This is Jean-Paul Rodrigue’s stages of a bubble chart:
This is a chart of the price of Bitcoin from the BoE: Read more
The value of Bitcoins has exploded. Again.
FT Alphaville takes you through the latest news as well as the history of Bitcoin, and also we get a bit philosophical about what it all means. Jump in and join the discussion!
The key finding of the BoE’s report on cryptocurrencies is that the technology which supports digital currencies, the distributed open ledger — also known as the blockchain — may have a potential and positive use in the wider banking and asset business.
This is contrary, however, to its position on the Bitcoin currency which it says in its current fixed supply form would expose the economy to significant deflationary risk if it was ever to be widely adopted by the public. Or as they put it:
…the inability of the money supply to vary in response to demand would likely cause welfare-destroying volatility in prices and real activity.
Okay, we know, this is now our fourth post on the BoE’s foray into the world of cryptocurrencies. But we think it may be the most interesting, given that it focuses on the economics at the heart of Bitcoin mining.
For example, who can resist this log scale chart of the computational power per address in the Bitcoin network?:
The BoE’s latest quarterly bulletin delves into the choppy waters of cryptocurrency innovation, providing some useful historical context into what’s going on. As we’ve already noted, the house view on Bitcoin “the currency” is sceptical due to its ultimate inflexibility relative to demand. But the BoE is much more open-minded about the potential of the distributed ledger that drives the Bitcoin system, and sees it a true innovation.
Before we get to the latter point, however, it’s worth presenting the Bulletin’s view on how all these new technologies fit into the monetary hierarchy picture.
As the Bulletin makes clear, while new payments “technologies” do have the potential to expand that unsupervised money base and add risk, they don’t always have to. Read more
The Bank of England is daring to open Pandora’s Bitcoin box with two major articles on the rise of cryptocurrencies in its latest Quarterly Bulletin, released on Thursday.
The two-minute take-away is that the report’s authors remain sceptical about Bitcoin’s potential as a currency (due to its inability to respond to aggregate demand), but are open minded about the potential of the technology of the distributed open ledger. As we’ll explain later, a lot of that open mindedness is related to the distributed ledger’s potential to bringing transparency to financial transactions outright, and also its potential to limit the system’s dependence on centralised clearers and counterparties.
The best thing about the report, however, is that it brings much needed clarity on the issue (and hierarchy) of the modern money system. Read more
Pirates. Can’t live with them. Can’t get rid of them.
And… it has always been so. Read more
Bitcoin prices rebounded from recent lows overnight as “results” of the US Marshal Silkroad Bitcoin hoard auction came through: (Chart via Bitstamp)
The following from Paul McCulley, chief economist at Pimco and Zoltan Pozsar, a senior adviser at the US Treasury department, came out earlier this week in the FT, but is worth rehashing in light of this relatively absurd call from the Institute of Economic Affairs for the UK government to privatise the pound and replace it with Bitcoin (capital B).
The central message of the McCulley piece being — one which happens to be echoed by most seasoned central bankers and economists — that we do of course already have a private money system! And that was part of the whole problem!! Read more
Since we just spent a good while arguing against the idea of blockchain society, we thought we’d quickly follow up with a post explaining why that doesn’t necessarily mean we’re against blockchain innovation itself.
It’s very likely that the blockchain might one day be usefully incorporated into existing services to make them better and fairer. We’re just not convinced this will necessarily democratise the world the way Matthew Sparkes at the Telegraph envisions or make it cheaper to process information. If anything, it’s likely to de-risk markets (the sort that feature real goods and services) through improved information gathering, sharing and transparency — something which limits the need for currencies, not increases it. Read more
The Telegraph’s Matthew Sparkes, just like Neo in the Matrix, has fallen down the blockchain rabbit hole. Everywhere he looks he sees blockchains.
Blockchains for automated self-driving car-fleet management. Blockchains for money. Blockchains for stock. Blockchains for votes. It’s cybernetic blockchain utopia!
Or as he puts it: Read more
We were struck by a PR email we received this week directing our attention to a three-month old crypto currency called “Blackcoin”.
According to said PR:
… [Blackcoin] is already one of the top 10 by market cap. BlackCoin is based on many of the ideas contained in the original Bitcoin protocol, but with a few important changes. Most critically, BlackCoin secures its network entirely through Proof of Stake, compared to Bitcoin, which uses Proof of Work.
Okay, we’ll play. Please tell us more about this revelatory innovation called “proof of stake”? Read more
Here’s one for the FT Alphaville Blockchain log.
It seems key bitcoin foundation member Gavin Andresen has finally figured out that the cryptocurrency’s competitive transaction fee may be dependent on a constant capital transfer from real money systems.
And, more specifically, that when people stop subsidising miners with “seigniorage” revenue, they’ll either have to:
1) Hike fees to compensate miners for managing the currency and not bailing out. [Surely you mean interest rates? - Ed]
2) Make the thing much less costly to run by making the hash rate easier, something which would inevitably expand the money supply. Read more
That Isaac Newton, one of the greatest minds that ever lived, was both mathematician and physicist and alchemist and gold standard enthusiast seems in the context of the bitcoin movement oddly appropriate.
After all, nothing represents the fusing of mystical alchemical forces with the principals of physics and maths better than a crypto-currency — especially when its supply is designed to be purposefully rigid, like gold.
Nowhere is that fact more evident than in the market for crypto-currency mining rigs. Read more
Tim Hartford directs us to a nice piece by John Cassidy in the New Yorker this week wondering why it is that hedge funds can still get away with making a killing when their performance is so underwhelming these days.
It is, in his opinion, a bit of a mystery.
He adds that even though institutional money is putting pressure on fees — in some cases leading to the traditional 2 and 20 model being sliced to 1.4 and 17 — it’s hardly enough of a cut to justify the lackluster performance.
Furthermore, the biggest and most successful funds don’t seem to have this problem. Their ability to attract money on those terms suggests there’s no end of rich people happy to throw their money at them. Read more
We referenced the obvious similarities between the oil market and the Bitcoin market — specifically with regards to cost of production and capital intensity preventing a competitive threat to Opec — in our previous post.
In a fortunate coincidence, John Kemp at Reuters today directs his readers to the myth-busting 2004 work of former MIT professor Morris Adelman, who compellingly argued against the “oil is running out, prices can only go up” thesis. Read more
Bitcoin prices are in retreat, seeming to suffer from the triple whammy of a Chinese crackdown, ongoing repercussions of the MT.Gox implosion as well as the IRS deciding that miners will not be immune to tax in the US.
Dorian Satoshi Nakamoto, the LA-based man that Newsweek alleged on Thursday was the probable creator of the Bitcoin protocol, denied all involved in an AP interview — but the plot continues to thicken.
Surprise, surprise — the user is claiming that the man featured in the Newsweek article is not Satoshi Nakamoto.
At this stage, one has to ask what’s really preventing the real Satoshi from revealing his true identity and claiming his fortune? (And there are reports that the bitcoins associated with Satoshi are already on the move on Friday.) Read more
Tech billionaire and bitcoin investor Marc Andreessen says Mt Gox is to bitcoin what MF Global is to the dollar.
But before we get to that, we’d like to explore revelations that it may not have been a malleability issue, a.k.a. a transaction doppelganging problem, that brought down the world’s premier bitcoin exchange but the much more common problem of “under-capitalisation”. It’s a common problem of banks and ponzi schemes everywhere. Read more
How to handle bad news, by public relations guru and propaganda expert Edward Bernays from his book Propaganda (1928):
The counsel on public relations must be in a position to deal effectively with rumours and suspicions, attempting to stop them at their source, counteracting them promptly with correct or more complete information through channels which will be most effective, or best of all establish such relationships of confidence in the concern’s integrity that rumours and suspicions will have no opportunity to take root.
A single factory, potentially capable of supplying a whole continent with its particular product, cannot afford to wait until the public asks for its product; it must maintain constant touch, through advertising and propaganda, with the vast public in order to assure itself the continuous demand which alone will make its costly plant profitable.
Bitcoin may be many things: a cheaper and more efficient payments mechanism, a decentralised form of QE, an extreme way to break through the ZLB, a worthy private substitute for cash, an opportunity to stick it to the man or even a speculative investment opportunity of a lifetime.
What it isn’t, however, is a fair distribution of income.
Here’s a crazy thought to start the New Year year with. What if virtual currencies were born less of an organic anti-government peoples’ movement and more of extreme unconventional monetary policy by the state? The ultimate central bank Jedi mind trick if you will, which takes easing to levels that conventional policy just cannot go.
But even if it’s not a plan hatched directly by monetary bodies to serve the interests of the state, there’s still a strong argument to be made that virtual currencies could be doing the Fed, the BoE and even the ECB a big favour. Read more
Or something like it. We’re not, after all, physicists. Though, feel free to read about the Hubble Bubble theory here. What we probably should be referring to is Hubble’s flow, the rate at which expansion of the universe occurs.
All of which is a whimsical way of suggesting that perhaps Larry Summers has a point. Perhaps bubbles are part of our collective universal nature? A phenomenon that should be embraced as an unstoppable physical force, one that will find a way no matter what.
The proof is out there if we look hard enough. Latest manifestation: Bitcoin.
If we go with that notion, then perhaps inflating asset bubbles one after the other isn’t such a bad idea. Perhaps it’s even necessary? Read more