Bitcoin provides an opportunity to expose financial regulation as political favoritism and not consumer protection

Bitcoin is, at present, almost entirely unregulated, save for a few vague guidelines from FinCEN.  The only real regulations imposed upon the exchange markets are those of supply and demand, at least for now.

This is not the case regarding the large conventional markets that we are more accustomed to dealing with. Muddled among the actual consumer sentiments are layers upon layers of structures, rules, and hidden costs that obscure the information that the market is trying to convey.

In many ways, financial regulation for the sake of stability is like damming a river. You may succeed in stopping the yearly flood that ruins a couple of houses, but you also ensure that when it does eventually flood, that the river will probably wipe out the whole village.

For lack of a better term, investors have been coddled into complacency with regards to their financial decisions. When was the last time that you checked the solvency of the bank where you leave your deposits? Do you even care about its financial health? Of course not, because your deposits are insured. Surely, you would never have to take a haircut like our friends in Cyprus did. That is, of course, until the flood.

When you deal in Bitcoin, you have to wear your big-boy pants. Nobody is there to help you if you make a poor decision. You have to do your own research and sink or swim on those terms. For instance, I keep a small but non-trivial amount of Bitcoins on the securities trading platform Havelock Investments. Recently I reached out to the owner, James, to inquire about his security precautions. He was gracious enough to describe his protocols (by the way, they are top-notch) and put my mind at ease. Conversely, I have no idea at all how imprudent that Bank of America may or may not be with my US dollars.

When the markets go bonkers, and Mt. Gox begins to lag, remember that people can only manipulate you if you let them. The panic selling that ensues after a DDOS attack has become less and less pronounced because Bitcoin owners are wising up. We don’t need an uptick rule, we just need experience. We’re learning all sorts of things that we never could with the Dow, the FTSE, or the Nikkei.

Take, for instance, the Bitcoin-only gambling game Satoshi Dice. It pays a monthly dividend in the form of 13% of net profits. In the world we are accustomed to living in, SD would be subject to all sorts of reporting and insider trading regulations. But in the Bitcoin world, the story is refreshingly simple. There are no rules to follow or break, no guarantee that insiders won’t trade the stock for certain periods of time. Personally, I love it. It means that I can trust the current price a lot more assuming that people in-the-know have affected it already. I get more information from the price and can therefor make better decisions about whether I think it is a good time to buy or sell. As a bonus, the absence of regulatory cost burdens means higher profits and more money in my pocket.

If you follow the regulatory paper trail, you will often end up at the doorstep of large banks such as JP Morgan Chase or Goldman Sachs. This is because they have very effective lobby groups that know how to get legislation passed. Regulations are sold to the public as necessary for the protection of consumers and the ferreting out of fraud and money laundering. But you shouldn’t be surprised to notice that the side effects of many bills serve to make large financial institutions larger and to raise the barriers to enter and thus compete.

So how can we show the world that Bitcoin doesn’t need regulating? At the very least, don’t ask for it. Don’t blame anybody but yourself if you lose money trading, or your coins are stolen because you were careless. Become your own financial advocate. Do your research, learn about the companies you choose to trust with your money, and when the trading bots start flittering around the Mt. Gox order book, or somebody sells a big chunk of coins, go for a walk. You’ve got your big-boy pants on, and big boys don’t panic.

If bitcoin works without regulation, then it will have the potential to invalidate many claims that “regulation is for your own protection,” leaving the alternative explanation that regulation in general is little more than a blunt anti-competitive tool.

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Bitcoin Luminary Series: Jeff Berwick

It is my pleasure to introduce a new ongoing feature of Real Virtual Currency: The Bitcoin Luminary Series, in which I reach out to the individuals who are making a splash in the digital currency pond. The purpose of the interview is to ask roughly 50% Bitcoin questions and 50% personal questions, and as such, the tagline of the Bitcoin Luminary Series is: “More interesting than Bitcoin itself, are the people it attracts.”

Today, we speak with Jeff Berwick, Canadian entrepreneur, economics, finance, and investment writer, and libertarian activist. Currently, Jeff has been making waves with the Bitcoin ATM: coming soon to a financially distressed country near you. Many will recognize him from his recent appearances on international news sources, and we thank him for joining us.

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1)      How would you describe your childhood?

Cold and horrible.  I grew up in a place called Edmonton, Canada.   It is literally below freezing almost the entire year… and well below.  Often -40c/-40f for weeks at a time (-40 is where Celsius and Fahrenheit meet… only someone from Edmonton would know that).  I hated the child prison camps, schools, from grade 7 on but luckily I discovered personal computers (an Apple II+) around 1980 and then just found ways to not go to school (which helped me tremendously with my development) and just discover things about computers.

2)      What inspired you to start StockHouse Media Corporation?

As explained above, I was what is described as a “computer nerd” but by 1992 I had grown a bit bored of it.  I kept asking, “why can’t they get all these computers linked up together?”.  So, I moved on in life and worked at a bank and was interested in the stock market.  I almost had become a stock broker when I heard the internet finally existed and so I thought to myself, “This is going to change the world…. What should I do on it?”.  The most obvious answer was to start a financial website covering the Canadian stock market.  Within months it was the biggest financial site in Canada and still is to this day… comparable to Marketwatch.com in the US.  We initially expanded to 8 countries and had over 200 staff but I didn’t realize that much of it was fueled by Alan Greenspan blowing his Y2K bubble.  After that it collapsed and I found myself wondering what happened.  Luckily, that led me down a new path towards freedom, Austrian economics and understanding how these bubbles get blown.

3)      How did your lack of prior business experience help you or hurt you as an entrepreneur?

I don’t think anyone is really born without understanding business.  I want something so I have to trade that for something that someone else wants and get something in exchange for it.  There, I just saved some people four years of “business school”.  Entrepreneurism, or at least, true capitalism, is fairly natural in everyone.  What differentiates your average person from an entrepreneur is the ability to deal with unbelievable volatility and risk.  Most people cling to a paycheck for security.  An entrepreneur is willing to take a chance and fail.

4)      At what point did you realize that you were going to be successful at a very young age?

I’ve never “realized” I’d be successful.  That’s the thing about being an entrepreneur, there is no guarantees.  However, I do have to say that when I was younger I realized how many people around me had no idea what is going on and I saw opportunity in that.  I remember thinking when I was 14, “I will be a millionaire before I am 30”.  Of course, at that point, I didn’t realize that the central banks would make a millionaire fairly boring… but I do remember celebrating my birthday at 30 and being worth more than $100 million.  However, that was in 2001.  A year later I was worth almost nothing, monetarily.  But, thanks to public schooling, I’ve always known I am way ahead of the pack as most people have no idea how to start a business, take risks and think critically and logically.

5)      Do you have any siblings?

Yes, one.  He hates me.  Long story.

6)      How would you define the term “happiness?”

Wow… talking about something important now!  I look at that term as a deeply individual question.  Happiness is subjective.  Stalin was probably happy as he genocided millions.  As for me, that is a very tough question.  I guess I start with the happiness I get from always trying to do the right thing.  At least if I know that in my subjective opinion I am always trying to do the right thing it gives me some happiness.  Of course, when you sit out on your porch and ask yourself if you are happy that question morphs.  Happiness is not only subjective but changes by the moment as your needs and wants change.  That’s why I just try to not hurt anyone and try to help people as much as possible – which I see as creating wealth and opportunity – as being a good base.  From there, ask me every five minutes if I am happy and I’ll give you a slightly different answer… depending on whether the right food, drink or people surround me.

7)      You’ve said in interviews that you don’t consider yourself much of a planner, more of an analyzer who adapts to the environment in which he finds himself. Nevertheless, what are some of your personal objectives for the next 10 years?

That’s true.  I never think that far ahead.  As per your last question I’m just taking one step in front of the other and keep trying to make the right decisions for what I think is correct and go from there.  We are all somehow alive on a space rock flying through the universe, as far as we know, at something like 30,000 km/s, so this idea of stability seems a bit insane to me.

8)      I’ve heard that you are quite the sailor. Tell me a bit about your seafaring adventures.

Well, if you mean by “quite the sailor” that I sunk my sailing catamaran off the coast of El Salvador in 2005… then yes.  I will say this about being all alone in the middle of the ocean, however: It is a unique and important experience to know yourself and to understand that you are not in control of anything.

9)      When was your first “aha” moment with regards to Bitcoin?

I have to shyly admit it was just recently.  Maybe I am getting old.  I was told about it and liked the idea almost two years ago to the day.  It was around $3-6 at the time and had just got its first mainstream media exposure.  Backed by that influx of demand it rose to $30 and then quickly regressed to $3.  I still hadn’t realized its importance to individual liberty though but always had it in my head as something interesting.  It’s only been in the last year as countless young people have come up to me, wide-eyed and full of adventure, that I realized this may change the world.  After the Cyprus bank robbery I think many people woke up to its true value, including myself, and as a good entrepreneur I have focused much of my effort in the last few months on investing as much time as possible into this liberating, anarcho-currency.  I’ve known central banks are evil for quite a while but I didn’t know Bitcoin was one of the best answers until recently.  I’ve also known the monetary system as we know it will collapse for a number of years… since about 2004… I’ve since invested most of my life into educating myself on everything to do with the current monetary and political systems and came to the conclusion that it will all collapse…. And soon!  So I started The Dollar Vigilante in 2010 and it has led me down this path.  The one question everyone would ask me about the impending monetary system collapse is “But what will come after it”.  My response was always, “Private enterprise will come up with answers”.  But it wasn’t until Bitcoin that I realized it already had.  It’s beautiful.

10)  If you were to pick your top 3 favorite Bitcoin properties, what would they be?

Number one, by far, is it is decentralized.  If you understand the reason the Soviet Union was horrible is because it was a top down, centrally controlled economy, then you will understand that.  Second, at the moment, and this is subject to change, is that it is unstoppable.  It is so decentralized… it is in fact, a true money of the people, that this is “true” democracy.  Democracy, in political terms, is antifreedom.  If there are five of us in a democracy and three people say I can’t do something that hurts no-one, that is anti-freedom.  But in Bitcoin terms, only if people agree to accept it in its current form it is a true democracy of money.  It is completely open-source and transparent.  Sort of like Barack O’Bomber said he’d be transparent.. but this does not depend on one individual.  And, finally, this revolutionizes money and banking.  It can be instantaneous and fee-free.  Ask your local bank if they have an account like that.  Bitcoin actually makes each individual their own bank.  This is the revolution.  Self ownership.

11)  Among all of the potential business ventures, why did you pick the Bitcoin ATM as a target?

It just happened organically.  I was working with a number of young entrepreneurs and they came up with the idea.  Again, with some embarrassment, I didn’t understand the value of what they had come up with.  A few weeks later, however, with every bank and ATM in Cyprus closed, my eyes opened and I realized the massive potential of what they were talking about.

12)  By your assessment, what are the greatest threats to the long-term viability of Bitcoin?

There are plenty of threats.  Heck, our survival as a species on this space rock rampaging through space is nowhere near a certainty.  But, number one has to be the internet.  The last vestiges of evil, collectivism and government, have a lot of power right now.  The biggest terrorist agency on Earth, the US government, can blow up the entire planet 100 times over.  And they can use that evil power to try to shut down the internet.  I think, however, individuals around the world already have already awoken.  They see the power of the internet, which I see as an evolution, or revolution, in communications.  And if those people who wish to control others try to stop it now they will finally get those fat 20-somethings off their couch and into the street.  They missed the boat.  We’ve won.  Humanity has won over its oppressors… they just don’t know it yet.

13)  Complete the following sentence. For 1,000 BTC I would ________ .

I’d do almost anything at the right time and right place.  The only thing I would never do is hurt others.

14)  What advice would you give to people who don’t have a lot of financial resources, but want to protect themselves in the event of future economic and social crises?

This is what I write about constantly at The Dollar Vigilante.  If you have nothing, you are lucky, you have nothing to lose.  Now get out there and create wealth that improves the world.  If you have something, get it into hard assets.  And, by that, I mean, anything Ben Bernanke can’t counterfeit at the push of a button.

15) Tell us something about Jeff Berwick that most people don’t know, but may find interesting.

I’m actually very quiet and private in my normal life.  I’d love nothing more than a perfect world where I can just relax and have some small amounts of fun with friends and family.

AL: Thank you for your time!

Absolutely, my pleasure.

The alt-coin conundrum: Same same, but different

I have often had to field the question, “Does the fact that Bitcoin can be cloned threaten its long-term viability?”

The stock answer from the community is, “No,” due to the “Network Effect.”

While I agree with that statement, there is more to the story. Let’s take some time to explore the curious world of competing digital currencies.

Bitcoin is odd to begin with; it is something that is scarce at the unit level, but can be copied at the program level. The situation seems even more absurd when you realize that the ability to simply copy and counterfeit Bitcoins is inversely proportional to the number of Bitcoin client copies extant. The more you copy/paste the software onto machines around the world, the more astronomically difficult it would be to successfully “copy” a Bitcoin.

But what happens when you copy the Bitcoin protocol itself, make a few tweaks in terms of confirmation time and mining nuances, and then rename the software “Litecoin.” Well, congratulations, you’ve just made an alt-coin.

Usually, when people are asked something like, “Why is Apple larger than Microsoft today?” they will respond with qualitative differences in superiority. “Apple products are sleeker, more intuitive, have better support, etc.” So why isn’t Microsoft beating Apple in certain product categories? “Because it’s different.”

Yet, ask the same question about alt-coins, “Why won’t Litecoin compete strongly against Bitcoin?” and the answer is, “Because it is the same.” Now, that’s a head-scratcher.

So we get the feeling that currencies aren’t quite like companies in this way. There must be something else that makes “sameness” a potential recipe for failure. What we mean to say is that Litecoin has no differentiating features significant enough to allow it to target digital currency novices, nor current digital currency users in a new way, EXCEPT…yes, there is one exception – Litecoin offers the potential to be an early adopter.

Most Litecoin users that I know will say things such as, “I’ve got about 250 Bitcoins and 500 Litecoins… just in case.” In fact, I’ve heard this phrase “just in case,” so many times that I’ve considered labeling “LTC,” “JIC” from now on (no disrespect meant to the LTC true believers). It’s being used as a backup of sorts, as protection against unforeseen events.

However, when I visit btc-e.com to see what’s new with Litecoin, I am presented with a different story. While there really are Litecoin enthusiasts who truly believe in its long-term viability, most of the gossip in the chat box is focused on short-term LTC/BTC trading. And a smaller, but non-trivial component openly plots episodes of LTC pump-and-dumps.

This fact helps me to address the apparent contradiction of being pro-Bitcoin and (mildly) anti-Litecoin, when they are pretty much the same thing. Luckily, the answer was staring us in the face the whole time, it is the Network Effect.

Because of its early mover advantage, Bitcoin has attracted both core and ancillary developers like a vacuum cleaner. The Bitcoin ecosystem is teeming with genuine efforts to turn the fledgling crypto-ledger into a global, viable, currency. There is a positive feedback loop causing people to join today because people have joined in the past, at a faster rate than any other alternative currency. This gives users confidence that Bitcoin has the potential to actually thrive in the marketplace someday.

But I don’t see the same happening with Litecoin. That doesn’t mean it won’t happen eventually. I can imagine that if Bitcoin prices plateau many years from now, that it will also serve to make alt-coins even more attractive as growth vehicles. This would present a new set of issues related to the pseudo-inflation of crypto-currencies (how’s that for a dissertation title?), but it is unclear today how this would unfold, or how it would affect the market leader, Bitcoin.

In conclusion, I won’t dismiss Litecoin offhandedly. As a free-market currency advocate, I have to remain somewhat agnostic about the whole thing, even if I do continue to entertain a kind of secret hope that it will just go away.

At this point, I can almost hear the digital voices of proponents of other alt-coins besides Litecoin: “You’ve completely ignored all of the other alt-coins. Litecoin isn’t the only one, and you failed to mention the strongest contender of them all, PPCoin!”

You’re right. I didn’t mention PPCoin. That’s because it will be featured in it’s own upcoming story: “The worst-named competitive digital currency that you’ve maybe heard of.”

2,100,000,000,000,000 currency units will never be enough to fuel an economy

2.1 quadrillion.

That will the number of outstanding Satoshis (the smallest BTC denomination at 1/100,000,000th) in the Bitcoin economy by 2140.

I for one, have to completely agree with the respected economists who claim this this figure is obviously too small to ever be able to facilitate any semblance of actual trade.

If Bitcoin were to become popular, we would obviously encounter the problem of people hoarding the crypto-currency. This would decrease the flow and availability of Bitcoin to a dangerous level.

Just imagine if 99% of the Bitcoins in circulation were held by savers, leaving only a paltry 21 trillion Satoshi to service the actual functioning economy.

With time, maybe 99.999999999% of all Bitcoins would just be held. Nobody would ever spend them and they would just get more and more valuable. People would actually get richer without doing anything. This would simply be morally wrong, and we would have to put a stop to it.

And if Bitcoin continued to be popular even still, we would eventually only be left with a single Satoshi to service the whole economy. Just one! Bitcoiners say that this Satoshi could be broken into smaller increments if need be, but I would call that cheating. You can’t just create something from nothing.

For the good of humanity, we must put a stop to Bitcoin in its present form. To this end, I propose that we increase the total number of eventual Bitcoin to 21,000,000,000,000,000,000,000,000,000,000,000 (21 undecillion). By my calculations, this should be just about right.

Bitcoin enthusiasts, while well meaning, really just aren’t that good with math.

Tell your kids to be coders

Don’t get a job, invent one, or so the saying goes.

When I was about 10 years old, I remember by Social Studies teacher telling my class that when we grew up, many of us would have jobs that didn’t exist yet.

I was dumbfounded. I could list at least 10 jobs off the top of my head: fireman, policeman, doctor, lawyer, businessman, astronaut, president, teacher, nurse, actor (each of which I assumed was about as prevalent as the rest). But for some reason, I couldn’t conjure up any job that didn’t exist already. It was as if somebody had told me that there are other colors besides the ones I could already see, and I was tasked with creating an image in my mind of how these mysterious hues might appear.

50 years ago, the title of “software engineer” didn’t even exist. And when it was first coined around the late 60’s, it was scoffed at for its seemingly oxymoronic play on words. Everybody knew that engineers designed stuff, physical stuff. Calling someone a software engineer seemed as silly as labeling them a flightless pilot or a stone horticulturist. 

If we take a giant step back, we can observe the birth of what is potentially the most high growth, disruptive, and valuable craft that humankind has every seen, that of the coder.

They – are – everywhere.

Anybody who has conducted a quick search on any job listing website can attest to the fact that coders are in hot demand. How disappointing it is to the layman to see all of these postings asking for literacy in languages we’ve never heard of before. Regardless of the occupational category, there is always a place for a coder.

Law, real estate, finance, tourist, entertainment… the list goes on. Everybody needs help creating integrated networks, realtime analyses, and scalable customer interfaces.

In my own career realm of Life Sciences, I work daily with people who can say with a straight face: “My job is to make radiologists obsolete” or “In ten years, treatment decisions will be determined by evidence-based algorithms that create pathways with the highest probability of positive outcomes.” 

Being a coder, coupled with some domain-specific expertise such as medicine or supply chain management, is the ultimate power combo in today’s mercurial market place.

In addition, the ability to code provides a method to comfortably straddle two career paths for your entire working life: That of the employee, and that of the entrepreneur. Coders can go back and forth depending on their preferences. They can find employment in any industry they please, with the option to strike off on their own when the right opportunity presents itself. And if they play their cards right, they can get their work done in a cramped Manhattan apartment as easily as on the beaches of Bora Bora.

No wonder that the coding elite have descended upon Bitcoin in swarms. It’s a magnificent place for them to put their skills to the test, create meaningful solutions, and potentially earn gobs of money.

Everybody today can benefit from even a little bit of programming knowledge. But if you truly find the art of coding to be beyond your abilities, at least tell your kids that if they work hard, and want to make an impact in the world, that they could do a lot worse than becoming a coder.

Bitcoin, the beautiful bubble machine

Whether you believe that Bitcoin will be highly successful or not, you should recognize that we are witnessing the birth of a potential currency in realtime. Regardless of which economic camp you call home, your theories will be put to the test. We can all learn something from watching the fledgling Bitcoin try to escape the nest and survive in a complex world.

People validly observe that the Bitcoin price denominated in fiat currencies is phenomenally volatile, and on occasion organizes itself into distinct run-ups that we call “bubbles.” Personally, I prefer to call them “bubblettes,” since if Bitcoin really really takes off, we’re going to see price increases that will completely eclipse historical comparisons.  

I would argue that the prevalence of consecutive bubbles is actually a healthy and expected part of the growth phase in Bitcoin, and that they provide a potential counterargument to the supposition that Bitcoin will become irrelevant due to hoarding.

At any given time, the distribution of Bitcoin holdings looks about the same. You will see about 70% of wallets holding a small amount, 29% of wallets holding a medium-sized amount, and 1% of wallets holding a significant amount – depending on your subjective definitions.

Over time, this distribution will change, coincident with the amount of Bitcoins needed to qualify for the top 1%. The reason for this is because bubbles serve a very valuable purpose in prying Bitcons from the hands of large holders. It is the market’s way of letting small and new players say: “We want those Bitcoins, and we’re coming for you.”

What ensues is a chase up a very steep hill, atop which the large Bitcoin holders eventually capitulate and sell their coins – then everybody walks (or tumbles) downhill on the other side.

Because of psychological reasons, the large holders will always be the majority of sellers in the last stages of a bubble. The reason being the asymmetrical value of a currency hedge to holders of different amounts. For instance, if you own 0.1 Bitcoins, and the price quadruples, you are much less likely to get trigger happy and sell than if you owned 10,000 Bitcoins. Surely, even the most stoic of Bitcoin believers would trim a little off the top of a stash that large if the price were $500. Not so for the small holders. In fact, they might be more likely to keep buying.

And so this process continues in a very fair way. New and small players chase around the big players as if they were in a game of American Football, trying to swat away Bitcoins and cause a fumble. On net, this sloughs off more and more coins from the top percentiles over time.

Just to give you an example, I would remind you of the frequent stories told by super early adopters when they would send around 10,000 or 20,000 BTC between one another just for fun. Some would sell 30,000 at $0.01 each, feeling very happy with the $20 profit that they turned.

Yet today, we lament that those days are long gone, and it’s such a shame that we have to pay $100+ for a single Bitcoin!

But remember, that’s what people thought when Bitcoins hit $1 apiece: “The days of mere pennies per Bitcoin are over!” Early on, 100 Bitcoins was chump change. Now those Bitcoins would be worth over $10,000. 

In conclusion, people only hoard Bitcoins until they don’t. The market makes sure of that, and bubbles are an illustration of this activity, something to be marveled at and (depending on your sensibilities) even embraced. Some individuals believe that early adopters will hold too large a sway in the future because of their ability to smash the market with large sell orders. This argument is true, but only to a limited extent. Remember, when a large holder of Bitcoins loads the proverbial chamber and fires a slug at the exchange rate, they also deplete their ammo.

Unlike the purveyors of the world’s fiat currencies, nobody has unlimited Bitcoins.