term indiscriminately, but in this case, I mean it. From that point on, I’ve been completely obsessed – another word that people tend to use carelessly.

From 2011 until early 2013, I was busy educating myself, connecting with other Bitcoiners, and investing in some of the early Bitcoin start-ups, most of which are long gone. It wasn’t until April of 2013 that a new, and large, influx of people discovered Bitcoin, thanks to media coverage of the Cyprus crisis. It was at this point that I started my Blog, “Real Virtual Currency (a factual Bitcoin blog),” and posted daily to dispel myths about the ways in which Bitcoin worked. Most of my time was spent addressing concerns over it being a scam, a Ponzi scheme, insecure, “not real,” lacking “intrinsic value,” or some combination thereof.

By mid-2013, to my great delight, it seemed that most people had grasped that Bitcoin was indeed something special, and not just Tulip 2.0 or another Furby fad. Media outlets stopped making blatant errors, so I eased up on the gas and began to post more infrequently. I even changed the tagline of my blog to “Real Virtual Currency (a curious Bitcoin blog)” to allow myself a bit more op-ed flexibility.

This is going to be a short post, because I only really have one point to make. Despite claims by seasoned entrepreneurs that early adopter libertarians and anarcho-capitalists will turn on Bitcoin, or that the next phase for Bitcoin will grow beyond these roots, we’ll still be here. We’ve always been here, and we love that the rest of the world is joining in.

We don’t particularly mind that others want to regulate Bitcoin for it to gain legitimacy. Sure, we contest the legitimacy of the IRS to steal property, but most of us pay our taxes. For many of us, the singular compelling feature of Bitcoin is that it does not compel a single person. It is a beautiful, free, and voluntary system, wherein people can interact with one another peacefully to create value and economic liberty. And it’s really hard to change that.

So please, carry on! We’re happy that our baby has grown up so much, and that it has brought others with a rich and diverse set of values into the fold. I never really thought that Bitcoin would catch on with communists, but I stand corrected. The benefits of Bitcoin are so broad and far-reaching that there seems to be a little bit of everything for everybody. And as for Dogecoin… wow.

I do miss some of the great discussions, though. Maybe I’ll start writing again just to remind new Bitcoiners that the crazies are still here :-)

 

May you live in interesting times… and have the wits to recognize it

If you are 100 or older, you have been around since before modern automobiles were commonplace.

If you are 50 or older, you have been around since before humans walked on the moon.

If you are 30 or older, you have been around longer than video games (most of them anyway).

If you are 20 or older, you have been around longer than the cell phone was popular.

There are grey areas regarding the exact dates when these technologies emerged, yes. But the point remains: We live in interesting times.

What might not occur to everybody, however, is that in geological terms, we are in the midst of a flash bang of technology. Many authors and futurists from Arthur C Clarke to Ray Kurzweil have spoken at length of accelerations in technology – hockey sticks, which are at or near their inflection points, from which further advancements snowball until the world becomes virtually unrecognizable… and recognizably virtual.

And yet, for all the incredible advancements of the past few decades, humans remain oddly… unimpressed. Rather than gawking out the airplane window, marveling at how a steel tube can fly at 600 miles per hour through the sky without killing every passenger on board, we complain about the seat, or the food, or the service.

We are all guilty of this odd complacency. Maybe it’s some sort of prehistoric adaptive trait for humans to quickly take things for granted. Even so, sometimes circumstances give us the chance to catch a glimmer of how magical a world we live in.

For instance, between 2006 and 2008, I was literally off the grid, sailing a 43-foot boat across the seas while writing educational articles for school children. When I returned, broke and malnourished, I was shocked to see people casually accessing full web pages on their phones. Before I left, there were some WAP enabled phones, but nothing like these sleek fancy full-screened buttonless beauties! People had the internet on their phones. People had the internet on their phones! For at least 5 minutes I felt as if I had been teleported into the future. Of course once that feeling wore off, I joined in with the others, complaining about trivialities such as loading time and icon design.

People of earth, your money is getting an upgrade. But there is a risk that you won’t even notice once it has happened. Bitcoin increased in value about 100x last year, and the new normal is now high 3 figures for a single bitcoin. To many, this change doesn’t feel monumental – it feels incremental. Even detractors dismiss the run-up as a faddy mania with no underlying fundamentals.

Perhaps our collective ability to get used to change is accelerating as well, matching the speed of technological advance. Maybe it doesn’t take more, but more faster to get our attention and raise our eyebrows. Recently, I attended the North American Bitcoin Conference in Miami, and had the pleasure of posing the final question to Roger Ver (Bitcoin Jesus) after his presentation. I pointed out that we were somewhat “ahead of schedule” with Bitcoin’s progress compared to what we thought possible only 3 years ago – and from that vantage point, how would he define the “ultimate Bitcoin success?”

He assured me later that his answer was off the cuff, but I found it thoroughly convincing. His response was, to paraphrase: that so many battles are fought due to the simple fact that they can be funded, and so many wars are funded due to the simple fact that the state controls the money supply, and can thereby skim wealth from its citizens to pay for destruction, death, and harm. In a world where people use Bitcoin, the state is limited in the amount it can unilaterally expropriate, and it then follows that on some level, Bitcoin can bring greater peace to humanity.

Believe me, I know how the claim that “Bitcoin can create peace on earth” sounds a bit naive. But that wasn’t what Roger was saying. He was describing some of the superlative potential of Bitcoin, which could come to pass given the proper conditions, and even then, probably incrementally.

However, I get immense satisfaction in knowing that a tool such as Bitcoin really could make a large-scale difference – quickly too. But my question is whether it can outrun the zippy pace of our own indifference. Bitcoin might change the world, in more ways than we can imagine. But will we even notice?

I hope so. But for an interesting experiment, I encourage people to live under a rock for a few years, then come back and tell us what we’re missing. We live in interesting times, so let’s take a minute to stop and look around once in a while.