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Bitcoin provocations

November 10, 2014

Yesterday at the Alt Banking meeting we had a special speaker and member, Josh Snodgrass (not his real name), come talk to us about Bitcoin, the alternative “cryptocurrency”. I’ll just throw together some fun and provocative observations that came from the meeting.

  1. First, Josh demonstrated how quickly you can price alternative currencies, by giving out a few of our Alt Banking “52 Shades of Greed” cards and stipulating that the jacks (I had a jack) were worth 1 “occudollar” but the 2’s (I also had a 2) were worthy 1,000,000,000 occudollars. Then he paid me $1 for my jack, which made me a billionaire. After thinking for a minute, I paid him $5 to get my jack back, which made me a multibillionaire. Come to think of it I don’t think I got that $5 back after the meeting.
  2. There’s a place you can have lunch in the city that accepts Bitcoin. I think it’s called Pita City.
  3. The idea behind Bitcoin is that you don’t have to have a trustworthy middleman in order to buy stuff with it. But in fact, the “bitcoin wallet” companies are increasingly playing the role of the trusted middlemen, especially considering it takes on average 10 minutes, but sometimes up to 40 minutes, of computing time to finish a transaction. If you want to leave the lunch place after lunch, you’d better have a middleman that the shop owner trusts or you could be sitting there for a while.
  4. People compare bitcoin to other alternative currencies like the Ithaca Hours, but there are two very important differences.
  5. First, Ithaca Hours, and other local currencies, are explicitly intended to promote local businesses: you pay for your bread with them, and the bread company you give money to buys ingredients with them, and they need to buy from someone who accepts them, which is by construction a local business.
  6. Second, local currencies like the Madison East Side Babysitting Coop’s “popsicle currency” are very low tech, used my middle class people to represent labor, whereas Bitcoin is highly technical and used primarily by technologists and other fancy people.
  7. There is class divide and a sophistication divide here, in other words.
  8. Speaking of sophistication, we had an interesting discussion about whether it would ever make sense to have bitcoin banks and – yes – fractional reserve bitcoin banking. On the one hand, since there’s a limit to the number of overall bitcoins, you can’t have everyone pretending they can pay a positive interest rate on all the bitcoin every year, but on the other hand a given individual can always write a contract saying they’d accept 100 bitcoins now and pay back 103 in a year, because it might just be a bet on the dollar value of bitcoins in a year. And in the meantime that person can lend out bitcoins to people, knowing full well they won’t all be spent at once. Altogether that looks a lot like fractional reserve bitcoin banking, which would effectively increase the number of bitcoins in circulation.
  9. Also, what about derivatives based on bitcoins? Do they already exist?
  10. Remaining question: will bitcoins ever actually be usable and trustworthy for people to send money to their families across the world below the current cost? And below the cost of whatever disruptions are being formulated in the money business by Paypal and Google and whoever else?

Update: there will be a Bitcoin Hackathon at NYU next weekend (hat tip Chris Wiggins). More info here.

Categories: #OWS, economics, finance
  1. November 10, 2014 at 7:51 am

    fascinating stuff (especially to someone who has trouble comprehending the viability of bitcoin). The thing that most jumps out to me is that business of “fractional reserve bitcoin banking” and ‘effectively increasing the number of bitcoins in circulation’ — seems like once someone offered such “contracts” all competitors would be forced to do so as well, creating a huge (and speculative) built-in problem that could self-destruct… don’t know if you can explain any further how stabilizing safeguards would work?
    Curious, how many readers here own one or more bitcoins, or are contemplating their purchase in near future?


    • November 11, 2014 at 4:14 am

      I took a serious look at BTC about this time last year when the trading prices exploded to around $1000/BTC. The aspects I considered were:
      (1) valuation model
      (2) arbitrage possibilities
      (3) the economics of running a “mining” operations
      (4) concrete logistics around acquiring BTC

      For (4), at the time at least, buying bitcoin required either paying a significant premium or sending traditional currency to a dodgy location (I’m looking at you, Eastern Europe) or a dodgy exchange, or some combination of these three factors.

      Personally, I am a fan of many aspects of the structure of bitcoin, In particular, I think the concept of using a public ledger validated by a proof-of-work number theory calculation is quite elegant. I strongly support this type of approach for other problems, like land-registry. On the other hand, the dodginess around BTC is unsettling for any meaningful amount of money.

      Also, it is unfortunate that the bitcoin transactions almost literally represent waste:
      wasted material devoted to mining operations and wasted energy running those mining machines.


  2. Josh
    November 10, 2014 at 8:45 am

    Let me add one more provocation: Despite the way it is presented, bitcoin is not system put in place and running without guidance. There are modfications made to the underlying protocol and other aspects of the system. Decisions on these modification are made in a manner that is anarchic and plutocratic at the same time. There is no set governance structure but the competing theories of how decisions are ratified are:
    1) That 51% of the “miners” decide — this is a very concentrated group
    2) Others argue (and I tend to agree) that it won’t strictly be 51% of the miners but more amorphously those holding the “economic majority” of power. https://en.bitcoin.it/wiki/Economic_majority

    Either way, this is a plutocratic system where the 99% does not get a vote.

    Yes, derivatives on bitcoin already exist.


  3. johnarkansawyer
    November 10, 2014 at 9:24 am

    A question regarding provocation number six: If middle-class people use alt-currency to represent labor, what do “technologists and other fancy people” represent with bitcoin?

    I have my thoughts about that, but I’m curious to hear yours first.


    • November 10, 2014 at 9:25 am

      Well, most obviously, computing time. And then after that I’d guess something like political freedom.


      • johnarkansawyer
        November 11, 2014 at 10:29 am

        Yes, it maps very directly to computing time. To rank-and-file technologists, I’m pretty sure it maps next most closely to political freedom. What I’m curious about is what it means to the “fancy people”, the very rich and the very powerful.

        To them, I don’t think it represents political freedom. I think it means freedom from politics, in a deep and inhumane sense.


  4. November 10, 2014 at 9:26 am

    I see a need for a cryptocurrency (not bitcoin) as an alternative for the 99%. The 1% have and are accumulating all the ‘real’ currency (Fed notes) so we the people need a currency just to be able to survive through trade between the 99%. Let the 1% eat their notes. The reason it should be a cryptocurrency is to keep it untraceable by any gov. that would want to shut it down. And instead of a central computing engine that all transactions have to go through (really a wallet is a distributed engine but a choke point) all ‘wallets’ should just talk to the wallet in the transaction so nobody else has a clue that a transaction has taken place. Double secure. No network for the NSA to track.


    • November 10, 2014 at 9:30 am

      As I learned from David Graeber’s book:


      money has value in part because governments collect taxes. So yeah, the 99% needs dollars if we are going to live in this country, because we pay our taxes in dollars.

      On Mon, Nov 10, 2014 at 9:26 AM, mathbabe wrote:



      • Min
        November 10, 2014 at 5:26 pm

        One reason that the Continental Dollar crashed was that it was not backed by taxation. The states did not allow the Continental Congress to levy taxes and did not accept Continental Dollars in payment for their own taxes. (Benjamin Franklin warned them about this problem, BTW.)

        After the crash of the Continental Dollar brought financial ruin to a lot of patriots, Tom Paine rather uncharitably said, Did you think you could have a war for free?


  5. cat
    November 10, 2014 at 10:08 am

    #1 is why no cryptocurrency will ever succeed as it will never penetrate into the middle class because they value stability and safety over most things. The volatility of a cryptocurrency that is being manipulated will give it such a bad name nobody will want anything to do with it.

    The biggest provocation you left out is that fiat currency is the right answer for currency and the cryptocurrency zealots refuse to believe there is any value in that at all so they insist on having a finite amount of cyrptocurrency available.


  6. November 10, 2014 at 11:17 am

    Bitcoin = Bit Con.

    I’ll stick with “real” money and “real” assets.


  7. lindapbrown2013
    November 10, 2014 at 3:16 pm

    Did you discuss situations like the following: a friend recently went to her volunteer job at a non-profit and was told not to use the computers. The organization had been targeted by hackers who had encrypted much of what was in their files and were demanding ransom–in bitcoin! Otherwise the files would be forever inaccessible. And the organization, I think, was going to pay.


  8. Auros
    November 11, 2014 at 1:39 am

    Your “bitcoin banking” scenario should increase the velocity of money in a bitcoin economy, and thus its overall GDP, but only at the cost of risking massive disruption if there’s ever a loss of trust — a bitcoin bank is just as vulnerable to a run as a real-world one, and the system is designed such that not only isn’t there a lender of last resort like the Fed to prop them up and make good on deposits; it is technically impossible to create such a lender. Because that lender by definition would need to have control over expanding and contracting the money supply, and expanding the money supply is one of the things the bitcoin fanatics are opposed to (and never mind that this means committing to deflation in the long run).


  9. November 11, 2014 at 4:20 am

    By the way, your valuation scenario from provocation 1 is the basis of two other things we see in markets:
    (1) the valuation of precious metals (I could include most gem stones, too, especially diamonds, but don’t get me started on that)
    (2) a classic penny stock scam where a couple of traders alternate selling and buying the same stock back and forth, driving up the price (illegal, of course).

    It also reminds me of a comment I heard about paper currency in failed states:
    In a place without a functioning central government to print currency and control counterfeiting, the paper currency can still hold a value roughly equal to the cost of production. There remains one constraint on counterfeiting: printers are stuck with the denominations in circulation when a legitimate central authority still existed (for comparison, everyone would recognize as fake $100,000,000 bill).

    Apparently, this has happened in parts of Africa (Somalia, I guess) but I haven’t had the guts to go and investigate it.


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