I’ve been collecting arguments against Bitcoin over the years. I felt that I could answer them, almost all of them; it was a constant frustration to be unable to respond when I heard TV pundits lambast Bitcoin with an argument that I thought was particularly weak. If only I could contain all my thoughts in one reproducible place. So I wrote a book.
The book is called ‘The Case for Bitcoin’. I explore Bitcoin the protocol and the trustless paradigm more generally. What are the hurdles and what are the opportunities? What are the implications for society and for economics when trusted middlemen can be dispensed with? What other sorts of things can exist on blockchains? The inspiration of Bitcoin has sent a potent message to developers and enthusiasts throughout the world. But no where, I felt, had the scope of that potential been properly communicated to a lay audience. I felt impelled to write.
‘The Case for Bitcoin’ was a challenge to write. I had to boil down my knowledge and excitement regarding Bitcoin into legible pages. I had to force myself to eschew hyperbole, which I knew would not be pleasant to read. Moreover I felt impelled to include a ‘Bitcoin’s Weaknesses’ section where I outlined plausible weaknesses to the protocol going forward: 51% attacks, scalability, etc.
I spent a considerable amount of time discussing economic history, and answering the most common criticisms of Bitcoin. A general theme was that political processes are far less reliable than mathematical rules; with Bitcoin you don’t have to trust people. That’s a good thing.
A few chapters are devoted to other things that can be built with Bitcoin, cryptographic finance, identity systems, blockchain swarms, and homographic organisms! There’s a lot of futurology which I hope will be enjoyable to the reader.
Check out the new Kindle Ebook here. I’d be flattered if someone read it and felt that they’d learned something.
That’s how I feel about my new laptop. It’s small. It’s underpowered. It’s totally impractical in every sense of the word. It has virtually no ports. It is so slight, I’ll surely smash it in twain within a fortnight. Worst of all, it’s wildly expensive.
But I love it.
The new Macbook just seduced me. I was looking at the Air. I was even considering, on a theoretical level, some sort of Linux laptop that would be orders of magnitude cheaper. But I just kept coming back to the new, ultralight, ultrasleek Macbook. I walked away and it drew me back again… and again. I tried to resist. I tried to be reasonable, to calculate costs, to detach myself from that sexy smooth interface, those keyboard keys which stretched just imperceptibly beyond the plane of the computer.
But I couldn’t. There was no denying that, no matter the impracticality, I simply loved the new Macbook. I couldn’t go back to a computer without those sleek keys. The Air felt heavy, like a sad piece of 1980’s technology. It’s protruding, elephantine keys embarrassed me. Its superfluous spaces were love handles. I could not stop my eyes from straying back to that luscious Space-Grey metallic board, those lines so slim, you’d think they’d belong in Flatland.
As I grazed its surface with my fingers, I kept thinking of all the great things, I’d compose with it. What wondrous apps could come out of its divine proportions? What words would be found gazing into its retina display resolution? Who could say? Those would be the easy parts, surely, once that laptop were in my possession. All I needed were those keys and all the rest would simply fall into place. I bought it.
It is beautiful. Now that this post is the first thing I’ve done with it, the dream of composing epic works is already crashing hard into disappointment. Maybe its seductive look won’t lead me to some great creative insight after all. Nevertheless, I’m quite pleased I got it: the heart wants what it wants.
Bitcoin achieves consensus on payments, but currency is not the sole end to which that consensus can be employed. The settlement and clearance of financial instruments can equally well be achieved via blockchain technology. The same way a Bitcoin transaction is beyond reproach, a broad array of financial assets (stocks, bonds, derivatives) could possess the same degree of certainty.
Currently underwriters, banks, and large institutional counter-parties extract enormous rents from their role as the trusted nodes of finance. In a system based on relationships, this is entirely sensible. Who else could one entrust with vast sums, often amounting to billions of dollars, but the largest, most reputable banks? It made perfect sense. Due to the scarcity of such players, and the large amounts at stake, they could command massive fees. The typical bond underwriter takes 0.5-1% of the principal in fees. If you compare that against 3% a year in interest, which is the true cost of money, then transactional fees can amount to an enormous fraction of the total cost of capital.
But if bonds were created on a blockchain, they could be directly sold to bond buyers without any counterparty risk. The bonds would be represented as cryptotokens, colored coins, that have the same properties of bitcoins, without necessarily being pegged to oscillations in the Bitcoin price. These tokens would directly represent ownership of bonds. They could be exchanged trustlessly, so anyone, anywhere could buy or sell them without counterparty risk. Exchanges could allow for vastly superior liquidity of abstruse financial instruments, such as foreign bonds. One could buy and sell bonds cheaply and with granularity, as stocks are traded today online.
Bond payments could also be conducted on the Bitcoin Blockchain. These would be publicly observable; whoever owned the cryptotokens representing the bonds would receive the mathematically correct amount of bitcoins. These payments don’t have to be denominated in Bitcoin. Even though they are paid in bitcoins, the actual amount can be a simple conversion from dollars. Thus financial contracts fixed to dollars can simply use the Bitcoin Blockchain as a settlement mechanism without dabbling much in the currency itself. The blockchain is merely a tool.
If interest payments can be tracked historically, the entire credit rating for separate entities could be extracted algorithmically. Your identity becomes a public key. One could cryptographically prove one’s identity; post a picture of yourself with a cryptographic signature coming from a particular Bitcoin address. That address is now you. The deals it engages it, the contracts it signs (cryptographically), the interest payments it does or doesn’t make, they may all compute towards one’s credit score. Extracting credit history directly from a blockchain means that there are no gatekeepers of information.
One would not be wise to lend bitcoins to anonymous, unproven Bitcoin addresses. That would be financial suicide, like trusting strangers on the Internet with your credit card data. But large institutions could employ bonds on the blockchain and their bonds could become actively traded. If even one reputable institution issued debts in this form, they could become highly liquid assets. Whole exchanges could sprout up to service these cryptobond assets.
Lastly, bonds traded on the Blockchain would vastly democratize and flatten credit distribution worldwide. If Brazilian savers can lend to businesses in Pakistan, pegged to USD, without any currency risk, then interest rates will depend solely on the credit-worthiness of the borrower and nothing else. This is how credit always should have been. Instead, in today’s world, lending abroad comes with extraordinary risks: currency volatility and capital controls.
International bond markets are illiquid, high-friction markets. When bonds must pass through that many intermediaries, and receive ‘trusted’ sanctions so many times, they become overburdened instruments, too heavy to be actively traded, or to fall into the hands of most retail investors.
The benefits of flattening world credit would work both ways. Savers hungry for yield could get it by having a broader scope of potential borrowers. Chinese savers starved for yield could lend money to companies in Bulgaria without currency risk and in very small amounts. People in Africa, who can’t get reliable yield almost at any price, could invest in foreign bonds in a way that is truly permission-less.
Maybe that’s Bitcoin’s killer app, giving people yield. People around the world want yield. And many others want to raise debts. But the settlement and exchange systems underlying that credit are too cumbersome, slow, costly, and restricted by national borders.
I’m passionate about abstracting financial instruments over Bitcoin. I firmly believe that they are the future. Expect more to come.
Lately I got out of San Francisco and traveled to Turkey. I’d been there many times. But even revisiting it after so long (6 years), I was struck by the differentness of the place. All the sights and sounds are different. The bread smells different; it has some variant of sesame we don’t have in the US. Every little thing is different, as if rethought from scratch by someone unfamiliar with our culture. That is what culture is, I suppose: a radical rethinking of everything along a slightly separate vein.
I marveled also at the effect travel had on me, even after only three years of living exclusively in the US. My brain was challenged with every sensation. The Turkish language exemplifies the foreign feeling of everything there; the language possesses radically different concepts from English (and all Indo-European languages). I speak some Turkish. I struggled to form the words of the most basic sentences. I lost the feeling of full command over language that we enjoy in our mother tongue. I was trapped inside halting, idiot-like speech. Hearing myself speak English occasionally, I thought with relief, “My god, I actually speak something well.” It was like the swordsman without a sword, making do with a little stick instead. When he finds the sword, he feels like he’s slipped into his own shoes.
The little challenges of parsing differentness, in every form, was a boon to my imagination. I was liberated from the routine I enjoy in SF. I walk to work. I have an altogether pleasant life. But even in that pleasantness there is a monotony, an unchallenged state of the brain, that hampers creativity.
It seems crucial that the brain be challenged. Merely hard work is not enough. Foreignness is required. Differentness makes time slow down. It makes you see things in another light. The slowest times I ever felt, bar none, were the most difficult days I spent in Guinea. Those days felt absolutely glacial. But my brain was on. Each moment was a memory precisely because the differentness was at a fever pitch. Those are the days you remember being alive.
Facebook is one of the worst big stocks out there to own. After increasing by 4.5% today to ~$95 a share it has a market cap of $266 billion dollars. Owning FB stock is equivalent to saying “I think Facebook is worth more than the yearly GDP of Pakistan”. This is insane.
This is a good resource for their stats: http://finviz.com/quote.ashx?t=fb
A few points.
– FB’s price to earnings ratio is 95. This is suicide-nosebleed territory. Maybe for a company with huge growth potential such a ratio could be defensible, for a massive $266 billion market cap, it is totally crazy.
– Their price-to-book is 6:1. A lot of investors will say that this parameter doesn’t matter. But it does. With such high P/E and P/B ratios, there is no safety at all in owning this stock. If someday something doesn’t go well, or if anything happens at all, you are completely vulnerable to a massive downturn. Valuation always matters, especially when everyone says it doesn’t matter.
Actually their P/B ratio is much worse than 6:1. If you look at their balance sheet you will see that, for $42 billion of equity, $18 billion is actually goodwill. This means it’s basically hot air. So their real book value is, at most, little more than half the stated one. Once again, if the Greater Fool Theory ever stops working, this goodwill value is probably worth approximately zero.
– Facebook is investing in all sorts of areas in which they have no core competence. Such as WhatsApp and Virtual Reality devices. This screams of a corporation with lots of cash, lots of ability to raise cash, but precious few ideas. Throwing money at areas outside one’s core competence is unlikely to yield success.
– Just think about their WhatsApp acquisition. They paid $19 billion dollars for a company with no profits, whose entire valuation was goodwill. Those $19 billion dollars were themselves ~10 years’ worth of organic FB profits.
– Some will claim that Facebook has so many users that they ‘must be worth something’. This is like what people in the late 90’s used to say about ‘webpage views replacing profits’. Profits are the ultimate source of equity value. You shouldn’t hand-wave that.
– Insiders are selling aggressively. See the Finviz link above.
– FB is probably not very defensible. Sure they’re a huge network. But huge networks come and go all the time. What happens when FB becomes ‘less cool’ or is threatened by a scrappy upstart? What about this business suggests a permanent moat? It’s the Internet… everything is in a constant state of upheaval. What are the odds that FB shareholders will get their money back through organic profits?
Facebook is surging and shareholders are crowing. But the wary should sell now. Take profits. Get out. Don’t think you can follow momentum and get out at the right time. With the same money, you could buy into a business that actually earns profits. This is one of the most dangerous stocks to own because its share price is so egregiously out of whack.
I’m still on vacation in Turkey and I often find myself negotiating for the best price. Negotiation is essential here on a daily basis, particularly for tourists. The key is access to information. One must ascertain the real market value for an item solely by wrangling over prices with merchants. Finding the right price is a painstaking process of saying ‘No’ lots of times as you gather more data. Finally, when you have enough, you can say ‘Yes’.
Often I’ll supplement the fact-finding part of negotiations by getting information from other merchants. They are often only too happy to squeal on the real story behind a given item. For example, the man selling us scarves was only too happy to talk about the rug salesmen, whom he described as inveterate con-men and thieves. “They will say these carpets are hand made in Turkey,” he said, “But they will really be from sweat shops in China”. He shook in disgust at their sneaky ways. Then with a smile he offered me “the finest copper tableware of ‘the highest quality'”.
I’ve gained a lot of useful market information from these conversations with merchants. I’ll often simply ask what the fair price of something should be, and Turks will often respond earnestly. When I use that information later on an unsuspecting merchant, he may be dumbfounded and chagrined that I know the correct price. It’s also easier to spot quality when another merchant has ‘taught’ you the ‘parameter space’ for a given type of item.
But a recurring theme throughout these conversations is that, while the merchant you’re talking to is a benevolent friend, all the other merchants are filthy liars who are not to be believed. Again and again traders tell me how their peers are shambolic hucksters who cannot be trusted one iota. They go to great lengths to describe their schemes, while professing none of their own. It’s amusing. But a salient lesson comes to the fore: trust no one. So even as a I receive advice from a well-wishing merchant, I’m internally playing a double-meta guessing game, anticipating the deep strategy of deception they may-or-may-not be playing.
Just the other day, a merchant took extraordinary efforts to describe the scams of his peers in the pottery business. It was an incredible performance. But in the guise of giving me privileged information, I sensed a very deep sales strategy. As he lured me in with partially true information, like any good counterintelligence strategy, he also positioned himself for a masterstroke of a deal. At the end, I backpedalled. And even now I wonder longingly about his story about the scams of others, where the truth ended and fantasy began. When even the warnings of the scams of others is itself a scam, laden with half-truths, then you’ve dived deep into the mysteries of the market.
I just arrived in Turkey for vacation and one thing struck me almost immediately: the sheer amount of hustle in the streets. Every square inch seems packed with glitz and manpower constantly selling. I couldn’t believe the density of commerce; virtually no nook or cranny is left unused. One is barraged by offers, deals, and ‘unbelievable low prices’. It’s all part of sales game that is finely tuned for such a touristic milieu. While many find the solicitation annoying, or even offensive, it’s actually a highly calculated strategy to maximize profits.
The difference is that, in Turkey, it is possible to employ people (or employ one’s self), in comparatively menial sales jobs. They will spend huge amounts of time pursuing the sale. People walk around the ferry boats selling goods; just today I bought hot tea on a ferry for 30 cents. It was perfect. It was wildly cheap. But how was it possible that I could be served for so little (while on a moving target,no less)?
It’s not merely that Turkish labor is less expensive. It is. But something else is in play. The sheer variety of low-income jobs that I saw that facilitated the sale, if only marginally, was qualitatively different from what we have in the US. Another example: a child greeted us at a restaurant, sat us down, and asked us our order (in English no less!). The boy could hardly have been 10 or 11. When I asked for something not on the menu, he thought nothing of going to another restaurant to go fetch it. He was apparently the son of the owner. It wasn’t ‘abusive child labor’; it was a son helping out at the family business, learning practical business skills, and English no less.
Other people, often young men, roam with popular snacks that passers-by might want to buy. These men probably make very little profit, even by Turkish standards. But that’s not the point. They’re still out there hustling. Hustling in the best possible sense of the word. They’re making something from nothing by the simple mechanism of satisfying customers.
In America, their counterparts are too often sitting and doing nothing. People in comparable situations, with minimal skills or employment prospects, are usually sitting at home. They may be looking for jobs. But they’re almost certainly not hustling on the streets the way their Turkish peers are. There’s something wrong there.
I suspect that in America, the man serving tea could not legally serve it due to health regulations and commercial license requirements. The boy who helped us to our seat in the restaurant could not legally do so due to child labor laws (as far as I can tell…). The countless salesmen on Turkish streets couldn’t exist in the US because
A) They can’t afford the licensing and regulatory costs to employ themselves (or they aren’t worth the regulatory costs to potential employers). Put another way, for individuals who produce low (but nonzero) value, the regulatory costs consistently outweigh the produced value.
B) Minimum Wage laws plainly prohibit the sorts of occupations I’ve described. If someone produces less value than the mandated minimum wage, their job has been effectively outlawed, without addressing the root problem of low-value.
Some will say that Americans will not work such jobs because their time is too valuable. This is true for many Americans. And yet, for people who are unemployed, or who are desperate, their time has very little (financial) value; it should be rational to pursue such jobs.
Others might say that Americans culturally dislike ‘hustling’ and thus that it is not suited for us. But one can define hustling quite expansively, in the least offensive ways (such as the old man quietly serving tea on the ferry boat).
All we hear in politics these days are complaints about the lack of jobs. But lots of jobs could exist that don’t. So many human services could be offered with some economic value. Something is better than nothing.
All I’m proposing is a more relaxed attitude towards low-income jobs. The minimum wage is actually highly pernicious in that it renders them extinct, without actually helping the people who would have worked those jobs. Regulatory costs also hit low-value jobs disproportionately strongly since they must be paid for out of a smaller revenue stream.
Were Americans highly employed, with a high cost of labor across the board, then there would be no place for ‘hustling, menial’ jobs. But as it is, with very low labor force participation, with widespread unemployment, and the total absence of comparable services in the US, something is truly wrong with our labor laws.