Bitcoin’s lien problem

At cryptocurrency and fintech conferences, FT Alphaville often hears Bitcoin enthusiasts make the assertion that Bitcoin is superior to fiat currency because it eliminates debt from the monetary system.

But this, of course, is a fallacy.

Bitcoin may have the potential to create a fully-funded reserve system, but it certainly doesn’t eliminate debt from any system.

At best, Bitcoin’s public ledger records a transfer of digital access rights in the eyes of the clearing network. It does not, however, record or see the terms and conditions of that transfer. Read more

Blockchains as a public and private resource

FT Alphaville attended Tomorrow’s Transactions 18th annual forum this week where all facets of blockchain and distributed-ledger systems were explored.

The most interesting ideas (at least to us) were those presented by Vitalik Buterin of Ethereum and Preston Byrne of Eris Industries. Both are focused on moving blockchain beyond bitcoin and towards useful real-world applications.

The former, for example, is focused on creating a so-called “Turing complete” public chain that would — as we understand it — allow anyone with coding capability to tap a globally distributed processing network to run their programmes upon safe in the knowledge that the underlying data can’t be falsified or manipulated. Read more

On the potential of closed-system blockchains

Followers of FT Alphaville’s Bitcoinmania series will be familiar with our generally sceptical position on all things bitcoin.

Indeed, over the course of more than 64 posts, we’ve presented a mostly negative case for bitcoin “the currency”, and remain confident that the open-source “people-cleared” cryptocurrency (which replaces one accountable and identifiable third party with 10,000 anonymous parties of dubious intent) is ill-suited for the job of currency in any stable economic system.

That said, we have reflected tiny bursts of enthusiasm for what blockchain technology, the distributed public ledger underpinning bitcoin, could do for the murky and shadowy world of OTC bilateral clearing. Read more

Bitcoin continues to evolve into a worse version of the current system

A cheaper, faster and more secure way to pay for things on the internet or on your smart phone.

Those are the usual claims you hear about Bitcoin. But on January 12, anyone transacting on the network may have come across an unusual problem: a near two-hour wait for a payment to be processed. Read more

How to corner markets, Bitcoin style

If you think retail FX and spread-betting shops have a problem with one-way client risk, then don’t even dare to look into the Wild West stuff going on in crypto land. It’s the Bank to the Future Biff Tannen version of 1985 in Technicolor (Oculus Rift form naturally).

As we’ve noted before, Bitcoin markets are a hotbed for unscrupulous market practices. Everything from HFT, front-running, rebating, preferential order flow, poor margining, naked shorting, and now the truly popular one — active “collusion” by big players. It’s all there.

What’s really cute is that a lot of the time the cowboys think they’re being truly innovative with these strategies. (Michael Lewis obviously hasn’t penetrated their radar.)

On which note, unconfirmed reports come our way of the latest bearwhale scheme being hatched — this time being organised by a particular bearwhale called Benji — to corner the market with the cunning use of the “shake out the weak shorts and cause a short-squeeze” strategy. Read more

Do you have a finance degree from the university of Bitcoin?

As the Bitcoin price crumbles….

… and the capital hole (economic flaw) at the heart of all cryptocurrency schemes is exposed, we thought we’d uncharacteristically look at what was actually good about the phenomenon of Bitcoin. Read more

Bitcoin’s upcoming capital crisis

A quick update on the scam-ridden world of Bitcoin — not to be confused, of course, with the (sacrosanct) technology of THE BLOCKCHAIN, still dubbed “promising” and “respectable” by VCs in the know — which seems to be fast descending into a blazing fireball of financial chaos, bankruptcy and despair.

On Monday, we had the suspension of Bitstamp, one of Bitcoin’s most reputable and liquid exchanges, founded and operated by two Slovenian kids in their 20s and funded to the tune of $10m by US-based hedge fund Pantera Capital (an arm of Fortress Investments) despite the youngsters’ lack of discernible financial credentials.

As of pixel time, the official line by way of CEO Nejc Kodric was still that a hack had pilfered $5m worth of Bitcoin from the company accounts but that Bitstamp would be back up and running within 24hrs, 48hrs, “soon”, and that customers should not worry because the company had more than enough reserves to cover their customer liabilities.*

*Update: Bitstamp is back up and trading as of Friday evening. No change to the official narrative and no real explanation of who is covering the loss. Read more

Who needs caveat emptor when you’ve got Bitcoin?

What did you miss while you were away eating turkey and whatnot?

Well, there was that one thing about China’s State Administration of Foreign Exchange relaxing the rules on Chinese banks’ foreign-exchange holdings, allowing them to hold fewer dollars — a pretty useful ruling during a dollar shortage issue. Read more

Bitcoin cognitive dissonance of the day, Bill Gates edition

If there’s anyone who knows about the benefits of “early adoption” it’s Bill Gates — the man who built an empire from understanding the value of access rights to software.

Should we really be surprised, then, that he’s also in favour of Bitcoin, a system that helps a whole new generation of software “early adopters” gain vast amounts of wealth through the cunning ability to spot a market that’s fit for monopolisation.

But that’s not even the value of Bitcoin, according to Gates! Here he is on Bloomberg gushing about how the virtual currency’s greatest feature is how cheap it makes payments processing: Read more

BitCon: The book

Jeffrey Robinson is an American author best known in media circles for his work on international financial crime via his 1995 book The Laundrymen.

Suffice to say, when one of the world’s best known financial-crime authors turns his attention to the world of cryptocurrencies, and in particular Bitcoin, it probably makes sense to pay attention. Especially when the book he publishes is called, BitCon: The Naked Truth About Bitcoin.

Sadly, for the Bitcoin faithful — as well as all the other reasonable institutions that seem to have been taken in — the verdict is not good. Robinson reduces the entire phenomenon to a classic swindle. A small cohort of ruthless predators taking advantage, as usual, of the naive and gullible via a carefully constructed and asymmetrical myth, which happens to appeal to those of a certain persuasion, encouraging them to take leave of their senses entirely.

Part of the fervour is driven by classic get-rich-quick sentiment, but the other and the more sinister part is based on the art of indoctrination, no different to that employed by cults focused on getting people to hand over their hard-earned cash for the the sake of reserving themselves a prime slot in heaven and/or the supposed system that comes after this one.

 Read more

Bitcoin business model too good to be true…proves to be too good to be true

After days of speculation, Ars Technica has finally provided confirmation that the business model everyone in the finance world (not suffering from the Dunning Kruger effect) knew to be fantastical was in fact…fantastical.

For more on the greed dynamics that drive perfectly reasonable people to hand over hard-earned fiat cash to strange unregulated companies (with no track record) which promise to use that cash to handcraft depreciating money-printing machines, see our previous post here.

Safe to say, however, that if your business depends on collecting other people’s money to build money-printing devices that depreciate over time, the temptation to use those machines for yourself, rather than to deliver them to customers, may prove rather hard to resist. Read more

Cult Markets: When the bubble bursts

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

BoE on the potential of the blockchain

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.

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BoE on the Bitcoin tech arms race

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?:

 Read more

BoE on the moneyness of modern payment innovation

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 BoE opens Pandora’s Bitcoin box

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

A Bitcoin flash crash

Bitcoin has been on a sharp course downwards for a few weeks now (chart courtesy of Bitstamp).

But on Monday, the unthinkable happened.

Bitcoin prices on the BTC-e exchange suffered a flash crash that took the price as low as $309 per bitcoin from a day high of $497.79.

Here’s the damage:

 Read more

Osborne deals with the pirate threat

Pirates. Can’t live with them. Can’t get rid of them.

And… it has always been so. Read more

Seventy Bitcoin risks

Click to enlarge, via the European Banking Authority’s response to virtual currencies. Do note E31.

 Read more

Bitcoin auction, the aftermath

Bitcoin prices rebounded from recent lows overnight as “results” of the US Marshal Silkroad Bitcoin hoard auction came through: (Chart via Bitstamp)

 Read more

Do private sales affect public prices?

It’s a tricky question for the Bitcoin community this morning, who just can’t decide.

From the Bitcoin reddit: Read more

Newsflash Bitcoin people, we already have a private money system

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

Blockchains vs stock exchanges

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

I see blockchains

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

Who’d have thought. Cryptocurrencies are replicating conventional systems

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

Bitcoin shocker!

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

Why the golden goose market may be decaying

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

Peak Bitcoin or peak hedge fund?

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

The linguistic verdict: Dorian is probably not Satoshi

Everyone has a linguistic signature (apparently).

Luckily for Bitcoin sleuths trying to determine the real identity of Satoshi Nakamoto the existence of *that* Bitcoin white paper provides everyone with some valuable clues. 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