Bitcoin: Where it’s Headed (Eventually) and Musings on the Future of Cryptocurrency part 1
Today I’m going to go on a deep dive of one of the subjects I touched on in my first article What the Sam Hill is going on around here anyways? In fact, I plan to do a deeper analysis of several of the major points of my initial article. Without further ado…
There can be little doubt it seems that cryptocurrency is the future of commerce. It is highly secure (for now), it uses a distributed network making it resilient to breakdown of system components, it is nearly infinitely divisible (a key component of transaction friendly “money”) and it doesn’t decay. Bitcoin also has very little counter-party risk (meaning risk that another part of the agreement won’t come through as happened with the Sub-prime mortgage market) and indeed all of these features were built into the concept of bitcoin by “Satoshi” who was attempting to mimic the qualities of the ultimate form of money…gold.
This is why some call Bitcoin “digital gold”, although I think that’s a very poor comparison in reality as nothing digital can truly claim to be the same as anything physical. Example, if an Electro-Magnetic Pulse hit over my city, the draft copy of this article would be gone on my computer, but were I to have a physical copy instead I would still have it. It seems a simple distinction and with our increasingly digital lives it would be easy enough to dismiss the importance of physicality, especially when it comes to money. Physicality becomes even more important if you understand the critical nature of trust in any monetary system. Further, once one understands how banking truly works, you can see how one of Bitcoin’s biggest claims to fame is also what make it so alluring to people who have had enough of the Banks and big government.
While the physical aspect is just one example, I urge you not to take the digital gold metaphor too far. Bitcoin is an amazing invention and I believe heralds a sea-change, just not in the way many Bitcoin fanatics think. The Cryptokids will of course chime in that if you store it in a wallet or in an exchange then it’s fine, or they might point out how gold can be taken from you just the same as Bitcoin. They will find a way to say I’m wrong on that line thinking, but the fact remains it does rely on technology. Gold on the other simply exists as an element. People also liken Bitcoin to gold in part due to its built in scarcity. Based on the architecture of Bitcoin, there can only ever be 21 million bitcoins.
Gold too is finite although we are still mining it and could conceivable mine the asteroid belt and other planets for it in the future. Still, gold’s relative rarity, ability to be nearly infinitely divisible and the fact that it doesn’t tarnish or rust (it’s a fairly non-reactive element) and when in hand has zero counter-party risk. All these qualities are why gold has been seen as the ultimate form of money for all of human history, including up to today. No Central Bank has a Bitcoin reserve (yet), but they all hold some amount of gold.
Now, it is also somewhat true that crypto has minimal counter-party risk, in fact currently close to zero, but I would argue that won’t be ultimately true when I reveal the reason Bitcoin is (eventually) doomed. In fact, the biggest selling point on Bitcoin is its truly remarkable security, which is the ever-increasingly secure RSA encrypted blockchain itself.
“Well Ian”, You might ask, “how then is Bitcoin not going to continue to go to the moon en route to mars and the flipping rings of Saturn?!?”.
A reasonable question and in fact Bitcoin may very well do that. However, the fact is it will eventually drop dramatically from its present highs. That is all but certain due to built in flaws in RSA encryption. I suspect bitcoins may eventually be valuable as collectibles, but as money they will cease to be viable in the not too distant future. Why? Quite a number of reasons actually.
To begin with, might I remind you of a face many of you knew and likely wanted to stooge slap into oblivion.
You see, I believe strongly that Bitcoin is the MySpace of Crypto. A strong first mover that will ultimately fail. The reason Bitcoin is leading the pack of Crypto at approximately $17,000(!) as of the writing of this article and not say the Independent Coin Offering from the esteemed Ghostface Killah[1] (that’s not a knock! We all know Wu-Tang Clan ain’t nuttin to fuck with!), is due to the fact that Bitcoin is the grand-daddy of them all.
Bitcoin was the first cryptocurrency to appear when the mysterious “Satoshi” mined the so-called genesis block and sent out various cryptography papers for proof of concept and got the initial early adopters to start joining Satoshi in mining and transactions. It is worth noting that “Satoshi” apparently has ONE MILLION BITCOINS that she or he mined. That’s about 17 Billion btw…and apparently if Satoshi were to ever cash in those coins they would thereby reveal their identity. Thus there is an almost religious belief (it’s a hope actually…) that Satoshi will, for the good of Bitcoin, just burn their million coins. I dunno, but it seems pretty hard to believe that any SANE person would just leave 17 Billion on the table. Also would revealing you invented Bitcoin really be such a bad thing right about now? I feel like it would make you an instant celebrity not to mention you’d be a mere 17 Billion richer. I believe the real reason for this theory, is that it is a fervent hope of Bitcoin “hodlers” (a silly name for “strong hands” bitcoin holders who plan on holding them until price-discovery has found equilibrium), because anyone dropping a few thousand coins might crash the current price.
The thing is Bitcoin is a bubble and it will fail and the proof of the latter is what makes the former true. Although Bitcoin may be a bubble unlike any we’ve ever seen in more ways than one.
Before I discuss why it will eventually fail, let’s explore for a moment why people love Bitcoin, which in turn sets the table for the likelihood of it being a bubble, especially with its Achilles heel. Bitcoin, or rather the RSA blockchain technology behind it, is a brand new invention with no real forerunner from which to draw comparisons. In fact, by its very nature Bitcoin is exceedingly difficult to understand and it also a novel invention which in turn makes its evaluation almost impossible. These by the way are classic traits of a bubble.
People, also love it because it’s anonymous and tax free! But is it? The IRS certainly doesn’t think it should go around capital gains tax and as it isn’t the sole province of the very rich, so of course they plan on taxing it. The IRS had already attempted to demand customer records from Coinbase[2] on more than one occasion and will very likely go after past sales once they do get that info and they almost certainly will.
It’s anonymous…or rather the transaction itself is anonymous, the blockchain hides identities, but it doesn’t hide the packets moving around. We know for a fact that every single packet in the US is tracked by NSA thanks to whistleblowers William Binney and Edward Snowden. Therefore, that would of course mean that Bitcoin is tracked as well. They might not know the specifics of who sent what amount, but they do know who is sending block chain transactions even if they can’t put together exactly who sent what, they know the internet addresses of all those who are participating.
It’s secure! This is one claim that not only is hard to doubt, but also strangely holds the seed to Bitcoin’s downfall. So far Nobody has been able to break the blockchain RSA public crypto key yet so it’s very secure. However, as the Mt. Gox hack showed and various other high profile hacks, there are always vulnerabilities in computer systems and so you need to be very careful in how exposed you are to hackers as you transact in Bitcoin. The best advice I’ve heard is to keep the coins on exchanges although as Mt. Gox showed[3], even those are vulnerable. With each passing day those exchanges get increasingly desirable to hack. Of course if sovereign governments and their spy apparatus ever get involved I expect the NSA’s “Bonesaw[4]” program to go right through any measly defenses that people might put up.
So wait a minute you say, NSA can track transactions and could feasibly disrupt the network if they wanted to? Well, likely not all of it, that is the beauty of the distributed ledger system and one of the reasons Blockchain and Bitcoin specifically have done so well. It would be very challenging for a hacker or single government to take it down. However, that leads me to bitcoins second biggest vulnerability. The so called “Violence Hack” which I illustrate here with an excellent XKCD comic
You see governments have a monopoly on two very important things. One, the creation of money and two the less discussed, yet more obvious monopoly on “legal violence”. Indeed the latter is so important, that when groups have challenged Government’s power, they have been brutally put down in short order.
The classic example is the mafia in the 1930’s as popularized in “The Untouchables”. The government responded to organized crime with superior violence.
The government has also routinely stamped out would be alternative currencies. There is some interesting speculation that when the Hunt brothers tried to corner the silver market it was to make a competing legal tender in Texas. Regardless of what the Hunts were up to, even small fry’s like the Liberty Dollars created by Norfed[5] when discovered are IMMEDIATELY crushed by government and the method is of course violence and property seizure.
Resisting a government’s laws inevitably leads to violence, legal, state sanctioned violence. So the question might arise why haven’t governments stepped in to any large degree thus far on Bitcoin? Perhaps they underestimated it? No, NORFED had a tiny value compared to the value of Bitcoin (not to mention how widespread its use is), so that can’t be it. Why then? This is an interesting question to ponder, a question which in my mind leads inexorably to one conclusion and a rather unpleasant one at that.
Interestingly, that thought train leads me to another of Bitcoin’s strengths — one I like quite a bit actually — namely, that it is free from the Central Bank’s network.
One of the things Bitcoin proponents often trumpet is that Bitcoin bypasses the Banks and frankly who likes the banks? I mean heck I like that idea too, the banks if one looks closely enough sure seem to run everything or at least every critical lever of power in the West and quite possibly in the East as well. New scientist published a paper awhile ago showing how almost all major businesses are part of a “super-entity” the center of which is a nexus of the big banks.
The Central Banking system, which all leads back to the Bank for International Settlements, is truly vast in scope including nearly every country on Earth and it took over a century to put into place. The architects of this system are in many ways the architects of the modern world. They can be found behind most major conflicts or at the very least they profit off them. Regardless, the entire financial system is run by the Central Banks and Bitcoin, plucky Bitcoin, bypasses their system. You know, the Central Bankers have put a lot of time and effort into their system and it seems astonishing that they would merely grumble about a “competing” system when they basically control all governments on Earth.
You see, while I have no proof other than what hasn’t happened, I believe that either Bitcoin itself was created by the Intel agencies and by extension the banks, OR it is a naturally occurring marvel which the Banks see as useful stepping stone towards their long held dream of a single digital currency. The technorati are buying into a purely digital currency and the very people who might have voiced concerns about such a system, are now heavily invested in Bitcoin.
Even if by some miracle this is an incredible technological genie the Bankers never had control of, make no mistake they will employ the power of the state ar so point, the so called “endboss for Bitcoin” as Daniel Jeffries astutely put it[6].
Even if Bitcoin defeats that big bad, Central Banking boss there is an even greater threat to its long term success…find out more in part 2 which you can read here: https://medium.com/@ianferguson_60616/bitcoin-where-its-headed-eventually-and-musings-on-the-future-of-cryptocurrency-part-deux-7eb4ef4a1751!
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Footnotes:
[1] https://www.investopedia.com/news/wutang-clans-ghostface-killah-launch-cryptocurrency/
[2] https://www.forbes.com/sites/kellyphillipserb/2017/03/20/irs-tries-again-to-make-coinbase-turn-over-customer-account-data/#618c2525175e
[3] https://www.wired.com/2014/03/bitcoin-exchange/
[4] http://www.zerohedge.com/news/2013-06-22/meet-man-charge-americas-secret-cyber-army-which-bonesaw-makes-mockery-prism
[5] https://en.wikipedia.org/wiki/Liberty_dollar_(private_currency)