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Things I Think About, by Peter Bowditch

Bitcoin Bollocks

You might have heard of a currency called Bitcoin. It only exists on the Internet and according to it’s supporters it will eventually replace all other currencies used for electronic payments. It is so powerful that the banks don’t know what to do about it. It is absolutely secure and can’t be manipulated because the software that runs it is open source so anyone can look at the program code and see what it does. (The fact that someone claimed to have had $1.4 million worth of Bitcoins stolen from his electronic wallet this week is just a hiccup. Of course, with no audit trail of any kind he didn’t want to bother the police with this because there’s nothing they can do. Cynics are suggesting that as he ran the “exchange” where the money was stored there might be more to the story, but what “18-year-old” would ever bother about “losing” that trivial amount of money?) One argument presented to me was that “fiat currencies” (the red flag du jour when talking to believers in financial conspiracies) have no actual asset backing since countries went off the gold standard and therefore the US dollar, the Yen, the Euro, the UK pound and the Australian dollar (the biggest players in the foreign exchange market) could all be worth nothing tomorrow and nobody will accept them as payment for anything. Questions about the asset backing of Bitcoins were met with non sequiturs about software and algorithms and how nobody controls it.

I have been somewhat critical of the proponents of this magical money for several reasons. One of them is that everything they say about the future of this is an echo of what I have been hearing for decades about multi-level marketing, which has always been a couple of years away from totally dominating retail sales of almost everything. (The silliest thing was someone telling me that the only way you could buy a Honda car in Japan was from an Amway distributor.) It doesn’t take much work to find that the numbers related to MLM show that it is no threat to the retail industry and never will be.

The main function of Bitcoin seems to be speculation in the value of Bitcoins. When I asked where I could spend them to buy things that I might really need to buy, such as food and petrol, I was referred to a list of a hundred or so places that would take the currency. Most of them had “bit” in their name and only offered unspecified “services”. The only place that seemed to be taking a lot of them was Silk Road, an underground sales outlet with about 70% of sales being illegal drugs. It was shut down by the FBI, coincidentally making the FBI one of the biggest Bitcoin holders.

Having been told of the wonders of this currency I thought I would see just how much of a threat it is to the word’s financial systems. Apparently there are about 12 million Bitcoins in circulation right now, with the number growing through some algorithm in the software that all users are obviously capable of reading and understanding, and which, of course, they trust that criminals like Silk Road haven’t been tampering with to get an edge. The maximum number of Bitcoins that can ever exist is 21 million, but nobody can predict when that might happen. Current speculative value at the time of writing is just under $US450/coin. Using these values, let’s see how Bitcoin stacks up against the Australian economy (which is about the tenth largest in the world). The $AU is worth $0.94 at the time of writing and this has been factored into the calculations.

Total value of Bitcoins: $A5.75 billion

Now, that’s a lot of money, so let’s see how it compares to the real world.

$A amount Bitcoin Comment
Cash in circulation $55.9 billion 10.28% Cash in wallets, purses, cash registers and behind the couch cushions
M3 (all the money in the economy) $1,584.4 billion 0.36%
Federal Government Budget Expenditure (2013-14) $398.5 billion 1.44%
Tasmanian Government Budget (2013-14) $5.1 billion 112.64% Oh look – more money than Australia’s smallest state spends
Coles supermarket sales $35.8 billion 16.05% Just less than two months’ grocery sales. There are other big supermarket chains.
Woolworths supermarket sales $40.0 billion 14.36% 52 day’s sales of groceries and liquor (Woolworths don’t separate the two in their reporting)
Bank profits (2012) $23.7 billion 24.24% That’s just the profit the banks made, not assets
ASX daily share turnover $4.7 billion 122.23% Shares alone, not futures or any other equities or derivatives
ASX market capitalisation $1,200 billion 0.48% Value of publicly listed shares on the Australian Stock Exchange (eighth biggest in the world). Does not include the value of futures contracts or any other derivatives.

References:

So it seems that if someone had all the Bitcoins in the world they could fund the Australian Government for five days, pay the bills for the smallest state for 13 months, keep bank shareholders happy for just under three months, buy all the shares sold on Monday and a bit of Tuesday and buy groceries and booze for almost two months.

And this is going to take over the world economy real soon now.

In one discussion with a true believer I pointed out that even if all the 21 million possible Bitcoins were here right now they would need an individual value of $2661 to match the amount of cash floating around in Australia. I was told that this was irrelevant because someone somewhere had said that they could be worth “100,000s of dollars each”. (I was tempted to ask whether this “economist” was trading the things and simply talking up the market, but I already had hints that the person I was talking to lacked some knowledge of economics – one indicator of this was that he had answered some questions by telling me to study economics.) I noted that 21 million Bitcoins at $200,000 each was equivalent to only 31.5 hours of international foreign exchange trading and was then subjected to a rant that showed that the person I was talking to didn’t know the difference between a market and the multiplier effect so I gracefully retired.

Is Bitcoin a viable currency? No, it is a traded commodity. Is the world money system likely to be replaced by Bitcoins? Not now, not ever. Are the banks worried that their hegemony on the holding, lending and transferring of money is threatened? Bitcoin might be mentioned at a bank board meeting for a bit of amusement but deciding which biscuits to have with the coffee would worry board members more. Will people make money trading Bitcoins? As long as there are enough people prepared to throw money at a speculative commodity there will be money to be made. Has anything like it ever been seen before? Yes, in Holland in the 17th century, but at least you could hold a tulip bulb in your hand. (The tulip in the picture sold in 1637 for ten times the annual wages of a skilled craftsman.) Will anything like it ever be seen again? Of course – there is always a new scam coming along.

What I found surprising in all this is that all my discussions happened in forums that are supposed to be populated by skeptics and critical thinkers, although the several Bitcoin enthusiasts seemed to just appear at the mention of the word in the way that mention of circumcision or abortion almost anywhere on the ‘net results in immediate spam, outrage and conflict. The passion shown by the true believers matched anything I’ve seen from religious bigots or racists. Their ability to produce straw men, misquote, provide non sequiturs and change the subject would do credit to any creationist or anti-vaccination liar. But, as one person told me, he was an expert in everything about it including the software code, the mathematical algorithm used to calculate value and number of issued coins, the security model (none, that I could see), the methods of communication and interaction between the many instances of the program and the inbuilt (but invisible to outsiders) method of auditing transactions. Despite all these he had no interest in it at all and was only arguing with me because I’m an idiot who can’t see the truth and I should act like a real skeptic and look at the evidence.

Well, I did look at the evidence, and what it told me was that emperors should be vary wary of Bitcoin promoters who offer to sell them clothes

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