Sunday, 2 March 2014

Bitcoin Crisis, What Crisis?

Mt Gox was at one time the largest Bitcoin exchange. With its recent demise many have been bringing to the forefront the issue of regulating Bitcoin. I knew this would become the centre piece of discussion as Bitcoin became more prominent. Its important we all remember how regulation in our current financial system works; not only does if fail to prevent fraud but it creates a form of crony capitalism that we should all be rallying for its removal. 

Mt Gox was big. It had a market cap of around 7-8% of the entire Bitcoin economy. One thing I have noticed during its collapse is how little effect it has had on the network. The price of Bitcoin has remained remarkably stable. Other exchanges, businesses and the whole payment network are all working as normal. There are no taxpayer bailouts. There were no bonuses to "claw" back. We didn't have to hear superficial Government hearings where CEOs and Directors on multi-million dollar payouts give empty lip service along with their false apologies

People have lost money with Mt Gox. We all must remember that is the choices we make in life. Holding cash in bank, under a mattress, in stocks and shares; you name the choice, they all have risks. All those people who lost funds with Mt Gox will in the future realise the risks and will ensure a safer distribution of their funds. Exchanges in the wake of the collapse may wish to prove they are solvent to their customers. The Bitcoin ledger is public. All they need to do is prove their public addresses by moving money and publish such information (Mt Gox did years ago when they were the market leaders). New security mechanism will be created. People will realise if they don't own the private keys to their funds, they don't own the money.

Contrast this to the 2008 Financial Crisis. We had mountains of regulation but still, it happened. We had trillions of dollars of taxpayers money to bailout everyone. The incompetent were not punished; many empty apologies and false promises that it wouldn't happen again. State coercion forced taxpayers to protect deposits for all banks, including the weak ones. We all guaranteed loans for people who had been irresponsible, wreakless and spent like there was no tomorrow. Tomorrow came; unfortunately people who had been prudent were instead punished in the form of negative interest rates on their savings. The Government and Regulators have been actively promoting bad behaviour prior to the crisis and post crisis. Bad Bank? The Government will bail it out. Consumers choose a Bad Bank? The Government will bail you out. More big bank bonuses? The Government encourages reflation, so go nuts. Flipping Homes? Its the policy. Be prudent and save? The Government will punish you.

With all the Regulation we have in place another financial crisis will happen and they have ensured it will be much worse. The same signs are there again. It feels like we have rolled back the clock and I'm thinking the same thoughts I had back in 2005/2006. Flipping of houses encouraged by the Government is happening yet again. The Government continues to spend like there is no tomorrow, despite the liabilities they have taken on. Banks are being reckless once more. Interest rates are at rock bottom with people once more taking on huge debts. 

Regulation. Nothing has been learnt. In fact its history repeating once more only we won't have any more bullets to fight the next crisis. Reflation works; until it doesn't. It always fails in the long run. History has proven that. 

Back to Bitcoin. Mt Gox collapsed. The only people who lost out were the ones who voluntary took the decision to hold funds with them. The crisis lasted days but is now over. Contrast that to the 2008 banking calamity that is taking years to subside. I say 'taking' as its still ongoing. Bitcoin users have all learned a valuable lesson; diversify your funds and have the majority of your money stored with keys you control. Mt Gox was not Bitcoin. It was a business that failed and under Capitalism and free markets it has been liquidated. Resources have been relinquished to the more competent. Consumers have learned some valuable lessons. All this ensures a far healthy market moving forward.

Bitcoins big game changer is the very fact that it liberates finance for individuals. There are many other innovations in Bitcoin; transparency and secrecy (your choice); low transaction fees; amoral; deflationary; lightening fast payments, but personal finance is the big one. People own their money in the purest sense of the term. It can't be a ponzi scheme for this very reason. I am the only person that can access my bitcoins. I'm not dependant on another 3rd party to release my funds, therefore I can always access my money, whenever and wherever. You may think you own the money in your bank but in reality you don't. The bank owns it. If you wish to withdraw your money you have to ask the bank for permission. The Bank can dictate how you transfer your funds. Bitcoin fundamentally changes that. With Bitcoin you can own your private keys to your funds. 

Bitcoin works on public/private key cryptography. With conventional banking  your public key is your sort code and account number. We all give these out if we wish to accept payment. Your private key is your bank number (in reality the bank holds another private key, the ability for you to withdraw your money. Ask the public in Cyprus to hear about this). Bitcoin works on the same premise; public and private keys. You publish your public key to accept payment and keep your private key under your ownership. In this system the private key is really completely under your control. No one can stop you transferring money. No one can confiscate those funds. No one can really know you own those funds if you wish for that to be the case. It really is Gold 2.0. The catch? You are the sole gatekeeper to those funds. If you loose the keys there is no one to help you (In reality if you think Bitcoin will never take off due to this, think again. People are already talking about multi-signature transactions where you and a trusted 3rd party could access the funds. If one lost the keys then the other could recover them. If thats what you want, similar to old banking with more permutations). 

A limit of 21 million meaning your money will gain value; not loose it as we are all so indoctrinated to accept. A boarder-less currency; no more exchanging money for holidays. Funds that you alone have spread among as many wallets as you wish. Funds that can be taken with you if political tyranny is a problem. A currency that has no political liabilities; backed instead with Mathematics. Divisible down to 10 to the minus 8 (and potentially more). A ledger that is public for all to see and unlike the closed ones of your standard bank can't be hacked. From that list everyone will value at least one property; hence Bitcoin has inherent value. It takes a long time for the majority of people to see that value. Think of the Internet, electricity, cars. Members of the public took years to see the value of such creations.

Currency Crisis? Bitcoin has only been on the scene for 5 years yet I've seen many so called "collapses", the death roundabout of Bitcoin. When I started reading up about it in 2012 I read about the 2011 panic; people said it was doomed. I witnessed the April 2013 panic. And now another in 2014. It won't be the last and I look forward to them; it gives a good point to buy and in my opinion is a once in a lifetime startup type investment; only this one is affordable for us all. The difference between a Bitcoin Crisis and the conventional banking crisis we see is timespan and how efficient the free market is, when left alone. Its gone in days, not years or decades. With the crisis comes a more resilient and efficient system. The Mt Gox Crisis? Less than a week gone and Bitcoin veterans are already saying, what crisis?

Saturday, 1 March 2014

Regulation: Tyranny in Practice

“People own their own bodies, and have the absolute right to put anything they want into it ... People like the FBI, and DEA agents who want to lock people in cages for buying, selling, or using drugs are the ones committing evil, and they need to stop. I look forward to the day when they see the error of their ways,  and stop committing evil acts in the name of ‘law enforcement’.”   Roger Ver, Venture Capitalist
My last post highlighted the misgivings of regulation and why there is no need for such a policy. 2013 will be known as the year that Bitcoin appeared on many regulators radar and 2014 will be the year that they intensify their focus on the new technology. Regulation, as I stated, stomps on innovation, it impedes the wealth producers. One such example was a young startup known as I covered it back in 2012 which was created by an Individual called Ben Reeves. Ben was a 20 something Software Developer who had only recently graduated from the same University I went to, Newcastle. Since that posting Ben has been ousted from his creation that he spent day and night developing. Not from competition or from incompetence; in fact his service was increasing in popularity all the time. He was ousted by the wealth destroyers.
One thing that cannot be emphasized strongly enough is how absolutely amazing Ben is. He created the entire website by himself, the iPhone app by himself, the Android app by himself, and up until nine months ago he was also running a service that allowed people to buy bitcoins through wire transfers and cash deposits in the Eurozone.

He was handling all of that, including customer support, by himself. But then, the powers that be in the banking system shut down his personal bank account, his business bank account and his brother’s personal bank account without warning. While he’s an amazing developer, he didn’t want to have to deal with banks and lawyers and regulators. That’s when I got more actively involved.

Roger Ver, Angel Investor in BlockChain
What did Ben do? He created a service that anyone was free to use under their own free will, for free. I used it and still use the service and think it is excellent. He was shaken down because the established order saw this as a direct threat. Remember the big guys are always trying to shut down the little guys. We may live in the West but don't be mistaken that we are absolutely free from acts of tyranny. Closing down bank accounts was an act of aggression with no regards to personal freedom. If a Communist Government had shut down an entrepreneurs bank account for starting a convenience store many in the West would regard this as tyranny. It is no different. Ben has since given the service over to avoid these acts of harassment. 

Then we have another recent example, BitInstants CEO Charlie Shrem has been under house arrest and was arrested at JFK Airport on charges of assisting in money laundering. Of course Charlie just ran his service in order for customers to transfer value as they wished. Its like a commercial bank being sued for assisting with money laundering because they unwittingly allowed a criminal to deposit cash under a relatives name to name many permutations. Charlie Shrem has been targeted so the regulators can make an example of him. Its to scare future entrepreneurs from even thinking about starting up a business related to Bitcoin. They don't want the status quo to be disrupted.

These are real life examples of the wealth creators and risk takers being subject to unjust attacks by the state. Recent news has been full of Bitcoin headlines after Mt Gox, a Bitcoin exchanged, collapsed. A lot of people have lost a lot of money. There is no doubt that this will be painful for the individuals involved and my sympathies are with them. However this is how free markets are supposed to work. Bad businesses fail giving resources to the people who prove themselves competent. This is why markets and capitalism always reign supreme to wealth creation over Central Dictation. The Financial Industry we have now has the "Too big to Fail" mantra where the incompetent can succeed just as well as the competent, creating a stagnant industry.

Mt Gox isn't the first nor will it be the last to fail and take peoples money. More exchanges and Bitcoin related businesses will follow a similar fate. This will not weaken Bitcoin. In fact it will strengthen the platform. More innovations regarding personal security will happen from these failures making the services that use the protocol more robust. Bitcoin, the platform and protocol, is still sound. What it doesn't need is regulation. Regulation is for old finance which is a complete mess. 

I will repeat what I said in my previous posts. No one is forced to take part in Bitcoin; it is voluntary. We all know the risks. These are the risks with building the future financial platform. We have to build the ecosystem and that takes time. Until then, there will be wild swings in price; businesses will fall; scams will come and go.

Erik Voorhees, a Bitcoin entrepreneur, lost over 500 BTC through Mt Gox so if anyone is bitter then Erik more than qualifies. However I think he sums up what needs to be done and its not regulation. Spoken like a true entrepreneur; upbeat in the face of despair; always positive on tomorrows challenges.
And finally, the lesson is not that we ought to seek out "regulation" to save us from the evils and incompetence of man. For the regulators are men too, and wield the very same evil and incompetence, only enshrined in an authority from which it can wreck amplified and far more insidious destruction. Let us not retreat from our rising platform only to cower back underneath the deranged machinations of Leviathan. The proper lesson, if I may suggest, is this: We are building a new financial order, and those of us building it, investing in it, and growing it, will pay the price of bringing it to the world. This is the harsh truth. We are building the channels, the bridges, and the towers of tomorrow's finance, and we put ourselves at risk in doing so.

We are at risk from accidents. We are at risk from fraud, from corruption, and from evil. We are at risk from journalists seeking headlines and from politicians seeking power and glory. We are at risk from the very market we are trying to build - a market which cares not about our portfolio, our ambitions, or our delicate sympathies.

For all these risks, devastation will befall us repeatedly. Some of us will be discouraged. Some will be ridiculed and insulted. Some will be tricked, or swindled. Some of us will be crushed or caged. We will be set upon by all manner of antagonists, repeatedly, for a long time.

So why do we do it? Why do we build these towers that fall down upon us? Why do we toil and strain and risk our precious time, which is the only real wealth we possess?

Because the world needs what we're building. It needs it desperately. If that matters to you, as it does to me, then hold to that thought. You will see through the smoke, and your wounds will heal.

So shake it off, brothers, for this won't be the last calamity endured before the win.

Tonight, my heart is with you all.

Tomorrow, my head is down. My eyes are open. And I am building.

Toward peace and freedom,

-Erik Voorhees