Why I am Still a Cryptocurrency Enthusiast, 2019 Edition

Cryptocurrencies had a rough ride in 2018. As of January 7, 2018, the total market capitalization of all cryptocurrencies tracked by CoinMarketCap.com came to more than $800 billion, its highest point ever. As I write this on January 3, 2019, that total market capitalization is down to about $130 billion — about 1/6th of the market’s high point.

You might be surprised to learn that I’m still a cryptocurrency fan. But, just to be up front, yes, I am.

Not because I’m sitting on a huge pile of the stuff (as of this moment, my cryptocurrency holdings are worth less than $100 US), nor because I expect to make a killing speculating (when I get some crypto, I generally spend it without waiting very long to see if it increases in value).

I’m still enthusiastic about cryptocurrency because I’ve seen what it can do and make plausible predictions about what it will be able to do in the future. Cryptocurrency seizes control of money from governments and puts it in the hands of people. With improvements in its privacy aspects, that’s only going to become more true. In short, cryptocurrency fuels freedom.

But can it last? Will it win? I think that the last year, far from dispelling that notion, reinforces it. Let me explain.

Two kinds of noise related to cryptocurrency seem to have faded in tandem with the market cap’s downward trend. As one might expect, the ultra-bullish “Bitcoin will go to $100,000 real soon now!” voices have gone down in number and volume. But so have the voices comparing cryptocurrency to a Ponzi scheme or to the 17th century “tulip bubble.”

Yes, there are exceptions. One is Nobel-winning economist Paul Krugman, who still seems to think that transaction costs and lack of “tethers” to fiat government currencies will make crypto a bad bet. Of course, Krugman also said, in 1998, that “[b]y 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” So however expert he may be in other areas, I doubt I’m alone in discounting his predictive abilities when it comes to technological advancements.

This year-long market correction has been exactly that — a correction toward real values. After a period of hype (“Initial Coin Offerings” based on bizarre use cases) and scams (“pump and dumps” cons based on new fly-by-night “altcoins”), the wheat is separating from the chaff, the fraud is settling down to a level consistent with the rest of human activity, and the financial “mainstream” attitude has gone from dismissive to curious to “how do we get in on this?”

Cryptocurrency is getting better and better at what it was meant to do. It facilitates transactions without regard to political borders, it safeguards the records of those transactions through a distributed ledger system (“blockchain”), and to varying degrees (depending on which currency and the individual user’s habits) it protects the privacy of those who use it from prying eyes.

Cryptocurrency, and the freedom it entails, are here to stay. Welcome to the future.

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The IMF Fears Cryptocurrency; It Should

The International Monetary Fund refers to cryptocurrency only once in its 215-page World Economic Outlook for October 2018, but that reference is telling: “Continued rapid growth of crypto assets could create new vulnerabilities in the international financial system.”

Ironically and counter-intuitively — but in my opinion not accidentally — that sentence is grouped in a paragraph  with worries about the potential of cyber warfare to “undermine cross-border payment systems and disrupt the flow of goods and services.”

Cryptocurrency, of course, is the perfect solution to “cross-border payment systems.” In terms of both movement and accounting, it simply ignores borders.  A Bitcoin is a Bitcoin is a Bitcoin — in Minneapolis, in Mumbai, in Moscow. And it can be moved between those three cities in a tiny fraction of the time and with a fraction of the effort  it takes to set up wire transfers between bank accounts and to exchange dollars for rupees, or for rubles. All without government permission, too.

The “vulnerabilities” the IMF worries about are its own. Cryptocurrencies are, to varying degrees, resistant to supervision, surveillance, and regulation by entities like the IMF and its 189 member governments (the so-called “international financial system”).

Those governments (and their intermediary institutions like the IMF) fear money they can’t control. Who can blame them? The long history of central government banking is a history of money and markets easily subjected to taxation and political manipulation. Its purpose is to shear the sheep — that is, to clothe the ruling class at the expense of those who produce goods and services of actual value.

The brief history of cryptocurrency, on the other hand, is a history of emerging financial (and, ultimately, political) freedom for the productive class. That’s its philosophical genesis and its technical goal: Putting wealth beyond the reach of the thieves and extortionists who call themselves “governments.” Crypto is, as the anarcho-syndicalists like to put it, “building the new world in the shell of the old.”

Some players in the crypto sector seek co-option by the existing “international financial system” — for example, seeking regulation by the US Securities and Exchange Commission and its global equivalents.  They’re backing the wrong horse. The old “international financial system” will be replaced, not reformed.

The IMF’s purpose is not to facilitate “cross-border payment systems and … the flow of goods and services,” but to control them.  Fortunately, the time when that was even remotely possible is coming to an end.

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Freedom is Winning in the Encryption Arms Race

At tax time in the US, as Gaurav Sangwani  of India’s Financial Express reports, many American cryptocurrency users weren’t interested in discussing that aspect of their lives with the Internal Revenue Service. In an early April TeamBlind survey of 2,600 people who earned money from crypto, 46% said they wouldn’t be reporting those earnings to Uncle Sam. Meanwhile, per Investopedia’s Nathan Reiff, fewer than 100 of Credit Karma Tax’s 250,000 most recent filers had reported cryptocurrency transactions as of April 13.

That’s bad news for the IRS, but great news for America. People whose ancestors fought a revolution nearly 250 years ago on the slogan “no taxation without representation” are finally acquiring the weapons to fight a new revolution on a new slogan: No taxation without CONSENT.

Taxation as we know it is really nothing more than the typical mob protection racket: “Nice livelihood you got there — be a shame if anything happened to it.” And since the birth of employer “withholding” during World War Two, the mobsters have mostly had it easy. They rake what they want right off the top of your paycheck and encourage you to think of any partial refund as a gift.

The racket has always had two weak points, though.

One is that it’s dependent on a model of employment — centralized workplace, lots of employees, one employer — that’s increasingly giving way to a “gig economy” in which more and more people are becoming de facto self-employers.

The other is that it’s dependent on an easy access to personal information that once favored the mobsters but that has likewise been breaking down since the dawn of widely available Internet access.

Since the late 1980s, Americans have been engaged in an arms race with the federal government: Our strong encryption versus their attempts to compromise that encryption. Win some, lose some, but cryptocurrency is potentially our side’s decisive super-weapon.

If you thought the perpetual whining from law enforcement about encryption was about fighting terrorism, think again. It’s mostly about the money. Like other mobsters, politicians and their accomplices hate the idea of their rackets coming to an end.

Government will get much smaller and much less powerful once it has to ask nicely for a share of the wealth you produce, and justify the request, instead of just taking what it wants. That day draws closer as the percentage of people using cryptocurrency and declining to tell Uncle Sam about it grows.

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First They Came for Backpage

The First Amendment to the US Constitution is pretty clear: “Congress shall make no law … abridging the freedom of speech, or of the press …”

The Communications Decency Act is similarly clear: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

But even after repeated judicial rebuffs on these grounds the federal government continues to attempt to “get” Backpage.com for allegedly “facilitating” sex work by accepting advertisements  — usually, and usually falsely, described by rabid demagogues like US Senator Claire McCaskill (D-MO) as “human trafficking.”

On April 6, several federal agencies stole (the word they used was “seized”) the site’s domain names and raided its co-founder’s home, arresting him pursuant to a 93-count indictment from a grand jury.

As of the raid, the indictment remained “sealed,” legalese for “why should the US government be obliged to tell mere serfs what it is up to or why?” That’s a rotten kettle of fish in and of itself. A “justice system” that operates in secret has no legitimate claim to the title.

News accounts that may be based on leaks (I’ve been unable to verify that the indictment has been un-“sealed”) describe the charges as relating to “money laundering” and “human trafficking.”  The “money laundering” nonsense brings an additional disturbing element with it to the extent that it’s described as being about the use of cryptocurrency (Bitcoin), another activity that the feds would like to bring under their control.

I hesitate to describe the secrecy and cryptocurrency angles as distractions. They’re absolutely important. But the most urgent problem from my point of view is that the federal government has openly arrogated to itself the power to outlaw speech and punish publishers for allowing that speech on their platforms, so long as it clicks its collective heels together and says “there’s no crime like human trafficking” three times first.

In 2016, after a court slapped down the attempts of Kamala Harris (D-CA), then attorney general of her state and now a US Senator, to prosecute Backpage for “pimping,” I suggested that merely dismissing the charges was not enough. I am still of that opinion.

The ringleaders of the Backpage crackdown — legislators, prosecutors and law enforcement chiefs — need to be charged with conspiracy against rights under United States Code, Title 18, Chapter 242:

“If two or more persons conspire to injure, oppress, threaten, or intimidate any person in any State, Territory, Commonwealth, Possession, or District in the free exercise or enjoyment of any right or privilege secured to him by the Constitution or laws of the United States, or because of his having so exercised the same … They shall be fined under this title or imprisoned not more than ten years …”

These bad actors have completely abandoned rule of law, and they’ve done so for the express purpose of violating the First Amendment. If they are not brought to bay and severely punished, Backpage will merely be their first, not their final, victim.

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When Academics Describe the World

I always gets a kick out of academics confidently describing the world based on their models and research, especially when the world right outside their window works nothing like what they are sure must be happening based on their theorizing.

I’m all for theorizing.  Big ideas require reflection.  But the best theorizing happens in a loop, taking in the real world, reflecting on it, putting the resulting theories to test back in the real world, reflecting again, etc.

In economics, theorists will tell you “public goods” like lighthouses can’t ever be supplied by private, profit-seeking ventures.  Meanwhile, right outside their window there are private lighthouses, provided in ways too varied and ingenious for the academic mind to comprehend, and too skin-in-the-game trial-and-error intuitive for the entrepreneur to even know how to explicitly describe.

So you have the self-interested tinkerers doing the impossible without being able to describe it, and the sheltered academic calling things impossible without being able to try them.  The Royal Society confidently declared that years of peer reviewed research proved what a couple of bike mechanics did at Kitty Hawk was not possible.  They didn’t publish any papers, they just flew the damn plane and changed the world beyond the small dreams of academics.

A far less dramatic example I recently encountered gave me a laugh too.  A professor told me that the best way for candidates to stand out on the job market, given the ubiquity of college degrees, is by their GPA.  It seemed to him a sensible and efficient way of beefing up the flabby and dying signal of a degree.  In the real world of hiring, no one cares about GPA.  No one wants to see it on a resume.  In fact, listing it has a greater chance of being a negative signal than positive.

I’ve also been following a debate in the bitcoin community about an academic paper on the probability of profit from “selfish mining”, basically a way to cheat the bitcoin system and, for all intents and purposes, ruin it.  I don’t pretend to know the higher math involved, nor do I claim to know the actual probability of this threat.  Still, I find it amusing the amount of confidence about what is mathematically possible that ignores what real rational actors in the market actually do.

It has a similar flavor to those old silly Hobbesian claims (often portrayed in unimaginative Hollywood films) that, absent Leviathan, everyone would immediately kill each other, or that all power disparities will result in total annihilation of the weaker.  Those who see the world this way claim to be taking account of man’s high level of self-interest, but in reality they don’t see the world at all, and are completely underestimating just how self-interested humans really are.

It seems the lack of academic imagination stems from lack of seeing the world around them, the way Watson failed to see what Sherlock did.  Those who can see are rarely the ones able to describe what they see or write books about it.  Instead, they act on it with innovation and value creation.  In a free market anyway, profit goes to the visionaries, even if they’re unable to describe what it is they see.  Then everyone else spends decades debating the proper description of the world created by the innovators.

Let them debate.  Go create.

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Taking the “Digital” out of “Digital Gold”

There’s an idea that bitcoin should be a “store of value”, like digital gold, instead of something used directly for every day transactions.

But this misses the entire point of digital gold.

Gold has been the most pervasive form of money on the planet for thousands of years because it has the best properties of any substance to act as money.  The one property gold does not have is portability.

That missing property is the source of many monetary woes in history. It makes gold easy to seize by governments. It requires claims to gold to be used in every day transactions, instead of gold itself, which opens an entirely new opportunity for fraud, fiat, and inflation.

The idea of digital gold is to take all the amazing attributes of gold and add the one thing it’s missing: portability. That’s what the “digital” part means. The magic of bitcoin is that it found a way to maintain all the very best properties of money found in gold and add to them the greatest portability of any money in existence with instant, near free global transactions.  Until bitcoin, there was always a choice between the other key attributes of money and portability. Digital scarcity was thought impossible. Bitcoin emerged as a new kind of money that puts the properties the oldest and best form into bits and bytes for maximum portability.

If the plan is to hamper the portability with low block limits, long waits, high and radically changing fees, then it’s not digital gold at all. The whole point of making gold digital is to take advantage of the portability of digital. Without that, it’s just like regular gold. But we already have regular gold.

If it requires second layer solutions and claims to the underlying asset, it’s no improvement over gold standards with paper money, which may be better than what we have today but vulnerabilities in that system also got us to today.

If you kill portability, you don’t have digital gold. You have a gold competitor that brings no new attributes to the table, save perhaps the known limit of supply.

To make use of the “digital” in digital gold is to ensure that one great property that physical gold lacks, portability. An instantly portable gold functions as cash. But better. It functions as the best properties of cash but with all the key properties of gold at once.

So a bitcoin unusable for daily transactions should certainly not be called electronic cash. But I think even digital gold is too generous, since there’s no point to digitization if you don’t take advantage of it.  It’s more like gold without history.

I prefer the vision in Satoshi’s paper. All the best properties of gold with instant portability is a game changing advance in human society.

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