Crypto & Socialist Action

This is now the second post in a week about Socialist Action (SA) and its chief honcho, Jeff Mackler. SA claims to be a "Vanguard Party," i.e., a Party that will lead us all to living happily ever after in a socialist utopia. That claim is belied by the fact that the Party has shrunk to minuscule size--indeed, it's arguable that Mr. Mackler is the very last member--the Vanguard Person. Or perhaps he's the Messiah? Who knows?

In the event, SA has become so small and so irrelevant that it's hardly worth paying them any attention at all. They're not even important within the narrow context of American Trotskyism, which this blog is vowed to cover. And yet here we are.

The reason for the favor is that Mr. Mackler attempts to do something important. He is, as far as I know, the first person on my Beat to actually discuss bitcoin and cryptocurrency. For this he deserves some credit. All the more is the pity that he understands absolutely nothing about the space. He's so ignorant that I have no choice but to make fun of him.

Full disclosure: I bought most of my bitcoin back in 2015, when it was very cheap, and sold all of it by the end of 2021--at a very healthy profit. For the moment I own no bitcoin or any other cryptocurrency. That should make me an expert (and compared to Mr. Mackler I am), but I have to confess that until it went bankrupt I had never heard of FTX! I attribute that (in retrospect) to the fact that I never watch sports, am unaware of how stadiums are named, and don't see any of the ads on those channels.

So now it is my sad duty to correct Mr. Mackler's many errors of fact about bitcoin and crypto. His article is entitled Behind Sam Bankman-Fried’s Cryptocurrency Crash.

Mr. Mackler writes

A competitor, CoinDesk, apparently hacked its financial balance sheet and made it public, revealing grave discrepancies between FTX’s claimed worth and the reality of its investment portfolio. All hell broke lose as investors ran for the hills. In a matter of days most of FTX’s $32 billion evaporated.

CoinDesk was not a competitor, but is instead a news site covering the crypto space. They didn't really "hack" anything, but reporter Ian Allison did some good journalism. Mr. Mackler's bad habit is to never cite his sources. In this case we can correct the error: Mr. Allison's piece is here. 

Mr. Mackler writes "Cryptocurrency has been largely unregulated; it was only in the IRS’s 2022 tax forms that an item appeared regarding reporting cryptocurrency income." This is not true. Crypto showed up on the 1040 form in 2021, and maybe earlier. The IRS issued guidelines for "digital assets" as early as 2014.

Bitcoin, by construction, is completely decentralized and can't be regulated. This is seen by many people as a feature and not a bug. Indeed, I find it kinda weird that Mr. Mackler supports "bourgeois" regulation. More, the vast majority of bitcoin trading takes place outside the USA, and is obviously not subject to American regulations.

What can be regulated are the on and off ramps--i.e., the process of buying or selling bitcoin for dollars. This is increasingly true in the US. The biggest US exchange, Coinbase, is required to obey all KYC/AML laws (Know your customer/Anti-money laundering). They're also required to submit some information to the IRS. But transactions from one bitcoin wallet to another are impossible to regulate.

Mr. Mackler informs us that

Its touted blockchain technology, powered by tens of thousands of computers, consumed some 0.55 percent of the world’s energy supply. It was said to be impenetrable—free from government oversight and, thus, free from tax obligations. Anonymous crypto speculators, called miners, spent countless hours pouring [sic] over new deals and opportunities. Initially, it was a dreamworld for anti-government-intervention libertarian politicos, who marveled at SBF’s [Samuel Bankman-Fried] gifting NGOs and related altruistic causes millions of dollars.

I'm not sure what the initial "Its" refers to. Is he talking about crypto generally, or is he just referring to bitcoin? I don't think he knows. Crypto coins can be mostly put into two classes: proof-of-work and proof-of-stake. Bitcoin uses a proof-of-work algorithm--and that does consume a lot of energy. Though I'm doubtful it's as high as Mr. Mackler claims--and in any case it's lower now than it was when bitcoin was at its high in 2021. (As usual, Mr. Mackler provides no reference for his data, so it's impossible to check.) Most other coins--notably ethereum--use the proof-of-stake algorithm, which uses much less energy. Both methods have their fans, but you can put me in the bitcoin camp. Mr. Mackler lumps them all together and ends up with confused mush.

The bitcoin network--started in 2009 by "Satoshi Nakamoto"--has proven itself impenetrable. Nobody has hacked it. The on/off ramps have been successfully hacked, and some users have lost their passwords to thieves, but the blockchain itself remains sacrosanct. I'm not sure that's as true with the proof-of-stake coins.

Mr. Mackler clearly does not understand the role of miners. Yes, perhaps some of them are speculators. Few of them are anonymous--bitcoin wallets are only pseudonymous, and once one cracks the pseudonym all trades are a public record. But the main purpose of the miners is to handle transactions. If I send bitcoin to Mr. Mackler (heaven forbid) then it's the miners' job to see that those coins are transferred irreversibly from my wallet to his wallet. That's what they do, and in return they're paid some small amount of newly minted bitcoin. It has nothing to do with "speculation" or "poring over opportunities."

Finally, Mr. Mackler has his history mixed up. The kooky Libertarian influence was strongest shortly after bitcoin was founded--say from 2009 to 2015. Since then bitcoin has entered mainstream consciousness and the ideologues have mostly been sidelined. FTX was founded in 2019--long after bitcoin had matured. Nathaniel Popper wrote a book published in 2015 that I reviewed. Mr. Mackler should read my review (or better yet, the book).

The remainder of Mr. Mackler's piece attempts to show that the whole crypto thing is just a bourgeois plot to destroy the working class, just as what happened during the 2008 financial crisis. I don't have the energy or space to go through it in detail, but it's just as sloppy as his account of crypto. 

He keeps referring to the government's response to the 2008 financial crisis as a "bailout," and then asserts that FTX wasn't "bailed out" because it lacked connections with the "ruling class." Of course it is impossible to "bail out" crypto--a bank is not the same thing as a blockchain. That Mr. Mackler can't tell the difference says something about Mr. Mackler.

In any case, the word "bailout" is inappropriate. The Federal Reserve was simply following Bagehot's law (1873) as best it could, which states that "to avert panic, central banks should lend early and freely (ie without limit), to solvent firms, against good collateral, and at ‘high rates’". In other words, all the Fed did was lend money--it didn't give anybody anything. I believe all or most of that money was paid back--at a high rate of interest. It's impossible to lend money to a blockchain.

In my aforementioned book review, I write

So what do Trotskyists think about bitcoin? I have absolutely no clue. My guess is that few of the papers on my Beat would know the difference between a blockchain and a cement block. If you're stuck in a 19th Century timewarp, then new technology becomes a mystery.

I'll give props to Mr. Mackler for at least trying, but unfortunately he still seems to be at the cement block stage.

PS  Let me link to this excellent post by Scott Alexander.

Further Reading:

• The Eurodollar
• Peak Bitcoin?
• Jeff Mackler Quits the 2020 Race

Peak Bitcoin?

Have we reached peak bitcoin?

Yes--I think we have, at least for this year.

I feel very strange saying that, seeing as I've been an enthusiastic bitcoin bull for many years. But now I'm bearish and have recently sold half my hoard. The reasons are various--some concern our current circumstances, but others reflect a changed understanding I have about the whole crypto phenomenon.

There is the old market saw: Buy the rumor. Sell the news. The idea is that the market goes up as rumors swirl, but by the time they actually become true the trend is already priced in. Then it's time to sell--or at least stop buying.

For months two big rumors have been making the rounds. First, big institutions have started buying bitcoin--most famously Tesla purchased $1.5 billion worth. Other companies are following suit, and many of the big money-center banks are jumping aboard. Options and other derivatives now widely available, and it's just a matter of time before an exchange-traded fund (ETF) is offered.

In other words, institutional involvement in bitcoin is no longer a rumor--it's a fact.

The second rumor--now news--was the prospective IPO of Coinbase. Coinbase is the largest crypto exchange in the United States--it's the place to go if you want to buy or sell bitcoin. Its going public represents a coming of age--the crypto debutante has arrived at the ball. And come of age it did--Coinbase is now traded on the NASDAQ and has a market cap of about $62 billion. Unlike many new public offerings, it's a profitable company.

The Coinbase reality has not quite lived up to the hype. Bitcoin rose to nearly $65,000 per coin leading up to the IPO--afterwards it fell to about $51K (now back up to $54K). Coinbase is priced in--the news will no longer move the market by much.

So the two big rumors that have been driving the bitcoin market for the past six months or so are now priced in. What's taking their place? Nothing that I can see. Yes, there are stories about progress in the DeFi space, or in Lightning applications. Have you heard of those? No? I didn't think so. They're just rumors of rumors--vaporware, if you will--without enough substance to push up the price.

That could change--and eventually I think it will. But for now there are few reasons to think bitcoin will go up.

A second reason I'm now bearish is precisely because of the aforementioned institutions. Institutional investors--banks, pension funds, insurance companies, hedge funds--behave differently from retail investors like you and me. We retail folks make one-directional bets--we buy the coin because we think the price is going up. If it goes down, we're pissed.

Institutions don't always do that--they make two-directional bets so that they can profit whether bitcoin goes up or down. They lose money when the price doesn't move much at all. How they do this is complicated--and since I'm not an institution I don't follow all the details--but it's got a lot to do with options and short-selling. The point is, they're not betting on bitcoin, instead they're betting on the volatility of bitcoin.

So bitcoin is wonderful for volatility investors--it goes up ten-fold one day, and crashes 80% the next--and institutions make money both on the way up, and then again on the way down. It's good work if you don't mind sitting in front of a computer screen 24/7. What they're really doing is arbitraging volatility--or oversimplifying it another way, they buy low and sell high.

The result is that bitcoin's low prices get higher, and the high prices get lower--the institutions squeeze the volatility out of the system. Thus bitcoin is now unlikely to crash by 80%--aren't you happy? But the other side of the bitcoin is also true--it's unlikely to go up by 1000%, or maybe not even 50%. In other words, bitcoin just becomes another boring investment, kind of like gold. OK, maybe not yet that boring, but it's getting there.

So I think reality has squashed the upside, and institutions have limited the downside. It's not gonna go up because nothing is driving the market, and it's not going down because institutions are buying on the dips. So there's little left for the one-directional, retail investor like me, and what is left is mostly on the down side. I think bitcoin is in a trading range, perhaps between $40K and $60K, and absent some big new rumor it will stay there until at least the New Year.

I finally came out as a bear after hearing a talk by Raoul Pal (paywalled) entitled The Exponential Age: Crypto's Fast and Furious Rise. As the title suggests, it's a breathless argument for the continued steep rise in cryptocurrencies, including bitcoin. We're all gonna become billionaires if we just hodl long enough! I thought it was way over the top, and it convinced me that the coin had topped out.

There is one argument for bitcoin that until a few weeks ago I subscribed to, but now I think it's wrong. The claim goes that bitcoin will eventually replace the dollar as the world's reserve currency. At first glance that seems reasonable, but on closer examination it completely falls apart.

Bitcoin will never become the world's reserve currency. Indeed, the very term is a misnomer.

There are two parts to this reserve currency business, and it's important to keep them straight. The first is the currency in which world trade is denominated--currently it is the US dollar, or more precisely, US dollars deposited in foreign banks known as eurodollars. If the only constraint on global trade was denominating it in the proper currency, then yes, bitcoin could solve all our problems. So could gold, or euros, or even toothpicks. The choice of currency is at some level arbitrary.

But that's not the essential feature of a reserve currency. A reserve currency has to finance global trade, not just denominate it. To oversimplify, some countries run trade surpluses while others run trade deficits. The surplus countries have to lend money to the deficit countries. In part this is just an accounting principle--the balance of payments has to balance.

Suppose Thailand ran a surplus in it's trade with Paraguay. Then for that bilateral trade to continue Thailand would have to invest in Paraguayan government bonds--along with all the other countries with which it ran a surplus. This is completely impractical. What happens instead is that Paraguay borrows money from a bank, while Thailand lends (deposits) money to that same bank--and the bank makes sure that all the numbers worldwide add up to a zero net balance of payments.

So what do you want in a bank? It has to be solvent--nobody wants to invest in a bankrupt bank. It has to be honest--that is the bank can't trade too much on its own account. And it has to be secure--no bank robber is gonna get away with the cash.

So who is the bank for today's global trade? It's the United States of America. We're definitely solvent--don't let anybody ever tell you otherwise. We're completely self-sufficient in food and fuel. Indeed, we have most of the natural resources we need. We have lots of people--the third largest in the world. Our population is younger than any other developed country.

We're (relatively) honest. For the most part we don't play favorites among nations, and when we do (e.g., impose sanctions) it's to widespread international complaint. We're honest in major part because international trade is a small percentage of our GDP--again, the smallest of any large nation. We're so self-sufficient we don't need to cheat.

And we're certainly secure--we have by a big margin the world's most powerful military. And our geography is a huge advantage--neither of our neighbors is a geopolitical rival. Nobody is capable of invading us. We have no territorial disputes with anybody.

Bitcoin is a computer program. The USA is a country. It's an apples & oranges comparison--and it should be obvious that bitcoin can't finance global trade any more than little green pieces of paper could do so by themselves without the full faith and credit of the USA. A so-called reserve currency isn't really a currency at all--it's really a very big bank. Only the USA is big enough to fit the bill.

I think crypto technology will dramatically change finance and property transactions, and so it will make things cheaper and better for everybody. Bitcoin is an indirect investment in that change, and as such it will gain value. That's why I'm still long-term bullish. But the rhetoric has gotten way out of hand, and expectations need to come down a few notches.

So I've sold half my stake--and I'm keeping the other half in case I'm wrong, and also for whatever long-term gains still remain. Though I think the big gains from crypto are probably behind us.

Further Reading:

• Book Review: Life After Google
• The Future of Bitcoin
• Let Them Eat Little Bits of Green Paper

Software Eats The World!

Michael Roberts, in a wonderful article republished in Left Voice, describes the current economy as clearly and as accurately as anybody. There is almost nothing he says that I disagree with. It's what he doesn't say that raises issues.

Weirdly, I'm actually more pessimistic about the economy than he is. Usually it's Marxists who predict capitalism's imminent demise--but now I'm in the strange position of seeing more problems than he.

His description of the current economy is spot-on. I'll condense Mr. Roberts' argument to bullet points.

• "US economic activity is still some 20-25% below where it was this time last year."
• "Overall, the US economy has shrunk by about 4-5% in 2020.  That is the largest contraction since the early 1930s – or 90 years ago!"
• "All the evidence suggests that there has been permanent ‘scarring’ to the economy in employment, investment and incomes."
• "Instead, there is what I have called a ‘reverse square root’ recovery where output falls but then does not recover to the same trajectory of economic growth that was there before. That output is lost forever, as the forecast for the US from Oxford Economics below shows."

(Source)

Mr. Roberts then describes the government response to this situation. I don't disagree with him, but I'd like to put it in a different context.

There are two components to the so-called "stimulus," which for shorthand I'll refer to (imprecisely) as fiscal stimulus and monetary stimulus.  Fiscal stimulus refers to payments made by the government directly to households and businesses. The money comes from government borrowing. That would include the CARES package, the $1200 checks we all got a few months ago, and the $600 checks we got a couple weeks ago. This is actual money put into the real economy, and should by all rights be inflationary.

Monetary stimulus, meanwhile, are actions taken by the Fed, most notably quantitative easing (QE), also misleadingly known as "printing money."

Jeffrey Snider (paywalled) describes the Fed as operating a warehouse, and as long as money stays within the warehouse, there is little effect on the real economy outside. The Fed prints money inside the warehouse, but unless the cash escapes into the wider economy, it doesn't really do anything. QE means the Fed is buying T-bills (and other assets) from banks (and now corporations). These assets are considered cash equivalents, i.e., nearly as good as money, and they are removed from the economy and sucked into the Fed's vaults inside the warehouse. Meanwhile, freshly-printed money is simply moved from one side of the warehouse to the other side--it never leaves!

The result--since cash equivalent assets are sucked into the warehouse and no cash is let out--is QE is disinflationary! Indeed, in the long history of quantitative easing, no inflation has ever ensued.

Essentially, in terms of inflation, QE undoes what the fiscal stimulus is supposed to accomplish--namely to create inflation. While QE removes assets, fiscal stimulus injects cash--and there is no net inflation. But there is now more cash and there isn't very much to buy with it (restaurants aren't open; planes aren't flying), so it goes back into assets. Mr. Roberts describes it this way.

Indeed, what has happened to all these credit injections is that they have been used by banks and big businesses to speculate in the stock and bond markets rather than to pay wages, preserve jobs or raise investment.  After the initial panic of the pandemic in March, the US stock market has gone on an unparalleled binge.

It is now at all-time highs and, relative to earnings and productive assets, is at extreme levels.  Yet with more Fed support to come, financial markets may well go rolling on up for a while longer.  So all monetary policy has done is to keep businesses on life support, while boosting the wealth of the very rich.

I'd take slight issue with the last phrase. It's not just the "very rich" who have benefited (though they certainly have), but it's anybody able to invest in assets. That includes the upper middle class--perhaps the top 10-15% of the population. People with 401Ks, owners of real estate, buyers of fancy collectables, and even bitcoin hoarders have benefited. Investable assets have all gone up.

It's a gigantic merry-go-round, spinning faster and faster, that nobody wants to be riding. If the Fed stops QE we'll end up with hyperinflation, which would be much worse than the problems we've got. And if they stop fiscal stimulus, the result will be bottomless deflation which, given the huge global debt overhang would rapidly lead to the biggest credit crunch the world has ever seen. So we're stuck.

Put aside the merry-go-round--which is just forestalling disaster. What really is the big problem that starts the merry-go-round spinning to begin with?

The big problem is deflation--the secular cost of everything is going down. The world is getting cheaper. That sounds wonderful--life on $2/day is sweet. But there are winners and losers in a deflationary world. The big losers are people in debt, since deflation causes real interest rates to go up. That's why we need all the fiscal stimulus--to make sure people can make their mortgage payments. It's hard to live on $2/day when the rent is $1500/month.

(Above I suggested a future problem might be hyperinflation. How can hyperinflation and deflation coexist at the same time? Hyperinflation is a problem with the dollar--too many of them chasing too few goods. The deflation I'm talking about is a much deeper problem, and it is that the costs of goods and services are decreasing in real terms, i.e., independent of whatever unreliable currency unit you choose to measure them with.)

The causes of deflation are much discussed. A big reason is demographics--global population growth is slowing, and in many big economies it is now shrinking. Because baby boomers are aging into retirement, the labor force is shrinking even faster than the population. The result is less demand for everything--food, oil, copper, etc., and accordingly, lower prices.

A second reason is automation--the examples are legion and are now part of everyday life. Just one to illustrate: in the old days a human cashier would ring up your groceries, and then make change for a $20 bill. Today I use the self-checkout (beep, beep, beep) and pay with a debit card (no change required). They still do have a few cashiers at Walmart for old folks who haven't caught on yet.

But we ain't seen nothing yet! Because now we're embarking on the second half of the chessboard. I first encountered that analogy in a book entitled The Second Machine Age (my review here). The analogy refers to the ancient king, proposing as a settlement for some debt, suggesting that his rival put a grain of wheat on a chessboard square. And a month later two grains of wheat on the second square, and then four on the third square, and then, on subsequent squares, 8, 16, 32, 64... By the time you get to the 32nd square, the king is due 4,294,967,296 grains of wheat--still maybe doable. But when you go beyond that, to the 33rd square and more, pretty soon his rival will owe more grains of wheat than there are stars in the universe!

Moore's Law is like that--computer power doubles roughly every 18 months. (While Moore's Law in the narrow sense seems to have reached its physical limits, progress in software and bandwidth continues the effect.) For example: college professors smugly note that Zoom meetings are no competition for the live classroom--and true enough. But 18 months from now, Zoom (or whatever replaces it) will be twice as good. And in 36 months it will be four times as good--so good, in fact, that nobody will ever want to sit in a classroom again (at least not for getting an education).

Community colleges and grad schools are already headed for extinction, replaced by Zoom and YouTube. Four-year colleges are not far behind--the notion that one has to sit in a classroom to get educated is doomed. And with that realization, everything else about colleges collapses: degree programs disintegrate, tuition plunges, campuses sit empty. Everything gets sucked up into the ether.

The ultimate software is artificial intelligence, which is advancing very rapidly. Consider another example: drug discovery. Today, a clinical trial consists of a single drug tested against a single disease. That's all the human brain can process at one time. But given enough data, AI can measure a single drug against all diseases, or for that matter all drugs and nutrients against all diseases, all overlayed on variations in the human genome. In other words, drug discovery becomes vastly more efficient--think about all the scientists who are about to get unemployed.

So here's the rub--where deflation is biting most hard. The real wages of the bottom half of our society are going down (h/t Jeff Booth--paywalled). They're competing against software, and in the end software is vastly cheaper. Software will win--it's eating the world. This is a disaster--society can't survive when half the population--professors, retail clerks, insurance agents, factory workers--are being reduced to poverty. The merry-go-round exists to forestall this cataclysmic event. 

The Fed--which is neither evil nor stupid--is working all out to prevent disaster. But it's got the wrong toolbox--using tools that were invented before software was ever a thing. All it can do is spin the merry-go-round ever faster until the whole thing falls apart.

It's not the fault of the bourgeoisie--who will also eventually lose out to software. Their current increase in wealth comes from the Fed whose merry-go-round pumps money into assets. But when the spinning stops the markets will crash, and only owners of software assets (e.g., bitcoin) will come out on top.

It's not the fault of the Democrats--who are working hard to completely miss the boat, arguing about who is more woke and who deserves promotion in the English department.

It's not the fault of the Republicans--who think if we just cut the budget all our problems will be solved. Nope.

Our Marxist friends have no solution. The proletariat can't stop the march of software anymore than the bourgeoisie. Fretting over the precise nature of the "vanguard party" is a spectacular waste of time.

The only winners will (eventually) be consumers, which ultimately is all of us. We'll all be able to live comfortably on $2 per day.

Further Reading:

• Austerity Comes to Campus
• Robots of the World, Unite!
• Getting Richer While Feeling Poorer

Book Review: Life After Google

George Gilder's book Life After Google is hot off the press, published earlier this year. It predicts the demise of Google, along with its kindred, cloud-computing competitors such as Facebook and Amazon.

Mr. Gilder is a marvelous writer--I've read much he has written. (My essay on Knowledge & Power is not my best work, but here it is.) I'm deeply sympathetic to Mr. Gilder's argument because he predicts a much more libertarian internet.

Mr. Gilder offers a larger philosophical argument beyond simply business and technology. I enjoyed that discussion, but I restrict my comments here to economic issues.

Famously, Google gives most of its content away for free, or (in comments Gilder credits to Tim Cook) if it's free, you're not the customer; you're the product. That's the least of it. Spanish has two words for "free"--gratis and libre. In our context it means gratis.

Let's count the ways gratis benefits Google:

• They are completely immune from any antitrust prosecution and most other regulatory oversight. 
• They can roll out buggy, beta software to consumers and improve it over time. 
• They don't have to take responsibility for security. Unlike a bank, Google is at no risk if somehow your data gets corrupted or stolen. 
• They provide no customer support. 
• Your data doesn't belong to you. Instead it belongs to Google, which can monetize it with the help of AI. 
• You get locked into a Google world, where everything you own is now at their mercy. (I'm in that situation.) Your data is precisely not libre. 

Note that Google didn't even bother to show up at the recent Congressional hearings about "fake news." They consider themselves above the law (or, perhaps more accurately, below the law). They can get away with this because it's free.

There are some disadvantages.

• It's not really free, but instead of paying with money you pay with time. Attention is the basic currency of Google-world. 
• People hate ads. "[O]nly 0.06 percent of smartphone ads were clicked through. Since more than 50 percent of the clicks were by mistake, according to surveys, the intentional response rate was 0.03 percent." This works only for spammers. Ad-blockers are becoming universal.
• Google thinks it can circumvent that by using AI to generate ads that will interest the user. No matter--people still hate them.The result is the value of advertising is declining. Gilder does not believe that AI will ever solve this problem. (I agree with him.) 
• Most important--Google loses any information about how valuable its products are. Airlines, for example, respond sensitively to price signals when determining which routes to fly, what equipment to use, what service levels to provide, etc. Price is the best communication mechanism known for conveying economic information. You immediately know what is valuable to consumers, and what isn't. Google loses all that information by going gratis.
  
  Is Gmail more valuable than Waze? Google has no idea. As a result it has no way of knowing where to invest its money and resources. It's just blindly throwing money at a dartboard.

The above disadvantages are manageable as long as the marginal cost per user is very small. Google invested billions of dollars in huge data farms (Gilder visited the one in The Dalles, OR), located near sources of cheap electricity and cold water (for cooling). Iceland is a prime location for these things. Each center contains thousands of racks of high-end servers connected by millions of miles of fiber-optic cable. This investment has paid off--the marginal cost per search is essentially zero.

But the world is changing fast--according to Gilder the tipping point is the transition from 4G to 5G; from the internet of web pages to the internet of things; from the internet of text and images, to the internet of virtual reality and video rendering; from the internet of computers to the internet of mobile phones, smart watches, and medical devices. To accommodate this new world Google will need to make a massive new investment.

The marginal cost--far from approaching zero--is now becoming near infinite. Without any price information the company has no clue who its most valuable "customers" really are, and cannot determine how best to allocate its resources. Further, the new world opens the door for much nimbler and low-cost competitors. So while Google may be a successful search engine, it will lose its hold over our data. We will own our own data.

Among those nimbler competitors is a Warsaw-based start-up called Golem. Realizing that most CPU clock cycles around the world go unused, the company is trying to tap into that wasted resource. For example, even while I'm busily typing away, my computer's CPU is mostly sitting idle doing nothing. If it were possible for me to rent out those excess clock cycles, then I'd make a little extra cash, and somebody else gets extra computing power they can use.

That's Golem's business model--by installing their software they enable me to rent out my clock cycles in exchange for payment. (In Michael Munger's language Golem is selling a reduction in transaction costs--i.e., making it easier to match my computer resources with somebody who is willing to pay for them.)

Two things need to happen before Golem's business model works. First, my computer needs to be on a 5G network. 5G eliminates the need for fiber-optic cables (at least over the last mile) by enabling high-bandwidth, wireless communication between my computer and the world. Without 5G I can't compete with Google. With 5G, my connection is just as efficient, or--put another way--Google has a few million miles of useless fiber-optic cables on its hands.

Second, Golem needs to handle micropayments--I will be paid pennies per minute of CPU time. The user--who is likely doing a massively parallel calculation--will owe pennies to thousands of computer-owners like me. Golem has got to keep track. The way they do that is through a blockchain currency known as GNT (Golem Network Tokens). The user will buy GNT's from Golem, and use them to pay me and all the others who contribute their clock cycles. As GNT is built on top of bitcoin, at the end of the day I can convert my GNTs to bitcoin, and hence to whatever currency I prefer.

This is more profound than it sounds. In our cloud-centered Google-world, processing and storage have become centralized, as required by fiber-optic technology. But as wireless displaces fiber, then there is no longer a reason for Google's huge data farms--everything can be decentralized. But this new technology requires a new operating system--a different computer architecture. The organizing principle of this new architecture is the blockchain--in all its forms, from distributed ledgers to secure financial transactions.

The blockchain will keep track of who owns what, who is owed what, and how people get paid. A hash of that whole transaction will be embedded in the software as a watermark. My few cents worth of CPU time will be embedded in the output for the ages.

There are currently two competing platforms on top of which the blockchain edifice can be built: bitcoin and ethereum. Bitcoin is very simple and secure--and slow. Ethereum comes with a Turing-complete programming language, in principle making it much easier to use. But it is manifestly less secure.

It turns out Mr. Gilder is agnostic on this choice. That surprises me--from Knowledge & Power I would have expected him to favor the simpler, more reliable bitcoin. Golem, after starting with Ethereum, switched to bitcoin.

I highly recommend reading Life After Google.

Further Reading:

• Crypto as a Global Currency
• Book Review: Gorbachev
• Book Review: Rise & Fall of American Growth

Crypto as a Global Currency

If you travel to Japan you need to convert your US dollars into Yen. The currency exchanges at the airport will charge you 7% each way (USD-->JPY-->USD), for round trip vigorish totalling 14%. If you use your credit card the fees are not quite so high, but still outrageous.

It’s like that for every country. You can’t even catch a break in Canada. Yes, greenbacks are widely accepted by our neighbor to the north, but at a price. A store will probably charge you 10% for the privilege. And woe to Canadians travelling to the USA--once you get south of Plattsburgh, NY, or Blaine, WA, your money is practically useless.

So one can sympathize with the euro project. My German friends used to carry bags of coins around with them to use while on day trips across one border or another: not just Marks, but also Francs, Guilders, Kroner, etc. The euro flattened it all out, and for the tourist trade it was a godsend, universally acclaimed by citizens everywhere who could go shopping in Belgium, France, or Germany without any currency headaches at all.

Though the euro has not fared that well. It turns out that a tourist’s convenience is not the primary test of a currency. At the end of the day the balance of payments must balance--that is, a country’s debits and credits have to match up. Greece was spending lots of euros buying German manufactures, and getting those euros back required them to borrow money. Lots of it. Greece is now completely bankrupt.

Without the euro Greece would certainly have big problems, but it likely wouldn’t be in debt up to its eyeballs. Arguably the euro has made the situation in Greece, along with Italy, Spain, and even France, much worse. It looks like Europe will eventually shed the euro and its citizens will go back to paying exorbitant currency exchange fees.

So there are reasons why countries have separate currencies. A currency zone isn’t just a matter of coinage, but depends on culture, language, banking rules, business habits, and comparative advantage.

Is there a way out of this mess? I argue yes, and the answer is cryptocurrencies.

No, I am not suggesting that we all go on bitcoin and expect to live happily ever after. If Europe can’t even support a single currency, then how much less the rest of the world? Germany and Greece use their currencies in different ways.

But we don’t have to divvy it up by national boundaries. Instead, let’s ignore political borders and consider different industries.

I was inspired to think about it this way when I ran across something called bunnyToken. It’s an ICO (initial coin offering) that aspires to be money for the adult entertainment industry. (That this particular ICO is widely believed to be a scam does not affect my larger point.) BunnyToken wants to be the money you will use if you want to buy a porn video, go to a strip club or hire a sex worker, etc. The intention is that you can use it for that purpose anywhere in the world--no exchange fees necessary.

Two points:

1) The adult industry is usually at the leading edge of new technology--witness VHS, internet payments, livestreaming, etc. That’s partly because the customers are not especially price-sensitive, but mostly because the industry is typically excluded from normal financial and distribution channels. So they have to invent their own. The fact that they're experimenting with their own currency is an important milestone.

2) BunnyToken has to guarantee anonymity and reliability. On the other hand, transaction times don’t have to be that fast (10 minutes should suffice), nor do transactions have to be all that cheap. Because transactions will likely be for relatively small amounts of money, super-tight security may not be necessary.

Think how sensible this is. Porn is porn, whether in Thailand or the USA. The prices won’t be the same--the law of comparative advantage still holds--but there is no reason why it has to be exchange rate sensitive, dependent on a nation’s macroeconomic variables. Let the porn industry have its own currency.

I can easily imagine any number of other bespoke currencies. A TouristCoin would be wonderful. Just imagine if I could pay for hotels, airlines and cruise ships around the world using a single coin. The specs on this money will differ from bunnyToken. It definitely should NOT be anonymous--I want to prove that I paid my hotel reservation. Transactions might be large, so security will be more important.

While the Greek economy overall is poorly developed, the country has a world-class tourist industry. Why should that industry be tied down by problems in the rest of the economy? Let them share a currency with tourist businesses across the globe, and let comparative advantage rule.

Similarly, a restaurant token is long overdue. Starbucks has invented a pale reflection of that with their phone app. But a real restaurant token will work anywhere in the world, from any Starbucks, to Alinea in Chicago, to a streetside vendor in Hanoi.

This will not eliminate exchange problems. After all, a pornstar may want to eat in a restaurant some day, where her bunnyTokens won’t buy her a meal. So she’ll have to exchange her bunnies for something that works in a restaurant. That could be fiat currency, which would be a very expensive solution. More likely it will be bitcoin, using exchanges like Binance. Our actress can exchange her bunnies for bitcoin, which can then be used to buy restaurant tokens. These exchanges will cost money, but far less than the 14% charged by fiat exchanges--likely only a couple percent. To be competitive it will have to be cheaper and more transparent than today's bank fees.

Like today’s fiat currencies, this proposed model is not one-size-fits-all. There will be different currencies for different industries, unlike today’s system where currencies correspond to political boundaries. Each currency will be tailored to the industry it serves, but within that industry it will have a global remit.

To make it work there needs to be a currency against which all the others can be traded, like the role of the US dollar today. I suggest that currency will be bitcoin--it has the first mover advantage, and also the largest market cap. Further, it’s stuck with an old-fashioned, slowpoke technology that has the benefit of being ultra-secure. Apps can be built on top of that to allow for more efficient and cheaper trading.

This is how crypto takes over the world. Not with one big whack, but rather with a thousand cuts. Starting with the porn industry.

Further Reading:

• How Low Can Bitcoin Go?
• The Future of Bitcoin
• Tradable vs. Non-Tradable Goods

How Low Can Bitcoin Go?

(This post is a bit technical. For a beginner's introduction to bitcoin and cryptocurrencies, the folks over at CoinCentral have put up a good resource, here.)

Zero, of course. Zero is the lower bound on lots of things: stock prices, minimum wages, retirement portfolios, etc.

Yeah, it's easy to imagine extinction events--an asteroid hitting the earth and eliminating humankind, for example. Or the commercialization of quantum computing--which at this point seems a very long way off (a few qubits at near absolute zero temperatures notwithstanding). Etc.

Yet I don't believe bitcoin will go to zero. The world is just not going to forget about cryptocurrencies--the technology will always be there. They may be more or less important in the future, but zero is not a likely outcome.

While many (most) of the so-called alt-coins will in fact go to zero, a few of them will undoubtedly survive and thrive. Bitcoin, if only because it has first-mover advantage, is the oldest and biggest of the bunch. Something substantial will have to happen before it gets displaced--and maybe not even then.

So let's eliminate zero as an option and ask: What is the lowest price bitcoin could fetch and still remain a viable cryptocurrency?

The cost of bitcoin depends on the expense of mining. Mining is the mechanism that cryptocurrencies use to verify each transaction. Transactions are signed cryptographically and put together in a block. Proving that the pass keys are all correct involves finding the solution to a cryptographic puzzle, which can only be done by trial and error--going through the billions and billions of possible solutions one at a time until the correct answer is found.

The miner who finds the correct solution today is rewarded by receiving 12.5 bitcoins, now worth around $85,000. The cost to the miner is the electricity used--on average in the US it costs an average of $4,758 per each bitcoin (in Louisiana the price averages $3,224). In South Korea, on the other hand, the bill runs $26,100--obviously there's no point in mining bitcoins there. The cheapest country for mining is Venezuela ($531), where electricity is highly subsidized.

So let's take Louisiana as representing the cheapest, readily available rate--and round up to $3,500. That cost corresponds to about $44,000 per block (leaving a bit over $20,000 as profit to the miner). So how many transactions are in a block? That depends on the demand for transactions, but if we go back to the "bubble" period last year transactions were at a max. On December 18th, 2017 over 2700 transactions were processed in one block.

That means each transaction cost about $16.30 to process. Note that this is per transaction and is not proportional to the amount transacted. Thus paying $2.50 at Starbucks is going to cost just as much as paying $5,000,000 to buy a NYC condo.

It's obvious that bitcoin makes no sense for small transactions--it adds multiples to the cost of your morning coffee. On the other hand, the overhead cost for the condo is trivial. So bitcoin makes sense for moving large amounts of money around, especially across international borders. No wonder institutions like banks and hedge funds have become really interested in bitcoin, while retail stores are generally not signing up. (Some apps are being developed to dramatically lower transactions costs for small purchases, albeit by sacrificing security.)

The higher the mining cost, the greater the security of the bitcoin blockchain. On the other hand, cheaper mining means saving money, but the miner can more easily cheat and steal your bitcoins. The cheapest possible mine is a database, where one person simply looks up how much bitcoin you have and keeps accounts. As long as that one person is honest everything will be fine. It's a trade-off: money for security. Bitcoin has opted for security--its blockchain has never been hacked.

For the moment, miners do their work for "free"--that is they are paid by creating new bitcoins rather than by charging users. But that will gradually change as fewer and fewer bitcoins remain to be mined. The last bitcoin will be mined in 2144. That's beyond my investment horizon, but in the meantime the rewards of mining gradually shrink. Beginning in 2020 each miner will only receive 6.75 bitcoins per block. Eventually transaction costs will be passed on to users as fees. 

So it's easy to conclude that it costs about $16.30 per transaction--and absent cheaper electricity and/or advances in computer technology that will remain true into the future. But it's not quite so simple. Note that mining is successful when, by trial and error, miners find the true solution from among billions and billions of possible answers. If there are more miners they find the answer quicker, but bitcoin has a mechanism so that a block is solved every 10 minutes. That is, if there are more miners, the difficulty of the puzzle is increased so that solutions are found about 10 minutes apart.

The bottom line is the fewer the number of miners, the cheaper the transaction costs because the mining gets easier. The larger the number of miners, the more expensive the transaction costs. That makes sense--all those miners require more electricity. And it repeats what we said above.

Since miners go into business to earn money, and since more money will be earned when bitcoin is at a high price, a higher cost of bitcoin will effectively raise the transaction cost. Conversely, cheap bitcoins will dissuade miners, lowering transaction costs.

There needs to be a minimum number of miners to guarantee the security of the system. Let's guesstimate that is half of today's number. That implies that bitcoin can sink to approximately $1250 (half of $3500) before it becomes totally uneconomic.

So I suggest the lowest low that bitcoin can go is about $1250. It can't even get that low because all that does is cover the transaction cost--why bother? Still, if it falls below that the next stop is definitely zero.

Further Reading:

• The Future of Bitcoin
• Tradable vs. Non-Tradable Goods
• Book Review: Everybody Lies: Big Data, New Data

Bitcoin & Big Box Stores

The current issue of The Militant contains two articles of economic interest. One, by Terry Evans, is about bitcoin, while the other, by Brian Williams, covers the travails of big box retail. The paper is alone on my Beat in paying any attention to the economy at all. Further, they're the first to make any comment about bitcoin. While I'll take a smidge of credit given that my recent posts about bitcoin may have been a prompt, they still deserve praise.

Both articles suffer from the same fundamental flaw: they assume that capitalism is in a crisis.

Obviously that's completely wrong. The global economy is running strong, with no recession on the immediate horizon.

Mr. Evans writes,

For decades, as capitalist profit rates have tended to decline, the bosses have been plowing their cash into speculation — or hoarding — rather than investing in capacity-expanding plant equipment and employment.

There's a contradiction here: where does the cash hoard come from if profits are declining? Putting more cash into "speculation" requires cash to begin with, which can only come from profits and/or wages.

As I've said many times, "profit rates" is an ambiguous concept, and in no meaningful way can they "tend to decline." They're certainly not declining now! Still, Mr. Evans is correct after a fashion--there are relatively few opportunities for investment today and therefore there is a savings glut (Larry Summer's term). This leads to low interest rates and a corresponding rise in asset prices, including bitcoin.

But this has nothing to do with a crisis in capitalism. There are at least two other explanations.

1) Demographics. The American population is barely growing at all, and arguably our labor force is shrinking. Fewer workers require less capital, and thus because of continued high profits there is more spare cash left over.

2) Technology. More industries are being computerized. Moving parts (and labor) are being replaced by computer chips--e.g., carburetors supplanted by electronic fuel injection. Computer chips are cheap, which means much less capital is required.

To buttress his case Mr. Evans cites that financial whiz kid, Jack Barnes, specifically a piece written in 2002. Mr. Barnes

explains speculative bubbles are “a manifestation of what Marx called commodity fetishism, the illusion that commodities and capital somehow have a social meaning in their own right, independent of the social labor that went into creating them, a life of their own.”

I think that's gibberish. It sounds like Mr. Barnes advocates a return to a barter economy.

The value of any object is a collective hallucination. A dollar is worth a donut only if a donut is worth a dollar. Both Dunkin' and I imagine that to be true, and hence a market is made in donuts. If they don't want to sell me a donut at that price, or if I don't want to buy one, then donuts will no longer "have a social meaning in their own right," whatever that means.

A Loonie coin is a token, sustained by collective hallucination. However, only Canadians share that imagery. Bring Loonies south of the border and you'll find they won't buy you a donut or anything else. We don't hallucinate about Loonies down here, and per Mr. Barnes we have a better grasp on reality. Does that mean Canadians don't "have a social meaning in their own right?"

Bitcoin is also a token. It has value as long as people believe it has value. There are reasons for people to hallucinate that, which I detailed in my previous post. I do not believe bitcoin's value will go to zero.

By the way, today bitcoin touched $10,000, or nearly a 50% drop from its all-time high. If bitcoin was in a bubble, then it certainly isn't in one now.

Here is Mr. Williams' lede:

While the big-business media has boasted that retail sales were up during the 2017 holiday season — 3.8 percent higher than the year before — the crisis of the bosses in the retail industry continues to unfold as growing numbers of U.S. retail and apparel companies face increasing debt, bankruptcy and competition.

On the one hand he acknowledges consumers are doing well--we got 3.8% more stuff than we got last year. Hurray!

Yet the retail industry is supposedly in crisis, suffocating under debt, bankruptcy and competition.

Later in the article he cites leveraged buyouts as a major culprit, by which speculators took companies private by foisting on them enormous debts. These capitalists, he tells us, made short-term gains while somehow (mysteriously) escaping the long-term losses.

There are two ways of financing any business: debt and/or equity. How capital is structured makes a big difference to the investor, but on net it makes little difference to the firm. The Coase Theorem says that financing via debt or equity or some combination won't matter at all except insofar as transaction costs are different.

That is, an insolvent firm will go bankrupt no matter how it's financed. Either the company will default on its bonds, or the share price will head towards zero. The net outcome is precisely the same. Conversely, a successful company will have a growing share price, or be able to float new bonds at very favorable rates.

So the problems in the retail industry have nothing to do with leveraged buyouts--they'd be just as much in trouble if they relied on selling shares. Toys "R" Us went bankrupt only because technology rendered the company's business model obsolete. A big-box toy store can't compete against Walmart on price, nor against Amazon on selection and convenience, nor with the corner Ma & Pa store on sales of high-end, bespoke items for a niche market.

When was the last time Mr. Williams has ever been to a Toys "R" Us store? I'll hazard never. Even I, when my children were still children, never went to Toys "R" Us. So why should a whole bunch of employees sit around all day waiting for no customers to walk through the door? It is surely much better--for them and for society alike--if their labor is invested in something useful. Or, in Mr. Barnes' precious phrase, doing something that has "a social meaning in [its] own right."

This is the problem with socialists: they're Luddites. No progress is allowed. However novel and revolutionary Sears, Roebuck or Toys "R" Us may have been in the past, we now need to keep them on no matter what--frozen in amber.

Let the companies go bankrupt. So what of the bondholders lose their fortune. Surely Mr. Williams doesn't feel sorry for them--and neither do I. In today's economy (4.1% unemployment) the former employees of those companies will be instantly reemployed more productively. The workers will make out just fine.

The big winner will be consumers--people with children who like to buy quality toys at cheap prices and maximum convenience.

Further Reading:

• What Marxists Don't Understand About Economics
• Louis Proyect and the Pro-Poverty Girl
• If You Really Care About the Poor

The Future of Bitcoin

Bitcoin is all the rage now. Many people think it is a bubble. While they might be right, much of what is said about bitcoin is nonsense.

Briefly, bitcoin is the world's first cryptocurrency, invented in 2009 by somebody or some group who went by the name Satoshi Nakamoto. Nobody knows who Satoshi really is--he disappeared from public view in 2010.

All bitcoin transactions are kept in a public record called the blockchain, copies of which are spread on thousands of computers around the world. The fact that the blockchain is massively copied guarantees the security of bitcoin since no hacker can hack into all the globe's computers (or even a small fraction of them). Accordingly, bitcoin itself has never been hacked, though various exchanges and individuals have been hacked.

Bitcoin is produced by mining. Miners solve cryptographic puzzles, the purpose of which is to update the blockchain to reflect any new transactions. As a reward for assuming this transaction cost, miners receive payment in new bitcoins. This will continue until the middle of the next century, after which all bitcoins will have been mined. Then miners will have to charge a fee in exchange for their services. Meanwhile, the actual transaction cost is the electricity used to power the many thousands of computers that work on mining bitcoin. This is substantial, and today bitcoin is mined primarily in places with cheap electricity.

So now some basic facts follow:

Bitcoin is not anonymous, but merely pseudonymous. If you or I open a bitcoin wallet, it will have a public key that I have to distribute to anybody I want to trade bitcoin with. That key is a pseudonym for my name. Given that key, then all transactions to or from that wallet are public record as part of the blockchain.

Ross Ulbricht--the founder of the Silk Road drug market, using bitcoin as the medium of exchange--didn't understand that. By using good old fashioned shoe-leather, the police eventually connected his wallet to his name, and then of course they knew exactly who he'd sent money to and from. For that he is now serving a life sentence without parole. Since then the criminals have gotten smarter. They undoubtedly know how to launder bitcoin on the dark web, so the old shoe-leather trick won't work anymore.

Thus bitcoin, as a substitute for cash, becomes an important tool for many a criminal enterprise. That, of course, is a disadvantage for those of us who wish to live in a civilized world, but it is a use-value for bitcoin that won't be going away anytime soon.

Bitcoin is not very useful as a currency. Because mining is so expensive, it typically takes about 10 minutes for any transaction to clear. These days, with bitcoin so popular, it can take considerably longer. Nobody is gonna go to Starbucks and wait ten minutes for their cup of coffee, which is why Starbucks doesn't accept bitcoin.

Simply put, the transaction costs for bitcoin are too expensive to justify using it for small amounts of money. However, the cost is per transaction, and is not proportional to the amount of money transferred. So bitcoin is impractical for $1.85, but for $1.85 million it's another story. For large amounts the transaction costs become irrelevant.

This is very much like gold. Try taking your Krugerrand to Starbucks and see how far that gets you. For just as with bitcoin, transaction costs for gold are very high--you have to weigh it, judge it's purity, ship it, and so on. But unlike bitcoin, gold transactions don't get that much cheaper with volume. So while bitcoin is nowhere near as convenient as paper currency or a credit card, it is much more convenient than gold.

Bitcoin will steal some of gold's luster. Yes, gold is a shiny metal that you can hold in your hand, while bitcoin is a public/private key combination that you can store in your safe. Gold is more tangible, but that very tangibility is what makes it less useful. Perhaps a better analogy for bitcoin is GLD (a gold-based ETF), rather than gold itself. Though--and here's the big deal--bitcoin is much more secure than GLD.

Gold has historically been used to settle transactions across international borders. Because the shipping costs are so high, in recent times international trade has been settled in eurodollars (dollars held in bank accounts outside the United States). This is not satisfactory to many participants (China, Russia, Iran, to name but a few), and I predict that bitcoin will eventually become a medium for international settlements. This is a second use-value for bitcoin.

It's worth noting that both China and Russia are very schizophrenic about bitcoin. On the one hand they see it as an avenue for capital flight, and thus they want to prevent citizens from using the currency, much the same as the US for many years prohibited citizens from owning gold. On the other hand, they both recognize the potential bitcoin has to free them from the dollar, and both countries have invested in significant mining capacity.

Meanwhile, many citizens around the world have every incentive to get their money the hell out of Dodge. Most recently that appears to be happening in South Korea, which is now the biggest bitcoin market in the world (or so I'm led to believe). The Chinese have been no slouches either, and are likely still crypto-sneaking money out of their country. Venezuela and Zimbabwe are big markets for bitcoin, for obvious reasons. (In Venezuela electricity is heavily subsidized, making mining very profitable, albeit illegal.)

Volatility, Schmolatility. Doesn't matter. There is no better way to transport money outside your falling-apart country with relative speed, liquidity, safety and anonymity than bitcoin. This is a third major use-value for bitcoin.

What are some of the disadvantages of bitcoin? There are a few.

First, many bitcoins have been lost. Since there is no central authority, there is no way of recovering your private key if you lose it. Many people have lost it. And then many others have died before revealing the secret to any of their heirs. Satoshi himself, at the beginning of bitcoin-time, mined himself about a million bitcoins, today worth nearly $20 billion. None of them have ever been spent (we know that from the blockchain), and Satoshi would give himself away if he ever tried to spend one. Perhaps that's a reason to leave $20 billion sitting on the table untouched.

Or, possibly, maybe Satoshi is dead, in which case all those bitcoins are gone for good. If there is one shortcoming in his design, it was not allowing for the replacement of lost bitcoins. Only 21 million will ever be mined, but over time more and more of them will be lost. Eventually there will be so few bitcoins in the world that they'll become a collector's item rather than a currency.

I don't know what fraction of the currently extant 17 million bitcoins have been lost. I read somewhere that it was 50%--I think that's too high. But suppose it's only 25%--that means the total capitalization is not the top-line $325 billion, but instead only $244 billion. So if bitcoin is in a bubble, it's not as big a bubble as everybody thinks.

A second threat to bitcoin is the development of a rival cryptocurrency that adds significant value and so displaces bitcoin. There are lots of cryptocurrencies already out there, but the main ones all do something different than bitcoin. BCH, for example, tries to speed up the transaction speed. ETH is primarily about trading assets rather than currency. Etc. There is a place under the sun for these species. But bitcoin is the most gold-like precisely because it's transaction time is relatively slow (and thus secure), and it is the most liquid. I think it will be hard to displace, but not impossible.

So is bitcoin in a bubble? I don't know. There is nothing written here that says it ain't so. But I will claim this: bitcoin has use-value. It's not just a speculative bubble. The price will not to fall to zero, and the equilibrium price is probably higher than it is now--though it's unlikely to get there in a straight line.

It's worth pointing out that Bitcoin is not primarily an American phenomenon. Predicting its value based only on sentiment within the United States is not reliable.

Further Reading:

• Sex and the Alpha Male
• Book Review: The Complacent Class
• Book Review: Popper's Bitcoin Book

Book Review: Popper's Bitcoin Book

Nathaniel Popper is the author of Digital Gold, an account of the short history of bitcoin. Bitcoin is a digital currency invented by "Satoshi Nakamoto," and released to the world in 2009.

The book is advertised as a business book, and no doubt some legitimate fortunes have been made and lost. A few of the characters are, indeed, entrepreneurs in the spirit of Sam Walton, Steve Jobs, or Aubrey McClendon. The name Wences Casares, the Patagonian founder of Xapo, comes to mind, though (apart from Satoshi himself) no bitcoiners rise to the rank of genius that one associates with those other giants of industry.

But two other less creditable strands are prominent, especially in the early years. First is a kind of crackpot libertarianism--a cross between Ron Paul and Occupy Wall Street. It's a paranoid world view that posits some grand conspiracy theory between the government, big business, and the Federal Reserve, among others. These are people for whom the dollar bill is an infringement on liberty, and the main object of activism is to protect one's privacy from the prying eye of government. Roger Ver, a longtime champion of bitcoin, who served time for illegally selling explosives and has renounced his US citizenship, is representative.

The second strand is outright criminality. The biggest use for bitcoin, even today, is buying and selling illegal drugs. The founder of the trade was a poor fellow named Ross Ulbricht, aka Dread Pirate Roberts. Along with belonging to the kooky Libertarian club, he also grew mushrooms in his basement and wanted to sell them. Apart from hawking them on a street corner, a bitcoin-enabled internet storefront looked to be a golden opportunity. And so Silk Road was born--the internet marketplace run along the principles of Amazon.com, but that used bitcoin as a cheap, relatively anonymous way to transfer money.

For this Mr. Ulbricht is now serving a life sentence without parole, a punishment which many (perhaps including me) think is excessive.

Other people got caught up in Silk Road, including an early bitcoin entrepreneur named Charlie Shrem. A born salesman and a natural champion for the new technology, he ran the first currency exchange facilitating bitcoin purchases. While great at raising capital, he wasn't a particularly good manager and had no interest at all in regulations surrounding financial transactions. So, despite likely having no criminal intent, he is now spending two years in the federal pen--a sentence that is surely unduly harsh.

And then there is Mark Karpeles, the French dude who bought Tokyo-based Mt. Gox, building it into the premier trading platform for bitcoin. Unfortunately his bookkeeping was not up to the challenge, and in 2014 Mr. Karpeles revealed that somehow the company had "lost" 750,000 bitcoins, worth as much as $500 million. That story is complicated (I don't think it is completely told in Mr. Popper's book), and some of the money has been recovered. Nevertheless, Mr. Karpeles is now charged with embezzlement.

Despite this, surprisingly bitcoin is still around. There are four reasons for its continued existence. First, successors to Silk Road have proliferated, and the technology remains today the best way to buy and sell contraband. This remains the biggest use for the currency and guarantees a market. Second, honest, non-ideological entrepreneurs have entered the market, of which Wences Casares is a preeminent example. He is looking for legitimate markets, and indeed, bitcoin is now popular in places where banks are unreliable, e.g., Mr. Casares' native Argentina.

Third, the dreaded establishment has latched on to bitcoin. Every major bank now has a research program on the technology. The blockchain (bitcoin) algorithm can be used to trade any number of things cheaply, e.g., stocks, bonds, and real estate. Blythe Masters, the lady wunderkind working for JP Morgan, actively disowns bitcoin currency, but is using the blockchain to trade derivatives. (Ms. Masters does not appear in Mr. Popper's book, but she is the first woman to play a significant role in any of the business books I have read.)

And finally, even the evil government is beginning to take notice. Much to the Libertarians' dismay, the gnomes at the Fed and the IRS have realized that bitcoin is not like cash. The latter is truly anonymous and can be used to evade taxes, among other things. Bitcoin is precisely not anonymous, but merely pseudonymous. Indeed, all transactions are a public record, just waiting for the police to figure out who hides behind the pseudonyms. That's how Mr. Ulbricht got caught.

So now some paranoid people are suggesting that the Fed wants to eliminate cash altogether and replace it with bitcoin or some similar system.

So what do Trotskyists think about bitcoin? I have absolutely no clue. My guess is that few of the papers on my Beat would know the difference between a blockchain and a cement block. If you're stuck in a 19th Century timewarp, then new technology becomes a mystery.

As for me, I'm cautiously optimistic about bitcoin. I took Mr. Casares' advice, which I paraphrase from memory here:  

Buy four bitcoins, which today costs about $1000. There's a good chance that you'll lose all your money--that the price of bitcoin will fall to zero. But there's also a chance that bitcoin will eventually be worth $1 million.

Paypal has about 200 million users in the world, and everybody acknowledges that Paypal is a success. But you need a credit card to use it, and only one billion of the world's population has a credit card. Bitcoin, on the other hand, only requires having a cell phone. Six billion people have a cell phone. So bitcoin has a much larger potential market than Paypal.

Today bitcoin has 13 million users. When it has 200 million (like Paypal) it will be a success. 

I bought the bitcoin lottery ticket. The most I can lose is a grand. But I might also become rich.

Further Reading:

• Capitalism Just Won't Sit Still
• Book Review: The Frackers
• Money and Gold