It’s a Scam

Rarely these days do we encounter the feedback “bitcoin is a scam”. It does happen though including this week. The argument was along the lines of, it’s only valuable as long as people say it is, otherwise it isn’t.  A bit like gold then. Nobody ever decreed gold as money, people just used it because it was scarce, durable and hard to produce.

Gold emerged organically. Likewise bitcoin. It has zero marketing budget and zero staff. It caught on organically because it was useful and provably scarce. It is just a piece of open source computer code, available for all to see and read, almost by definition it cannot be a scam, although I concede it does attract scammers.

It prompts me to wonder what would make people believe that something is a scam. I think the principal reason bitcoin suffers from this is that it is not a ‘government sponsored money’ like Australian or US dollars. The idea of non-government money is completely foreign to people, even though for most of humanity (until 1971) government money was bounded by something real.
Here’s a thought experiment for you. It’s 1971:

• A new currency system has just launched. The USA has defaulted on its Gold Standard commitments. Prior to that all currencies had been redeemable for USD and then for Gold if you wished.
• The new system is redeemable for nothing. It is now money because the government says so.
• You must pay your taxes in the new currency
• If the tax isn’t enough, the government will print some more of the new money. Sometimes they will print a lot more.
• That is not ideal for you because all your earnings and savings will be hugely devalued by this printing. That’s the system though. We hope you like it.

You would not tolerate that currency. It is systematic theft, since your savings and income are permanently devalued and the tax payment is an option for them on you, and not the other way round. Either you pay us tax, if it is not enough, we tax you anyway by printing more currency.

That is fiat currency today. It is a scam, but because most people have lived with it their whole lives, they don’t see it. The scam is as old as history itself and always ends the same way.

The scam is accelerating this year, as you will see below:

The Federal Reserve now has a zero reserve requirement for Depository Institutions (banks). Banks in the USA (since March 2020) have no requirement at all to keep some of your money on hand for you in case you want it.

In discussing this with a banker this week, he was anxious to point out that “it doesn’t really matter because there is unlimited credit available for banks through the Federal Reserve overnight window”.

So, previously you could convert to gold. Now you might be able to convert your deposit to cash, but if the bank doesn’t have the cash, they borrow it in the overnight window from the Fed, who print it and then give it to the bank, who give it to you.

Here’s the final reminder. Post the 2008 financial crisis it took 5 years for the US money stock to rise by $3 trillion dollars. This time around, it took 11 weeks. That’s what a scam looks like.

Microsoft

When Wall Street buys bitcoin, they do it for reasons like – it might go up because it’s scarce. Most analysis of bitcoin doesn’t go much beyond that.

This week Microsoft entered the landscape demonstrating a much deeper understanding of the protocol. They have launched ION, an identity system that makes use of the security of the bitcoin ledger.

The level of security provided by bitcoin is now beyond comprehension. Two weeks ago the cumulative work in the bitcoin blockchain (that is the amount of calculations that have gone into its construction) passed 2^92. It is the largest single purpose continuous calculation ever undertaken by humanity.

For someone to ‘hack’ or rewrite the bitcoin blockchain gets harder and harder with time and Microsoft is effectively leveraging that security for its new ION protocol. Their software tags a record in the bitcoin blockchain, that record cannot be altered and the digital identity profile is then built from there.

It’s actually a rather elegant solution since it does not overload bitcoin, requiring an entry on the blockchain only once to commence the identity process.

One of the most successful IT companies ever cannot build something more secure than bitcoin, so they have decided to just use it. I have no idea whether this will be successful but it points to the fact that when people are seeking ultimate truth that cannot be altered, look no further.

When history all around us is being rewritten, it makes the argument for permanent ledgers all the more compelling.

Security

On the subject of security, I recommend this interview featuring Dan Tapiero who discusses the value of the the bitcoin network from the perspective of its security.

As I mentioned last week bitcoin solved a long standing problem in computer science about digital scarcity, prompting this question in the interview.

Is Amazon as valuable as a new invention for humanity?

His point could be summarised as: how much would it cost a private company to recreate something with all the cumulative effort and skill that has gone into bitcoin? Answer, a great deal and considerably more than the current market value in his opinion.

26 Trillion

It did not take long. 34 days actually, for the US Government’s debt to go from $25 trillion to $26 trillion.

The speed with which this debt is now rising is alarming, an average of $1 trillion per month.

It may be that this rate of increase falls back as America returns to work and support programs from the Federal Government fall away. However, only the rate of increase will fall, the debt itself is never doing anything but rising.

Investors need to consider this and the best ways to protect themselves from the biggest debt ponzi in history. I repeat, for good measure, US debt holders will be repaid, the US can never default since it can just print the money and pay it back, the issue of course is how much will it be worth when you finally get your money returned to you.

At some point, investors will say “no more”. That will be the day you don’t want to be holding US bonds. It’s not here yet but when it comes, you will know about it.

The issue with the manipulated interest rates we currently have, is that it generates real problems in the real economy. Firstly, the discount rate becomes distorted and we get asset bubbles – stock market, real estate.

It also drops required return rates. If you can borrow at 1%, then 2% return projects are profitable. Most pension funds around the world are predicated on 7% returns. Where does a pension fund get 7% when most of the world is churning out 1 or 2% projects and bonds pay even less?

Well, Calpers, the biggest US public pension fund manager in the world has come up with the answer. Leverage.

In a presentation this week they laid out that they will be using, equity futures and debt to improve their returns. Their current portfolio of $395 billion is 30% short of the amount needed to fund retirees.

Obviously then, rather than explain to pensioners, that “we can’t afford it anymore so it’s haircut time” the answer is to gamble in the markets to try and claw back the missing $100 billion. I mean, what could go wrong?