Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Tag: Bitcoin

The Terror Of Electronic Money

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On November 24, 2021

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Electronic money is inherently authoritarian. (Bitcoin is authoritarian and deflationary, and deflation rewards first movers and the rich far more than normal people.)

A few weeks ago John Michael Greer noted that part of what happened during Covid is that people left the formal economy and joined in the informal one.

The strength of a government can, most simply, be measured by how much it can tax. The early absolutist monarchs spent much of their time figuring out how to tax people, something which was very difficult: they built bureaucracies largely to increase their income, so they could wage war better.

Cash money is always a problem to governments, because people can exchange it without registering the exchange. Granted, governments became very good at tracking money, but there were always ways to avoid the system, especially if you were smart and spent cash carefully. I’ve had multiple friends who worked for some period for cash under the table, especially the in the (old) gig economy and in restaurants.

Electronic money, whether done on a blockchain or not (though blockchains are terrible for privacy), with the removal of cash money, makes it almost impossible to escape the state’s taxation and makes many small exchanges not worth doing, since the fuss and expense of tax accounting is usually an immense pain.

So e-money is something governments really want more of, and it’s something that people who are concerned with real freedom, not theoretical freedom such as “rights” the government may or may not actually bother respecting, should be concerned every time they see a movement to restrict cash and move to e-money. Even partial moves, like India’ getting rid of larger bills, can be devastating, and if the informal economy is large enough, can be disastrous economically even if the government winds up with more taxes. (India’s experiment was bad for the Indian economy, as I expected.)

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Bitcoin is not “anonymous money”. Blockchains record every transaction. Cash is anonymous money, and anyone who tells you otherwise is a scam artist.

Computers and the telecom revolution, overall, have been bad for the freedom of most people, in very concrete ways; sometimes minute to minute ways, since they also allow for bosses to automatically monitor what workers are doing. Hell is micro-management, and this is moving out from warehouses, into white collar jobs. No one who isn’t powerful at work will have any real ability to dodge it.

I first noticed this at my last big corporate job, where every “automation” of clerical workers was really about control: every one reduced productivity but made workers jump thru automated hoops and made it easier for management to see exactly what each worker was doing.

None of this should be surprising. Advanced in communication technology always allow more control because they allow more knowledge to be centralized. This was true of writing and it’s true of computers. It used to be that if the boss wasn’t there and couldn’t justify a supervisor to stand over your shoulder, you had a fair bit of freedom to do the job your way, but now an algorithm watches you and managers can see real time dashboards.

My entire experience at work was that “Hell is micromanagement”, one of my best bad jobs was being a bike courier because back in the early 90s they couldn’t track where you were or what you were doing. They told you to pick up and deliver; as long as you did that on time, it was up to you how you did it, and when work was slow, no one was telling you to do make-work.

More and more this is going away; bosses are even putting tracking software on home computers for remote workers, and sometimes insisting on having cameras watching the workers.

Freedom isn’t just about the right to free speech and assembly or a speedy trial (rights we are losing anyway, in many countries) it is about the moment to moment experience of life, and the majority spend half their waking hours working. If work sucks, life sucks. And with e-money, you won’t even be able to opt out of the formal economy.

Welcome to Hell.

Bitcoin Is Reactionary Money

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On February 8, 2021

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This is only the second time I’ve written about Bitcoin. I have friends who have done very well off it, and Bitcoin’s fans are fanatical about it. This post will probably get more hate than everything else I’ve written combined.

The reason they’re fanatical is that it’s made many of them filthy rich, for doing nothing but being a first mover and HODLing (holding.)

Bitcoin’s original selling-proposition was a good one: peer-to-peer money; cut out the middleman. This is something which needs to be done, because the middlemen regularly abuse their power by shutting people they don’t approve of out of the system. This is true on the national levels, with sanctions, and true on the individual and corporate level. I remember when Visa, Matercard and PayPal all cut off Wikileaks, for example (long before 2016). They regularly cut access off from companies selling legal goods they don’t like (for example, various nootropics, or soft-porn.)

So a way of getting past these gatekeepers, whether sovereign or corporate, is needed, as those gatekeepers regularly abuse their power.

The problem is, to quote Stirling Newberry, that the bitcoin is the worst way to do something necessary. It has massive transaction costs, in terms of energy, and thus is bad for the environment. But, as money, it is reactionary money: it was designed to have 21 million bitcoins max, with less produced over time (halving rewards).

What this means is it vastly rewards early-movers. The sooner you got in, the more money you made. The people who made the right decision in the  past, control the future, much as the families who were rich in Florence in the 15th century are rich today.

This would be great if making one important decision good for yourself meant you would always make good decision in the future that were also good for other people. Money is power and people with more money have more power. Bitcoin creates a new power bloc: those who got in early.

There’s no reason, however, to assume one good decision for yourself means you will make future good decisions that are also good for other people. (At the extreme end, Genghis Khan says hi, and so does every other successful conqueror. So do the people who crashed the world economy in 08, but got bailed out.)

Bitcoin is deflationary: it gains value over time (assuming it doesn’t crash). Deflationary money is not good money. It restricts what can be done with it, rewards dead money (people who just sit on what they have), and empowers (again) people who won the past, not people who are doing good things in the present.

There is also the matter that bitcoin isn’t acting like money. It’s acting like a speculative resource bubble, which is because it is a speculative resource bubble. Making bitcoin is called “mining” for a reason: it was modeled after gold, except that unlike gold, you can’t find more of it once it’s done. It was designed to be GoldPLUS, for people who want to win once and be secure forever.

Its other great feature (which is fool’s gold) is that it can be used to bypass government restrictions. Or so fools think, since it’s a blockchain and every single transaction is recorded. Do NOT use bitcoin to pay for anything the government might one day want to track you down over. Use cash or a cryptocurrency engineered for privacy.

The question here is what’s going to happen when BTC is mostly mined out (mining the last block may take quite some time but it will be mined out before that. Twenty-one million coins can be mined, of that 18.5 have been mined.)

What happens to the value when the first mover advantage is gone? When it’s “mined out?”

Well, that depends on if there’s a genuine use-case. Is it a functional peer-to-peer payments system which lets you bypass both censorship and high fees? Right now, bitcoin is slower than many normal transactions. When mining ends, fees are expected to go up (since miners currently subsidize them while mining) and it isn’t actually anonymous money: in fact, given the ledger that permanently records every transaction, it’s almost perfectly engineered to be a totalitarian technology.

That said, what I see possibly happening is that it does stick around. Paypal is bringing it online, for example. Most people don’t hold much BTC in this future, they simply use BTC as a transaction medium, renting it, in effect, from the big HODLers. The lightning network also promises to speed up and cheapen transactions, there can be fixes to the transaction issues.

The other possibility is that once it’s no longer possible to get rich, we find out this is a bubble and a ponzi scheme. The first movers who were smart enough to cash out along the way do great and the bubble bursts. (If I were a big HODLer I’d hedge: cash out about half and buy off-chain assets, keep the rest in case BTC sticks around as infrastructure.)

Much of this depends on legal status and institutional support. Contrary to what a lot of BTC maximalists think, BTC can absolutely be shut down if enough big governments decide to do so. Set the forensics on the transaction chains and make its use illegal, subject to penalties or even jail time and yeah, that will destroy much of the value. It’s only a store of value if you can turn it into real world goods. If you can’t, it’s just a digital asset, worth less than a high level MMORPG character.

All that aside, the main issue is, again, that it’s reactionary money, intended to create a new class of winners who are then protected by the fact that they got in early enough, by the design of the coin itself.

It’s why BTC worked: because it was designed to create a protected asset class that rewarded first movers. The utopian stuff is overstated (because of the ledger). BTC is a greed project dressed up in idealist clothes, which doesn’t mean many people don’t genuinely believe its utopian promise. (Much as big capitalists constantly say how wonderful capitalism is for everyone and how they deserve to be rich because they make life better for everyone.)

All that said, I like a lot of BTC people I know and if it’s something of a scam, well, it’s not one-one hundredth as bad as what Wall Street does every day. In a world where almost all fortunes are illegitimate, based on scams or hurting other people, BTC at least gave some people outside the usual class a chance to get rich or make a bit of extra money.

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Do NOT Use Bitcoin Assuming It Is Anonymous

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On January 27, 2018

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Blockchain is a fundamentally totalitarian technology. It keeps track of every transaction ever made. Some crypto-currencies are better than others, but Bitcoin isn’t particularly anonymous.

Researchers at Qatar University and the country’s Hamad Bin Khalifa University earlier this week published findings that show just how easy it may be to dredge up evidence of years-old bitcoin transactions when spenders didn’t carefully launder their payments. In well over 100 cases, they could connect someone’s bitcoin payment on a dark web site to that person’s public account. In more than 20 instances, they say, they could easily link those public accounts to transactions specifically on the Silk Road, finding even some purchasers’ specific names and locations.

The researchers point out that they used only easily spotted addresses and simple matching techniques. They didn’t exploit, for instance, methods that other researchers have proposed for making less obvious connections between bitcoin addresses that identify “clusters” of addresses associated with dark web black markets. Nor could they use the means available to law enforcement to compel online services like the popular bitcoin wallet company Coinbase to cough up secret bitcoin addresses. “Our analysis shows a lower bound of what can be found,” Boshmaf says. More well-resourced and motivated hunters could potentially trace even more would-be anonymous bitcoin spenders, even years later.

The most anonymous technology for making untraceable purchases is known as “cash,’ which is why multiple countries are moving to phase it out (India being the largest), making it difficult, in particular, to make large purchases. Even places like the US and Canada, with their 10K reporting limit, haven’t raised that limit in decades, while inflation has made 10k a smaller and smaller amount of money.

Blockchains are far easier to use for totalitarian purposes than for non-totalitarian purposes. If you intend to use them for anonymity you MUST have done the necessary research into how to do so.

In general, using the internet for anything you want to remain private is dicey. The internet is not set up for it, and most powerful private and public actors in the world don’t want you to have any privacy. Understand this in your bones: What you do online is tracked, it is hard to make it anonymous, and it is often stored for long periods, so even if they can’t track it today, or choose not to, if you become of interest or techniques change, everything you’ve done online, now for decades, may turn into an open book.

This is becoming true offline as well, with the rise of surveillance cameras, often equipped with audio and permanent storage, combined with biometrics and pattern matching. The new AIs, while they aren’t going sentient, are extremely good at this sort of activity.

Still, offline is a harder problem, cash transfers are easier to conceal and harder to track, if you’re smart.

Know this, understand this, and act on this politically. Anyone who wants to remove cash is the enemy of anyone who values freedom. Anyone who wants blanket surveillance is the enemy of freedom.

There are no exceptions to this. This is law, natural law. Learn it in your bones, and use it to recognize the actual enemies of freedom.

Align yourself as you choose, but understand that the big killing and oppression is generally done by large actors, not by lone predators from whom government promises to protect you.

Government is a great slave. But as a master, it is a terror. If you don’t control your government, someone else will. And right now, someone else does.

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Major Governments Can Shut Down CryptoCurrencies at Will

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On January 14, 2018

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Government can shut down the cryptocurrency experiment any time it wants. Government money creation worked because the government insists you pay taxes in their money and they have people with guns. Crypto exists as long as governments wants it to and no longer.

There is a great deal of triumphalism in the crypto-world, because it has made a bunch of people rich. People who get rich virtually always think it is because they are great people. They feel empowered and so on. (And, according to the research, generally become selfish jerks with a reduced empathic response.)

The simple power relationship is this: Any government can put the hurt on crypto and largely shut it down in their country simply by criminalizing it and having their taxation folks watch the entrances and exits.

Crypto can be badly hurt by three governments: China, the EU, and the US, in exactly the same way. Crypto is arguably in violation of a host of security laws as it stands, and could be made more illegal any time a regulator or government chooses to.

People with guns beat people with cryptography. Code is not law, and the people who thought it was were fools. Law is what people with something approaching a monopoly on violence in an area say it is, and nothing else.

Peer-to-peer financial networks are a good idea: Cutting out banks for exchanging money is a good idea. (Bitcoin is a bad way to do both, but that’s not this article. Other coins do a better job.)

But it must be allowed by those people who control organized violence, and if they choose not to, all your technical wizardry will not save your networks, even if some crippled, black web version remains.

Nor is money creation quite what you think it is. Money exists mostly because powerful people want to be able to coerce the non-powerful through either taxation or debt-farming. Other benefits are incidental, if appreciated.

That doesn’t mean that crypto can’t, in theory, grab money creation from banks (though co-optation is far more likely). It means that, like banks, whether crypto can do so rests on whether they can cut a deal with, and prove their usefulness to, state-sanctioned, organized violence.

This is all it is ever about.

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Bitcoin Is a Bad Way to Do Something Necessary

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On November 8, 2017

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I don’t write about crypto-currency often because its proponents are fanatical. (You’d be fanatical too if you combined rabid self interest that might make you a multi-millionaire with a social engineering project you thought was utopian.)

But more and more, I am inclined to agree with a judgement my friend made years ago: While Bitcoin does something important (creates a peer-to-peer payment network) it does it in a terrible way.

This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). As the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries’ index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.

This is crazy. Looked at from this point of view, Bitcoin is terrible: Its actual transaction costs are far higher than those for any other form of money of which I am aware.

Bitcoin was also a libertarian project. Libertarians hate inflationary money, so Bitcoin was made deliberately deflationary. There are a limited amount of bitcoins which can be created. There is a strong first mover advantage even without the fact that bitcoin is acting more like stock in a company than money.

Deflationary money is reactionary. It rewards people for being first, not for being productive. It encourages people not to spend and not to invest in something other than money, which is bad for economies. Moderate inflation, contra-gold bugs and Austrians, is a good thing, as it devalues effort from the past. It’s great that you did something wonderful 40 years ago, but what you do today should matter more.

It shouldn’t matter completely more, I’m not saying that retired people shouldn’t be able to eat and pay rent, but it should discount and discount more and more over time.

People who won the past shouldn’t control the future for all that long. People who are winning the present should, if anyone should.

This piece will likely have people screaming in the comments, but just because Bitcoin is not government money does not mean it gets a pass from general economic principles.

And none of this is to say that blockchains are not an important innovation, or that Bitcoin isn’t important, won’t make its early movers lots of money, and so on. Just that its embedded economic assumptions and power requirements won’t produce maximum welfare.

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As Bitcoin Falls Apart

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On January 16, 2016

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It seems Bitcoin is skirting disaster. They need to increase the amount of memory allocated per block, but have refused to do so. The result is that transactions can take hours to occur. To manage this, fees for bitcoin usage are increasing, to the point where it costs more than a credit card. (Accepted by a lot less people, and costs more. The upside is…?)

One proposed solution is to, oh, increase the memory, but doing so is opposed by three of the five members of the people with access to the code base, and by the Chinese miners who control most of the “mining” which creates Bitcoins. (You can read about the adolescent infighting details here).

Now remember, Bitcoin was a Libertarian experiment in money. You have to “mine” it using computers which do nothing worthwhile except mine it. There is a built-in limit to the number of bitcoins which can ever be created, to  ensure that, in the long run, Bitcoins will be deflationary. All in all, it’s structure was designed to create huge, first-mover advantages and no governance worth speaking of (because that will all just “sort itself out”).

Or, as Daniel put it:

Yeah.

Now, Bitcoin was about the worst way possible to do something which REALLY needed to be done, which is to create a peer-to-peer payment system which cuts out the middleman. You do this so that banks/credit card companies can’t get what amounts to unearned money (the amounts of which are far more than the cost of the service provided), and also so that companies and governments can’t shut down the ability of people they don’t like to send and receive money, a power which has been terribly abused–especially by the US Treasury Department.

Bitcoin, minus Libertarian assumptions, with a bit of decent governance, could have really changed the world in a good way.

It didn’t, though the underlying technology of blockchains may yet. We’ll see about that, because what I’m hearing from the blockchain world is that banks are investing in it highly because they think it may help them with “know your customer,” “anti-money laundering,” and reduce transaction costs (for them, obviously, not necessarily the clients).

A “revolutionary” technology, thus, is likely to wind up reinforcing the status quo, though we’ll see.

Another contributing factor in all this is that, in addition to Bitcoin being a way for early movers to get rich (and for speculation), it’s real use has been primarily moving money in and out of countries.

It is important in China and tolerated, not just because the miners cluster there, but because the Chinese (including many of their officials) want an unofficial way to get money out of the country. Everyone has known China was going to run off the Mercantalist cliff, and people have wanted to get money out of there (the US dollar spiking like it is almost always a sign of flight to safety and presages a global recession).

Bitcoin got its first spike of fame outside tech circles by helping people get their money out of Cyprus when their banking sector had its collapse.

Political theory, which includes economic theory as a subset, matters. Bitcoin was based on libertarian theories which do not and cannot work in the real world. That is why it has not and will not live up to the utopian dreams of its early political backers.

We will see how the Blockchain is used by other cryptocurrencies, and whether any of them manage to create a functional peer-to-peer payments system.

I hope they do.

The failure of the Bitcoin dream (as opposed to the actual creation) doesn’t make me happy. We can use it as a lesson, the first of which is: “get your motives straight,” and the second of which is “Have a workable political and economic ideology.”

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Why China Banned Banks from Bitcoin Transactions

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On December 5, 2013

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China has ordered banks not to engage in Bitcoin transactions.  The reason is simple: bitcoin is used to bypass currency restrictions, and China doesn’t want even more money flowing out of China (it’s already contributed massively to the Australian housing bubble and affected New York’s, for that matter).  China is creating about sixteen times more money a year than the US, everyone else’s QE is meaningless in comparison.  That money is meant to boost the Chinese economy, not cause property bubbles outside of China.

Bitcoin is dubious at best.  It intentionally gives a huge first mover advantage (and has made its founders filthy rich). It is intentionally deflationary.  It is the libertarian answer to their screams about the central bank “no, we just wanted to be the central bank”.

What bitcoin is is an way of moving money without monetary authorities knowing about it.  Its first bubble peak was during the Cyprus debt crisis, when it was used to move money out of Cyprus.  Since then it has risen based on bubble psychology and on money movement and laundering.  I don’t necessarily mind, just because a government says you can’t buy something doesn’t mean the government is right, I just think it’s important to be clear what Bitcoin is.

The best way to make money from Bitcoin if you weren’t a founder is to mine Bitcoins: printing money, if you think Bitcoin is money.

Governments since the 70s have massively cracked down on movements of money: the $10,000 declaration when you travel (a lot less than it used to be given inflation), the $10,000 reporting limit at banks, huge lists of suspect individuals and corporations which must be checked during every transaction, requirements to report transactions that look like they are structured to avoid the 10K reporting limit, and so on.

This infrastructure was used, in part, to break old-style organized crime (so we could get the far worse networks we have today.)  It is used to break countries like Iran.  It used during the seizure of assets when the government decides to charge someone with a crime and take away all their money so they can’t defend themselves.  It is used to enforce legal restrictions and monopolies on what you can and can’t spend money on.

Bitcoin threatens that.  It also threatens monetary policy in countries which try to keep their money in their country, like China, which is why China was the first country to forbid it.  In the West, Bitcoin is used to move money by small people, the big guys have other ways to do it.  The Russians needed Bitcoin to get out of Cyprus because the Europeans were trying to screw them, but real Western elites, nah.

All of this might make you think I like Bitcoin: I don’t, it’s the wrong way to do something that needed to be done.  We need a peer to peer payment system, but Bitcoin, intentionally deflationary, and intentionally providing huge first mover advantages and advantages to miners which increase over time, is not it.

And if you’re not Chinese, you don’t want more Chinese money getting out.  Well, maybe you do, if you own prime real estate and want to sell in a few years.  Otherwise, no, that money isn’t going into useful production, it’s going into asset inflation.  That’s not good for you.

We’re going to have to clean up money creation and find a new measure of value to peg creation to. Bitcoin, however, is not it.

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