Kevin Gosztola is the managing editor of editor of Shadowproof. We talked about his article on the FCC under Ajit Pai relaxing the rules on cross-media ownership, and Kevin mentioned in particular this piece by John Oliver about the potential dominance of the Sinclair Broadcast Group:
Over the past couple of weeks, Bitcoin has bounced around in value, while in general surging upwards. To give you an idea of its surge, at the start of this year, in January 2017, Bitcoins were trading at less than US$1,000 each. Nine months later, by the middle of September, Bitcoin had risen to $3,000. By the end of November, less than three weeks ago, it hit $10,000, and in the last week it has traded over $18,000.
And by the way, if you’re not sure exactly what Bitcoin is, if you feel you need to learn more about it, I have just one piece of advice for you: don’t bother.
There are two types of people who are raving about Bitcoin at the moment. One of those types is the libertarians who want to remove the role of governments from backing money. If you advocate the total, or almost total, absence of state power over people’s lives, and say that this will lead to a blossoming of the economy, an obvious stumbling block is the fact that governments create and guarantee money, which is pretty important for the economy.
In case you don’t know, a Bitcoin is a type of computer file which is unique and traceable online. The Bitcoin is traceable, but its owner is not, and thanks to a bit of fancy computer mathematics, there is a limit to the total number of Bitcoins that can exist. The theory is that anything that’s scarce is valuable. Also thanks to that fancy mathematics, each Bitcoin needs some hefty computing power to be calculated, and each Bitcoin is exponentially more difficult to calculate than the last.
You might have heard of Bitcoin mining, that basically means setting a computer going to do the calculations to claim the next Bitcoin. But actually setting one computer going isn’t going to get you far right now. This isn’t like leaving your computer to defrag overnight. As I speak, there are people building warehouses full of specially-built high-spec computers, sucking huge amounts of electricity off the grid to mine – or calculate – the next Bitcoin.
For the libertarians who think that they can bypass the power of government, there are a couple of problems. People like Ron Paul have been banging on about the gold standard and how inflation is theft for decades. They do have a point, there is no denying how governments printing too much currency impoverished have their populations like in Zimbabwe or in Germany before the rise of Hitler.
We are well used to the problems of excessive inflation, but not so much with the problems of deflation, the constant fall in prices. Inflation at moderate levels has an important function in the economy. It rebalances the power between buyers and sellers.
If Ron Paul had his way, and all currency was just a token for a fixed amount of gold actual gold stored in a vault somewhere, then what would happen? If gold, or its tokens, were the basis of all trade, then the price of gold would skyrocket. And given that gold mining is a subset of the size of the global economy, all economic growth would mean increasing the amount of goods and services that could be bought by a fixed amount of gold. There would be either permanent deflation or permanent recession, or most likely both.
Anyone with any capital would be motivated to hoard it, not invest it, knowing that just doing nothing would make it worth more tomorrow than it is today.
That’s why governments steadily increase the money supply over time, ideally in line with economic growth. Sure, too much money supply can create hyperinflation, but too little can be equally disastrous. And there we come to Bitcoin. Its maths mean that there can only ever exist 21 million Bitcoins. Some people see that as a way of escape evil governments inflating away their savings with what is called fiat currency, but it cannot match the growth of the global economy, so if it ever was more than a sideshow, it would cause economic meltdown.
And let’s not get carried away. The second type of people enthusiastic about Bitcoin are computer enthusiasts. They rave about the way it polices itself, its security, its anonymity, all independent of any government authority. The first Bitcoin purchase was in 2011, buying two pizzas for 10,000 Bitcoins.
To make a transaction like that, you have to use Bitcoin exchanges such as Mt. Gox, Bitomat, MyBitcoin, Bitcoinica, Bitcoin Savings and Trust, Bitfloor, Instawallet, Bitcoin Foundation, Inputs.io, Global Bond Limited, Flexcoin, Bter, Bitstamp, Cryptsy, Gatecoin, Bitfinex, or NiceHash
But hang on. It’s not secure at all. As a proportion of its value over time, Bitcoin is probably the most stolen currency in history. The one thing about all those exchanges is that every one of them, every single one, has either been the target of successful hacks where hundreds of millions of dollars worth of Bitcoins were stolen by criminals, or the whole exchange turned out to be actually run by criminals who went offline and stole all their clients’ money.
Wired magazine noted that almost half of all Bitcoin exchanges have ended up closing down, that’s in the seven years that it has existed. By a proportion of its value over time, Bitcoin is probably the least secure currency in history.
But all that doesn’t matter, because I’m not arguing that Bitcoin is a bad currency. I’m arguing that a Bitcoin is not a currency at all. A currency is a reliable means of transmitting value over space and time. I can put some money into my wallet, drive to the grocery store and use it to pay for groceries, of I can borrow some money from the bank to buy a car and pay it back over the next couple of years from my wages.
Now, you I can make an online purchase and send Bitcoin so, if you manage not to get hacked, Bitcoin works well across space, but time is another thing. The Bitcoins paid for those two pizzas at Papa John’s a few years ago are now worth something like US $150M. I hope that pizza tasted good, I’m sure that guy is kicking himself, but hang on, what if he had borrowed the Bitcoins from his friend?
I mentioned the sharp increase in the value of Bitcoin, but another feature is the wild swings in value along the way. They mean that nobody could every make or take a loan in Bitcoin, because you would never have any idea what the repayments would be worth.
And it’s pretty clear that many of the swings in value were associated with online attacks, where criminals sold heavily in advance of bad news coming out, announced their hack, crashing the value, and then bought back when the price was low. Governments do everything in their power to make sure that doesn’t happen to their currencies, because they know that there will be a revolution if it does. The people who run Bitcoin exchanges sometimes have a vested interest in wild fluctuations.
Bubbles are based on a fool buying in, hoping that there will be a greater fool to buy from them. If you want to have some fun and have some spare cash, go right ahead, but don’t risk money you can’t afford to lose, and remember that like South Sea shares and Dutch tulips, whatever the price, they are now, and will always be worth nothing.