Topic: Please help me understand what was written about Bitcoin on www.TickerForum.org (Read 481 times)

I think that the owner of Tickerforum.org (KD) is an extremely intelligent man.  However, when it comes to Bitcoin, his might just be biased because he didn't come up the idea.

If you ever blog on his site ask him how his thesis on oil turned out (he argued that oil prices would be going to the moon).

This part of the argument always gets me:

.

Suppose Helen made $100 USD in 1960.  She put that money in a jar and in the year 2000, she spends that $100.

Does she get a tax break because her $100 bought a heck of a lot more in 1960 then it did in 2000?

No, she does not.

Is she required to make a documented record of the $100 she put in the jar?  No, that's ridiculous.


Second scenario:

If Jughead buys XYZ123 stock iin the way MOST FINANCIAL ADVISORS tell you to - via dollar cost averaging, he's also in a bind with the IRS.

If he starts buying the stock in 1950 when the stock is $10 a share, and he buys $50 worth of the stock every month, without fail for 50 years.

Over the course of 50 years, the stock goes through a roller coaster ride with a price from $10 when he started, up to a high of $300, and is now at $250.

Jughead wants to sell 20 shares of his stock in year 2000.

How can he rightly figure out his "capital gains" or "capital losses"?  

Does he know the EXACT stock he's selling?  Especially now that stock certificates in paper aren't really issued?

Similarly, when you buy and sell bitcoins are you given an exact code for each little slice of satoshi that you might have and are you expected to keep a record as to when that exact coin came in and out of your wallet?

If someone gives me a $10 USD in quarters and I deposit in the bank where it becomes transformed into a $10 bill - have I now lost track of that original money?  How realistically will anyone ever be able to calculate my gains and losses?

If I have $100,000 in the bank and when I put it there my dollar bought a whole loaf of bread, when I withdraw that same amount, my dollar buys only a few slices?

Who's tracking that "value"?  Isn't the government who issued the money then "liable" to me because I deposited my money with one understanding of it's value and then over time it has a different value.


I'm just playing devil's advocate here - the whole argument seems silly.

In one sense, the government says they will back up the dollar bill to the best of their ability, yet they never guarantee the real market value that coin or that bill might eventually have.

All currency is risk.

http://www.forbes.com/sites/jonmatonis/2013/04/03/bitcoin-obliterates-the-state-theory-of-money/

Author:  Jon Matonis 

Bitcoin Obliterates "The State Theory Of Money"


Once you get past the childish title, the recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists. Denninger is an intelligent student of the capital markets and his essay deserves a serious reply.

The economic contribution of his essay is that it represents the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an expose advocating the Chartalist approach to monetary theory claiming that money must have no intrinsic value and strictly be used as tokens issued by the government, or fiat money. Today, modern-day chartalists are from the school of thought known as Modern Monetary Theory (MMT).

Without getting into the intrinsic value debate, this is where I strongly depart from Denninger, because if we accept the thesis that all money is a universal mass illusion, then a market-based illusion can be just as valid or more valid than a State-controlled illusion. What Denninger and Greenbackers and MMT supporters reject is the notion that monetary illusions themselves are a competitive marketplace, falsely believing that only the State is in a ‘special’ position to confer legitimacy in monetary matters.

Regarding this issue of State-sanctioned legitimacy, bitcoin as a cryptographic unit seeks and gains legitimacy through the free and open marketplace. It is not a governmental instrument of legal tender that requires regulatory legitimacy and coercion by law in order to gain acceptance.



 Government Ban On Bitcoin Would Fail Miserably Jon MatonisContributor

ECB: "Roots Of Bitcoin Can Be Found In The Austrian School Of Economics" Jon MatonisContributor

Bitcoin Prevents Monetary Tyranny Jon MatonisContributor

Therefore, the path to widespread adoption of bitcoin hinges on three primary market-based developments: (a) robust and liquid global exchanges similar to national currencies that can offer risk management via futures and options, (b) more user-friendly applications that mask the complexities of cryptography from users and merchants, and (c) a paradigm shift towards “closing the loop” such as receiving source payments and wages in bitcoin to eliminate the need for conversion from or to national fiat.

Even after graciously accepting Denninger’s definition of what the ideal currency would be (which I don’t) and searching for any economic nuggets of value, his arguments can be distilled into four main criticisms of bitcoin as a monetary instrument. First, bitcoin does not provide cash-like anonymity. Second, bitcoin transactions take too long for confirmations to be useful in everyday transactions. Third, bitcoin exhibits irreversible entropy.  Fourth, the decoupling of the stateless bitcoin from the obligation of monetary sovereigns is considered a fatal weakness.

Now that we identified the objections, let’s take these in order.

On the first point surrounding bitcoin anonymity, Denninger only embarrasses himself with this criticism. By default, bitcoin may not offer anonymity and untraceability like our paper cash today, but it is better described as user-defined anonymity because the decision to reveal identity and usage patterns resides solely with the bitcoin user. This is far superior to a situation where users of a currency are relegated to seeking permission for their financial privacy which is typically denied by the monetary and financial overlords. Also, his capital gains tax issue is a non-starter because it’s a byproduct of a monopoly over money.

His second criticism of a lack of utility in the ‘goods and service preference’ due to timing of sufficient block chain confirmations has some merit. However, advances have been made in the use of green addressing techniques that solve the confirmation delay problem by utilizing special-purpose bitcoin addresses from parties trusted not to double spend.

Denniger’s third criticism that bitcoin exhibits irreversible entropy is confusing. Typically, entropy refers to a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system’s disorder. In the case of bitcoin, I suspect Denninger is taking it to mean the degradation of the matter in the universe because of his explicit comparison to gold. While it is true that bitcoins lost or forgotten are ultimately irretrievable, I view that as a feature not a bug because it is the prevailing trait of a digital bearer instrument. Two bitcoin digital attributes that make it superior to physical gold are its ability to create backups and its difficulty of confiscation. Furthermore, the number of spaces to the right of the decimal point (currently eight) is immaterial to bitcoin’s suitability as a monetary unit.

Now for the big and final one. Denninger asserts that monetary sovereign issuers possess not only the privilege, but the obligation, of seigniorage, which Denninger refers to as bi-directional since sovereigns have the responsibility of maintaining a stable price level during times of both economic expansion and economic contraction. As a product of Hayekian free choice in currency, market-based bitcoin is decentralized by nature and poses a false comparison to the century-old practice of central bank monetary manipulation. Fear not deflation.

Governments have appropriated the monetary unit for their own benefit by declaring it the only preferred monetary unit for payment of taxes to the State. Believing that governments have sincere and good intentions in administering the monetary system is akin to believing in fairy tales. Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign’s spending activity to the detriment of the unfortunate users of that monetary unit. Decentralized Bitcoin obliterates this sad state of affairs.

Denninger’s biased and establishment preference for a monetary sovereign serves only to harm his analysis because it undeniably closes him off from alternative, and usually superior, free-market monetary arrangements. More damaging, however, is the fact that it places him outside of the mainstream in free banking circles and squanders his remaining quasi-libertarian credibility as a champion of markets.

Hello Everyone,

I'm new to Bitcoin. Thank you for having this forum. It explains a great deal.  I am re-posting a "Ticker" that the author/owner of a blog known as Tickerforum (www.tickerforum.org) wrote regarding Bitcoin.  He adamantly opposes Bitcoin and points out several "flaws" in Bitcoin.  

Based on what I have read on the BitcoinTalk forum, I believe that his logic is flawed, but don't know enough to negate what he's saying.  Can those of you who have a more thorough knowledge of the intricacies of Bitcoin take a look at what he wrote and share your thoughts?

His essay is titled "BitCon: Don't" and it is pasted below.

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http://market-ticker.org/akcs-www?post=219284

BitCon: Don't
  

Ok, I've been asked enough times, here it is -- my view and analysis of "Bitcoin", which I have taken to calling "Bitcon."  That probably deserves an explanation....

Let's first define what an ideal currency would be.  Currency serves two purposes; it allows me to express a preference for one good or service over another, and it allows me to express time preference (that is, when I acquire or consume a good or service.)

All currencies must satisfy at least one of these purposes, and an ideal currency must satisfy both.

The good and service preference is what allows you to, possessing a dozen eggs from a chicken, to obtain a gallon of gasoline without finding someone who has gasoline and wants eggs.  That is, it is the ability to use the currency as a fungible intermediary between two goods and services, one of which you possess and the other of which you desire.  Without this function in an economy you have only barter and poor specialization, with it you have excellent specialization and a much-more-diverse economic picture.

Time preference is the ability to choose to perform a service or sell a good now but obtain and consume the other part of the transaction for yourself later.  With a perfect currency time preference has no finger on the scale; that is, the currency neither appreciates or depreciates over time against a reasonably-constant basket of goods and services.  Since technological advancement tends to make it easier to produce "things" in real terms, a perfect currency reflects this and makes time preference inherently valuable.  This in turn forces the producers of goods and services to innovate in order to attract your economic surplus from under the mattress and into their cash registers, since not spending your economic surplus is in fact to your advantage.  Today's fiat currencies intentionally violate the natural time preference of increasing productivity, but even yesterday's metallic standards did a poor job of representing it.  The problem here is the State, which always seeks (like most people) to get something for nothing and what it winds up doing instead (since getting something for nothing is impossible) is effectively stealing.

Unfortunately Bitcoin, as I will explain in detail, also does a*****-poor job of satisfying either of these requirements.

But before I get to that, I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.

This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.

All currencies require some means of validation.  That is, when you and I wish to transact using a currency I have to be able to know that you're not presenting a counterfeit token to me.  Gold became popular because it was fairly difficult to "create" (you had to find it and dig it out of the ground) and it was reasonably-easy to validate.  The mass and volume were easily verified and other materials of similar mass and volume had wildly-disparate physical properties and could be easily distinguished.  (The recent claims of "salted" bars with tungsten notwithstanding!)  With only a scale and a means of measuring displacement of a known thing (e.g. water) I could be reasonably-certain that if you presented to me something claiming to be one ounce of gold that it in fact was one ounce of gold.  It therefore was "self-validating."

Likewise, dollar bills are reasonably self-validating.  I can observe one and if it appears to be a dollar bill, feels correct and has the security features I can be reasonably certain that it is not counterfeit.  The Secret Service can determine with a fairly high degree of certainty (and very quickly too) whether a particular bill is real as they can verify the serial number was actually issued and that a bunch of the same serial numbers are not being seen in circulation, but for ordinary commerce this is not necessary; the bill itself has enough unique features so for ordinary purposes it is self-validating.

Bitcoin and other digital currencies are different -- they're just a string of bits.  To validate a coin, therefore, I must know that the one you are presenting to me is unique, that it wasn't just made up by you at random but in fact is a valid coin (you were either transferred it and the chain is intact or you personally "mined" it, a computationally-expensive thing to do), and has not been spent by you somewhere else first.  

In order to do this the system that implements the currency must maintain and expose a full and complete record of each and every transfer from the origin of that particular coin forward!

This is the only way I can know that nobody else was presented the same token before I was, and that the last transfer made of that token was to you.  I must know with certainty that both of these conditions are true, and then to be able to spend that coin I must make the fact that I hold it and you transferred it to me known to everyone as well.

Now consider the typical clandestine transaction -- Joe wishes to buy a bag of pot, which happens to be illegal to transact.  He has Bitcoins to buy the pot with.  He finds a dealer willing to sell the pot despite it being illegal to do so, and transfers the coins to the dealer.  The dealer must verify the block chain of the coins to insure that he is not being given coins that were already spent on gasoline or that Joe didn't counterfeit them, and then he transfers the pot to Joe.  There is now an indelible and permanent record of the transfer of funds and that record will never go away.

This creates several problems for both Joe and the dealer.  The dealer can (and might) take steps such as using "throw-away" wallets to try to unlink the transfer from his person, but that's dangerous.  In all jurisdictions "structuring" transactions to evade money laundering or reporting constraints is a separate and unique crime and usually is a felony.  Therefore, the very act of trying to split up transactions or use of "throw-away" wallets in and of itself is likely to be ruled a crime, leaving any party doing that exposed to separate and distinct criminal charges (along with whatever else they can bust you for.)

Second, due to the indelible nature of the records you're exposed for much longer that with traditional currencies to the risk of a bust and in many cases you might be exposed for the rest of your life.  In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States, along with many other jurisdictions.  Since the records never go away your exposure, once you engage in a transaction that leads to liability, is permanent.  

Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue.  Let's say you "buy" Bitcoins (whether for cash or in exchange for a good or service you provide) at a time when they have a "value" of $5 each against the US dollar.  You spend them when they have a "value" of $20 each.  You have a capital gain of $15.  At the time of the sale you have a tax liability too, and I'm willing to bet you didn't keep track of it or report it.  That liability never goes away as it was wilfully evaded and yet the ability to track the transaction never goes away either!

Worse, most jurisdictions only permit the taking of a capital loss against other gains, and not against ordinary income taxes.  This really sucks because it's a "heads you pay tax, tails you get screwed" situation. This is the inherent problem that gold and other commodities have as "inflation hedges"; the government always denominates its taxes in nominal dollars, not inflation-adjusted ones.  The only currency against which there is no FX tax exposure is the one the government you live under uses and denominates its taxes in.  That is why the government's issued currency will always be the preferred medium of exchange irrespective of all other competing currencies.

Incidentally, all of this exposure which you take with Bitcoin is very unlike transacting a bag of pot for a $100 bill -- or a gold coin.  Unless you're caught pretty much "in the act" once the pot is smoked and the dealer spends the $100 the odds of an ex-post-facto investigation being able to disclose what happened and tie you to the event fades to near-zero.  

This never happens with a Bitcoin transaction -- ever.

If that dealer is caught some time later, but still within the statute of limitations for the original offense, you could get tagged.  And if the statute of limitations has expired you're still not in the clear if you had a capital gain on the transaction.

There isn't any way to avoid these facts -- they're structural in all digital currencies.  And they don't just apply to buying or selling drugs -- they apply to any act that is intended to evade a government's currency or transaction controls.  The very thing that makes Bitcoin work, the irrefutable knowledge that a coin is "good" predicated on digital cryptography, is the noose that will go around your neck at the most-inappropriate time.

Those who are using Bitcoin as a means to try to foil currency controls or state prohibitions on certain transactions are asking for a criminal indictment not only for the original evasion act itself but also the possibility of a money-laundering indictment on top of it, and the proof necessary to hang you in a court of law is inherently present in the design of the currency system!

Now let's talk about the other problems generally with all such currency systems in terms of an ideal currency and how Bitcoin stacks up.

First, the ability to use Bitcoin to express good and service preference.

Here the fundamental problem of wide acceptance comes into view.  This is the problem that the proponents of the system are most-able to address through various promotional activities.  Unfortunately it also leads to deception -- either by omission or commission -- of the flaw just discussed.  To the extent that the popularity of the currency is driven by a desire to "escape" state control promotion of that currency on those grounds when in fact you are more likely to get caught (and irrefutably so!) than using conventional banknotes is an active fraud perpetrated upon those who are insufficiently aware of how a cryptocurrency works.

Cryptocurrencies have a secondary problem in that because they are not self-validating there is a time delay between your proposed transaction using a given token and when you can know that the token is valid.  Bitcoin typically takes a few minutes (about 10) to gain reasonable certainty that a given token is good, but quite a bit longer (an hour or so) to know with reasonable certainty that it is good.  That is, it is computationally reasonable to believe after 10 minutes or so that the chain integrity you are relying on is good.  It approaches computational impracticality after about an hour that the chain is invalid.

This is not a problem where ordering of a good or service and fulfillment is separated by a reasonable amount of time, but for "point of transaction" situations it is a very serious problem.  If you wish to fill up your tank with gasoline, for example, few people are going to be willing to wait for 10 minutes, say much less an hour, before being permitted to pump the gas -- or drive off with it.  This makes such a currency severely handicapped for general transaction use in an economy, and that in turn damages goods and service preference -- the ability to use it to exchange one good or service for another.  What's worse is that as the volume of transactions and the widespread acceptance rises so does the value of someone tampering with the block chain and as such the amount of time you must wait to be reasonably secure against that risk goes up rather than down.

Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns.  Yes, obligation -- not privilege.

Bitcoins are basically cryptographic "solutions."  The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin.  As each coin is "mined" the next solution becomes more difficult.  The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation.  Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.

That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later!  That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy.  If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!

The other problem that a cryptocurrency has is that it possesses entropy.  

Entropy is simply the tendency toward disorder (that is, loss of value.)  A car, left out in the open, exhibits this as it rusts away.  Gold has very low entropy, in that it is almost-impossible to actually destroy it.  It does not oxidize or react with most other elements and as such virtually all of the gold ever dug out of the ground still exists as actual gold.

Fiat currencies, of course, have entropy in both directions because they can be emitted and withdrawn at will.  We'll get to that in a minute, and it's quite important to understand.

Bitcoin exhibits irreversible entropy.  A coin that is "lost", that is, which the current possessor loses control over either by physically losing their wallet or the key to it, can never be recovered.  That cryptographic sequence is effectively and permanently abandoned since there is no way for the entity who currently has possession of it to pass it on to someone else.  This is often touted as a feature in that it inevitably is deflationary, but whether that's good or bad remains to be seen.  It certainly is something that those who tout the currency think is good for the value of what they hold, but the irreversible loss of value can also easily lead people to abandon the use of the currency in which case its utility value to express goods and service preference is damaged, quite-possibly to the point of revulsion.

This is not true, incidentally, for something like a gold coin.  The coin can be lost or stolen but unless it's lost over the side of a boat at irretrievable depth it can be recovered and the person who recovers it can spend it.  What constitutes "irretrievable depth" has a great deal to do with exactly how many coins might be there too -- what's impractical for one coin is most-certainly not when the potential haul reaches into the thousands of pounds!

I mentioned above about fiat currencies being able to be issued and withdrawn.  There is often much hay made about the principle of seigniorage, which is the term for the "from thin air" creation of value that a state actor obtains in creating tokens of money.  Seigniorage is simply the difference in represented value between the cost of emitting the token (in the case of paper money, the paper, security features and ink) and the "value" represented in the market.  There is much outrage directed at the premise of fiat currency in this regard but nearly all of it is misplaced because people do not understand that in a just and proper currency system the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.

That is, in order for time preference to be neutrally expressed, less the natural deflationary tendency from productivity improvement, the government entity issuing currency gets the benefit of seigniorage when the economy is expanding.  But -- during times of economic contraction they also get the duty to withdraw currency (or credit) so as to maintain the same balance, as otherwise the consequence is inflation -- that is, a generalized rise in the price level and the destruction of the common person's purchasing power.

That this is honored in the breach rather than the observance does not change how these functions are supposed to work, any more than the fact that we have bank robbers means we shouldn't have banks.  This, fundamentally, is why currency schemes like Bitcoin will never replace a properly functioning national currency and are always at risk of becoming worthless without warning should such a currency system arise, even ignoring the potential for legal (or extra-legal) attack.

Simply put there is no obligation to go along with the privilege that the originators of a crypto-currency scheme have left for themselves -- the ability to profit without effort by the future efforts of others who engage in the mining of coins.

Those who argue that state actors creating currencies get the same privilege are correct, but those state actors also have the countervailing duty to withdraw that currency during economic contractions associated with their privilege, whether they properly discharge that duty or not.

For these reasons I do not now and never will support Bitcoin or its offshoots, nor will I accept and transact in it in commerce.  I prefer instead to effort toward political recognition of the duties that come with the privilege that is bestowed on a sovereign currency issuer in the hope of solving the underlying problem rather than sniveling in the corner trying to evade it.

The latter is, in my opinion, unworthy of my involvement.