A Bitcoin ETF is a Good Way to Ruin Bitcoin

I don’t understand why people want a Bitcoin ETF.

I mean, I get that retail investors want exposure to Bitcoin. Who wouldn’t? Bitcoin has outperformed every asset class in the last decade, with an annualized return of infinity percent!

But treating a utility as a speculative asset is a great way to ruin its utility. A high Bitcoin price results in high transaction fees, and high transaction fees make for a sucky medium of exchange. For those who actually care about using Bitcoin as a peer-to-peer payment service, speculative traders are a pain in the ass.

Who the hell is this guy? Does he have any idea how dysfunctional transaction costs are gonna be at $400,000??

It’s not just Bitcoin, either:

Here’s a story: The first petroleum-fueled combustion engine was created in 1873. That was a big deal. Combustion engines had previously run on coal gas, which provides limited mechanical energy for a volume of fuel. Whereas gas-fired engines were big and stationary, liquid petroleum engines could be mobile.

Wall Street immediately recognized the potential, rushed in to HODL petroleum, and sent light sweet crude to the moon. Gasoline become unaffordable, and the automobile never advanced beyond a plaything for the wealthy elite.

1885 Daimler Reitwagon

Or how bout this: In 1882, Thomas Edison switched on the first system for electrical power distribution. Over the next few years, competing currents battled to connect America’s homes. The most enterprising individuals saw rising demand for copper wire, cornered the copper supply, and made conducting metals inaccessible to the masses. Electricity failed as a consumer product and was forgotten as a scientific curiosity.

One more: In 1669, German alchemist Hennig Brand was examining his own urine when he discovered the elemental form of Phosphorous1. As it turns out, phosphorous is crucial to fertilizer production. Speculators took to hoarding phosphate rock and bodily fluids, fertilizer became too expensive for agricultural use, and civilization fell into a Malthusian trap, where we live on the brink of starvation today.

None of those things happened. It doesn’t make sense to hoard a commodity because humans always figure out how to make things cheaper. No matter how often alarmists scream about Peak Oil and Peak Copper and Peak Phosphorous and Peak Coal and Peak Water and Peak Gold, commodity prices have stayed constant in the long run. To believe otherwise is to ignore thousands of years of human progress.

Bitcoin has only one unassailable use case: It pays transaction fees on the Bitcoin network. For everything else — whether remittances, micropayments, or means of cyber-extortion – there exists a substitute. What do Bitcoin ETF buyers think they’re getting here? A cryptocurrency is not a business – software contributors aren’t employees, and they’re certainly not working to maximize returns for investors. In fact, they’re working towards the opposite: Recent developments enable users to create more transactions while paying lower fees, and do Bitcoin things without even using Bitcoin.

Maybe ETF buyers have priced in decades of technological advancements, and are buying a future where the nation-state is dead, layer-2 networks are ubiquitous, and all the world’s wealth is denominated in Bitcoin. That would be nice. But the current price action is a great way to guarantee we’ll never get there.

1. Brand was looking for gold in the yellow liquid. Is it just me or does this seem like a particularly German thing to do?

The Nuts and Bolts of Redemption

Sima Qian (146-86 BC)

The great Chinese historian Sima Qian became a eunuch at age 46. After disputing the emperor’s criticism of a military officer, Sima Qian was sentenced to castration at the Inner Palace Office.

However, there was one possible recourse: Sima Qian could offset his crime for 20 liang (approx. 310g) of gold.

Chinese legal records have a term for this transaction: 贖 (shú), or redemption. Payment is voluntary, because it’s a choice to atone for your sins. This is different from a fine (罰 ), which implies coercion. Even the death penalty could be “redeemed” for 620 grams of gold.

Paying your way out of castration doesn’t seem like an elective transaction, but the goal was to make redemption seem accessible, even if not always affordable. Sadly, Sima Qian could not afford to redeem his crime1.

Ancient Chinese wealth transfers placed strong emphasis on noncompulsion. The earliest documented tax system (ca. 2070 BC) was called 貢 (gòng), which means “gift”. Citizens were expected to volunteer contributions to the government as an expression of gratitude. This stands in contrast to the early Germanic system of weregild, where a debt was imposed under threat of state-sponsored violence.

Weregild is supposed to feel coercive, because punishment deters misbehavior. It’s like the angry Old Testament God versus the compassionate New Testament God. Except that here, the difference between coercion and persuasion is entirely a function of wealth. Big banks have billion-dollar litigation reserves: They knowingly do bad things, they’ve done it often enough to know the price for getting caught, and their lawyers and accountants can perform a cost-benefit analysis before engaging in criminal behavior. For rich people, a financial penalty is like paying for indulgences.

For the less well-off, even an accusation is coercive.

Two years ago, a judge in Alabama gave criminal offenders a choice between donating blood or paying a fine. It was a clever homage to the origins of blood money! But the judge was suspended after the SPLC filed a complaint: Most of the criminal defendants were indigent, thus the blood donations constituted extortion.

For whatever reason, our society deems it necessary to give poor people fewer choices, not more. And if the lower class is forced to accept compulsory fines, then we should make it look like rich people are being forced into them too. Or at least their shareholders are. The only difference between extortion and bribery is marketing.

1. To put numbers in perspective: The average laborer earned about eight copper coins per day, and one liang of gold represented 72 days’ work.

See Also:
Anthony J. Barbieri-Low and Robin D.S. Yates. Law, State, and Society in Early Imperial China, 2015.

Fiatsplaining Bitcoin

People who summarily dismissed Bitcoin for the last eight years are suddenly super worried about weak transaction volumes. You see, no one is spending their bitcoin!

Bitcoin is in a weird position where the dollar-denominated price just keeps going…up. And because the price keeps going up, HODLers are reluctant to spend. And if no one is spending bitcoin, how can it become a currency?

This is problematic. Nobel Prize-winning blogger Paul Krugman explains why:

What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.

Paul Krugman wants everyone to spend their money, because consumption creates wealth.

Seems reasonable, but here’s a contrarian take from Greek philosopher Dio Chrysostom:

Because of stupidity and self-indulgence, a certain people take that which they prize most highly, silver, and of their own volition send it over a long road and across a vast expanse of sea…

He’s talking about the Roman citizens, and their desire for cheap crap from China. It was the first century AD, and Rome was sending all its silver down the Silk Road in exchange for fancy clothes and rare spices. These indulgences, Dio felt, represented a huge moral failing.

Under ordinary circumstances, weaker states send silver to stronger states in the form of tribute. Paying tribute is a form of submission, it’s what happens after conquerors have vanquished your army. There was absolutely no reason for the Romans to voluntarily send silver to an inferior state, aside from sheer stupidity.

Over the centuries, the Roman Empire faced constant coin shortages as precious metals flowed east. The emperors took to repeatedly debasing the coinage until the finances of the empire collapsed.

Today we export massive amounts of money to China in exchange for consumer goods, but it’s no longer considered reckless to do so. In fact, central bankers encourage such behavior. That’s because we’re not sending China anything of value, like gold or silver. We’re sending them our own worthless dollars, ha ha!

Foreign countries use US dollars to buy up Treasury bonds, and as the bonds depreciate due to inflation, the US government effectively imposes seigniorage. Thus we exact tribute on our overseas bondhonders, without even resorting to the threat of violence.

Don’t try this at home.

When Paul Krugman says that transactions make the economy rich, he means that consumer spending makes the US government rich. The more we consume, the more debt we can sell to our trade partners, the more tribute tax we extract. There’s no limit to household consumption – if we run out of money, lenders are happy to step in. Whereas borrowers used to compete for loans on the basis of good credit, now the lenders market every opportunity to load up on subprime debt. Take out a mortgage to own the American Dream! Invest in your future with a six-figure student loan! Buy a car with 0 down! How bout financing some designer pants?

Krugman refers to Bitcoin as “golden cyberfetters” because HODLers are locked into a virtuous cycle of saving and frugality (he calls it money-hoarding). Bitcoin, for all its features, has one fatal flaw: We can’t spend our way to imperial prosperity.

Digital Pets That Don’t Die

In case you were wondering what tech billionaires are up to these days, here’s a hint:

That’s right, they’re breeding digital cats on the blockchain! CryptoKitties are here, and they’re priming Ethereum enthusiasts for an assured future as cat ladies. After just five days, CryptoKitties is the most popular application on Ethereum, accounting for over 15% of all transactions on the network. What better use case for an unstoppable world computer?

Remember when digital kitties didn’t need to live on a blockchain? Back in the 90s we had Catz, and they roamed the background of a user’s desktop. Catz featured a primitive AI where the animals developed personalities depending on user interactions. If the cat was neglected or abused, it would run away. And yes, users could breed, adopt, and sell their Catz.

Catz for Windows 3.1

The Catz craze lasted maybe six months. Much like real-world pets, desktop animals get tiresome after the novelty wears off. The parent company followed up with digital Dogz, Hamsterz, Horsez, Pigz, Bunnyz, and Guppiez, but nothing really stuck; users invariably got bored and left their Petz to starve or run away.

Virtual goldfish not boring enough for you? Here are some digital Bunnyz!

To improve user retainment, the Petz brand came out with a new product: Babyz. It was the same basic game engine wrapped in the skin of a Cabbage Patch Kid. While Catz was mainly used as a desktop distraction, Babyz was designed for long-term emotional bonds. Users could talk to their digital baby through a microphone, and eventually the baby would learn to speak back.

Babyz couldn’t breed like the other animals, but they also couldn’t die. While most people have no qualms deleting a tired pet, the situation is different with a digital baby, especially one that has learned to talk. Compassionate users set up virtual orphanages where people could put their unwanted offspring up for adoption. Thousands of Babyz languished in online homeless shelters until the game was discontinued in 2000, at which point the children were digitally euthanized.

Send Baby to the digital Baby Farm.

CryptoKitties boasts that their cats can’t be destroyed, but the whole point of a digital creature is that it can be destroyed. Dogz and Catz run away, and digital Guppiez go belly-up — These are features, not flaws. They remind us that commitment is futile and that life is just a long process of being abandoned by everyone we ever cared about until we die alone. The advantage of a virtual pet is that we can delete the evidence and move on.

Just like its predecessors, CryptoKitties were made to be abandoned. This time it happens on the blockchain, where CryptoKitty remains are replicated across thousands of computers all around the world, persistently occupying real estate long after we’ve given up on them. This is probably what it’s like to have kids.

It’s Time to Talk About Geriatric Rights

I am so happy to see social justice warriors fixate on a topic that isn’t completely stupid for once: Age Discrimination in Silicon Valley!

Here’s the New Yorker. Here are recent reprimands from FT, Wired, NYTimes, and IEEE. Here are some out-of-context quotes that serve as evidence of rampant ageism:

People over 45 basically die in terms of new ideas.Vinod Khosla

The guys with kids and mortgages are at a real disadvantage. This is one reason I’d bet on the 25 year old over the 32 year old.Paul Graham

Most of history was built by young people.Naval Ravikant

IEEE posits that the engineer’s half-life of knowledge has fallen from ten years in 1960, to only a few years today. As a result, tech companies must continuously discard and replace their workforce to stay in the game.

That’s a lame excuse. Sure, web developers might have to learn a new Javascript framework every six months, but the fundamentals don’t change. The hottest tech fields – machine learning, blockchain, cybersecurity, cloud stuff – are based on established principles. Deep learning is an application of restricted Boltzmann machines; bitcoin is a combination of p2p networks and cryptography; cybersecurity is about responsible system administration and configuration management; and cloud computing is based on virtualization, which has been in use since the 1960s. Computing paradigms rarely get reinvented; they’re simply applied in different ways.

Sadly, age discrimination doesn’t stir liberal hearts the same way gender discrimination does. Partly because SJWs tend to be young and stupid, but also because ageism is a relatively new phenomenon. Until recently, most people died by 30.

Kidding. The tech industry used to respect their elders. During the dot-com era, VCs weren’t throwing money at hoodie-clad kids. They were investing in older people. That’s right, the founder of Webvan was 48 years old. The Pets.com sock puppet was created by a 43-year-old woman. eToys was founded by Bill Gross of Idealab at age 39. Even when companies were started by young people, investors quickly hired grown-ups to take the helm.

I remember all this because I AM OLD.

The preoccupation with youth might be just a fad. After a few more spectacular implosions like Theranos and Quixey and Jawbone and Quirky, investors might want to stack their portfolio companies with adults again. Khosla may be correct in stating that old people don’t have new ideas, but any VC can tell you that ideas are a dime a dozen — it’s all about execution. So there might be hope for us old folk yet.