When You Hear "Bitcoins," Think "Mt. Gox."
Mt. Gox is gone. Bankrupt. It took $473 million with it. Over a million investors listened to the hype about the "untraceable money of the future," and they turned real money over to some 25-year-old French kid -- a programmer who lived in Japan. They gave him real money. He gave them a dream.
Goodbye dream.
Mt. Gox's founders were going to get rich -- "Rich, I tell you! Rich! Hahahaha!" They had a plan. You can read it here.
Goodbye plan.
My mind drifts back to the 1960's.
Where have all the bitcoins gone, long time passing?
Where have all the bitcoins gone, long time ago?
Where have all the bitcoins gone?
Bad code swallowed every one.
Oh, when will they ever learn?
Oh, when will they . . . ever learn?
Pete Seeger, where are you, now that we need you?
GOXCOINS
First, I now refuse to capitalize bitcoins. That which de-capitalizes its users should not be capitalized. Then there is this: for as long as its defenders do capitalize it, it is not currency. We do not capitalize dollar, yen, or euro, because they are money. We capitalize proprietary brands. We capitalize Charmin. We capitalize Drano. But that which is universally used, we no not capitalize. We capitalize Krugerrand. We do not capitalize gold.
Second, economists do not defend bitcoins as a future worldwide currency. There is no worldwide currency today. Gold once served this purpose. So did silver in the form of Spanish pieces of eight. But nothing else has.
Third, libertarian programmers think bitcoins will become the world's first digital international currency, a stand-alone monetary system that is separate from commercial banking and central banking, a system where people will be able to buy and sell whatever they want, but without ever accessing a government-regulated bank account. Programmers do not understand either monetary theory or markets. Bitcoins are a dream come true for them, and they have adopted bitcoins as a representative dream.
Money is not based on dreams. It is based on personal self-interest. Adam Smith had it right in The Wealth of Nations. Mises had it right in Human Action. Free markets are driven by people pursuing their individual goals. They are not about ideologists trying to impose their views on society. Anything that involves the substitution of a minority's dream on the majority's personal imputation of value is not going to survive. The free market will kill it. The free market does not respond to this: "Adopt my dream for a better world, despite the fact that you don't see my program for a better world as being in your own personal self-interest. Believe me, I know better."
How did a million people lose $473 million? They thought they owned bitcoins. They in fact owned Goxcoins. Then they owned nothing.
There was no widespread warning. Until early February, the Web was not filled with rumors about Mt. Gox's imminent crisis. The company had been sued in 2013. There were warning signs of trouble. But they gained little traction. The bitcoins mania was overwhelming. To imply that the world's most famous bitcoins exchange was in fact a house of digital cards was considered something analogous to blasphemy. It was at least heretical. Now, some of the the survivors are saying, "Mt. Gox was not really representative of bitcoins." This is like saying that J. P. Morgan Chase is not representative of New York multinational banking.
Over a million people believed this:
ANONYMOUS MONEY
Defenders of bitcoins say its #1 advantage is its anonymity. When you think "anonymous money," think "Mt. Gox." When you think "untraceable money," think "Mt. Gox." Then think "roach motel." "Money checks in. It does not come out."
The collapse of Mt. Gox has sent a clear message to future potential buyers of bitcoins: "This is a high-risk crapshoot. It is not money."
On December 6, 2013, I wrote this.
All the talk of Bitcoins' privacy is nonsense. Real money is bank money. The initiating purchase of Bitcoins and their final conversion to real money are going to be recorded, because in order to get from Bitcoins to real money, in order to get from the virtual coinage to real coinage, in order to get from virtual purchases to real purchases, and in order to get from utopia to reality, you have to sell Bitcoins for digital dollars. But as soon as you do that, you lose privacy. The IRS can get you. The Federal Reserve has still got you.In between, all you have is a bunch of Bitcoins exchanges. Silk Road was shut down by the government. Sheep Marketplace went down because of massive theft inside the system. A hundred million dollars disappeared. The investors lost it all.
When your virtual money is gone, there is no appeal to arbitrators. There is no way to trace who did it. The money has disappeared for good.
Lesson: a fool and his virtual money are soon parted.
I knew what would happen. Mt. Gox was inevitable. There will be more incidents like this.
The public now knows. This is why bitcoins are dead as a replacement currency. Dead. RIP. A million people got skewered. They have no legal recourse. Trust is gone. One bitten, twice shy. "Fool me once, shame on you. Fool me twice, shame on me."
As anonymous money, bitcoins face enormous competition: currency. Anyone can get plenty of anonymous money at his local bank's ATM machine. These machines are everywhere. The users pay no fee for them in most cases -- and maybe 2% for machines served by a rival bank. They are familiar to everyone. There is no learning curve. There is no sense of foreboding associated with them. They are legal and will remain legal. You can easily get several hundred dollars in crisp, new $20 bills at any time at a drive-through at your bank. None of this legal tender money is traceable from the moment you hold the bills in your hand.
By the way, the words "legal tender" apply only to Federal Reserve Notes and coins. They do not apply to digital money, which constitutes virtually all money, except in the world of illegal drugs. Legal tender therefore has a very limited meaning and very limited application in the real world. A creditor must accept them in payment for debts. But most people use digital money to repay debts, precisely because it leaves a "paper trail," which is course is a digital trail. You can easily prove that you paid off a debt in digital money.
Where physical currency is used most widely for large transactions in the West -- illegal drug deals --the words "legal tender" are irrelevant. If you go into debt to a drug dealer -- highly unlikely -- he wants payment in currency. You do not have to force currency on him. So, legal tender is economically irrelevant in a world of digital money. The concept is a mere symbol, and only for libertarians. Operationally, it has been irrelevant since the end of World War II. Anyone who invokes "legal tender" is a person for whom symbolism matters greatly, but economic reality doesn't.
With this in mind, I shall now consider the views of a programmer who supports bitcoins. He specializes in cryptography -- digital privacy. He sees bitcoins' great advantage here: their anonymity.
I shall be polite. He shall remain anonymous.
"WHAT IS IMPORTANT IS THE RIGHT ATTITUDE!"
Money is about benefits for users, not the attitude of suppliers. Similarly, profits come from supplying a cost-effective service to customers, not from supplying right opinions. This has been the defense of the free market ever since Adam Smith.
This is not what our programmer believes.
Crypto currencies bitcoinI read a story recently about a group of dandies who want to "help regulate Bitcoin, for its own good." The thing about these guys is that they don't really care about Bitcoin as a beautiful, disruptive technology or even for the great benefit it brings to mankind. Instead, they see Bitcoin as their ticket into the halls of the elite.These people are not the agents of a new age. Rather, they're trying to get into the upper levels of the old, hierarchical system.
My response: So what? Who cares what their motives are? The question is this: "What do money users want?" They want money they can trust.
Think "Mt. Gox."
When Charlie Shrem of BitInstant was arrested, these people jumped in on the side of the ruling elite, saying things like:We were only passive investors in BitInstant, and we'll do everything we can to help law enforcement. We fully support any and all governmental efforts. We want to ensure that money laundering requirements are enforced, and look forward to clear regulation being implemented on the purchase and sale of bitcoins.
This is what investors/users want to hear.
Think "Mt. Gox."
And then, these elite wannabes -- supposedly pro-Bitcoin -- sucked up to the hypocritical 'enforcers' with everything they had. And I quote:There are certainly a handful of folks that are hardcore libertarians (some anarchists) that believe that bitcoin should be completely unregulated, but I believe they are in the minority and, as a percentage of bitcoin believers, is shrinking very quickly.In other words, "Please don't think of us as anything but your faithful companions, our overlords." It's disgusting.
Disgusting? Who cares? What matters is safety and liquidity.
Think "Mt. Gox."
The people who are grasping for prestige from the old system are making themselves enemies of the new. This is not about money, you understand -- the people I'm talking about are already wealthy. This is about their desire to stand in the highest levels of the ruling hierarchy. Once their heart has gone there, anything that threatens the old system threatens them, and they will end up fighting it.
As a user of money, I want the support of the ruling elite. They provide political and economic pressure to protect the monetary system. I don't want to be a nobody in a monetary system run by programmers with no money, no influence, and no understanding of how their code works.
Think "Mt. Gox."
What these people are trying to do, as best I can tell, is to form a new "smart wing" of the hierarchical elite, then to enlighten the world from that position. It seems like they still imagine themselves to be libertarians. But to get their new "smart wing of the elite" way, they have to minimize, discourage, or fight the authentic new way.
Authentic new way? I want authentic old money. I don't want money based on code developed by an anonymous Japanese programmer.
Then the programmer offers his confession of faith: Crypto-currencies Will Survive; Fiat Currencies Will Not.
Think "Mt. Gox."
It may seem very flamboyant of me to say that the dollar, the pound, the yen, the euro, and all the others are doomed, but it's quite a very safe comment to make.
Think "Mt. Gox." Has there been a Mt. Gox event in any FDIC-protected bank since 1934? No.
I do not like the FDIC in theory. I demand it in practice. I will not put my "must have" money in a bank that is not FDIC insured. Why not?
Think "Mt. Gox."
He continues:
Every fiat currency has crashed and burnt within a century or two, with no exceptions that I can point to.
I can think of two: the British pound and the United States dollar. They have both been around for over two centuries. The modern world has been developed in terms of them. Compound economic growth began in history in these two nations in 1800. It has not been reversed.
They're all built upon a flawed model, and they all eventually go away.
Not before I will go away. I'm 72.
Government money requires a large number of accountants, apologists, promoters, cooperative bankers, and supplemental players. It also requires violence -- forcing people to use it. That is the essence of "legal tender" laws. If people don't use the mandated currency, violence is applied.
He does not understand the words "legal tender" -- not in law and not in practice.
Crypto-currencies, on the other hand, are based upon mathematics, something that will never go away. Beyond that, all that's necessary are computers (which don't seem in any danger of going away) and people who wish to make money by running them. This desire to make money is also rather unlikely to vanish.
Think "Mt. Gox."
So, on the one hand we have government money -- a complex, expensive system that requires violence in order to survive. On the other, we have crypto-currency, a distributed system that operates just fine on a completely voluntary basis.
Think "Mt. Gox."
As a practical matter, crypto-currencies are more durable and more profitable for more people.
It is much less profitable for a million people than it was a week ago: Mt. Gox investors.
Make no mistake: "Team Violence Money" is making war on "Team Voluntary Money." Those of the old way either want to turn Bitcoin into a tool of their system or simply to kill it outright.
"Team violence money" is ignoring bitcoins. "Team voluntary money" is now $400 million poorer.
Think "Mt. Gox."
The banking system never lost a dime. To buy bitcoins from Mt. Gox, the investors transferred real money to sellers of Mt. Gox money. The amount of dollars did not change. Ownership changed. Those who sold Mt. Gox money for dollars won. Those who sold real money and bought Mt. Gox money lost.
If the wannabe elites get their way, they will turn Bitcoin into a decentralized version of PayPal -- a currency that requires full customer information in order to use. A fully controlled currency.
Exactly. That is what people with real money want. Libertarian programmer may want something else. Lots of luck!
Think "Mt. Gox."
But if that happens (and it looks like it will take some time), there will still be a Bitcoin underground. Black-market Bitcoin will find a variety of ways to thrive beneath official Bitcoin.
So what? These people have almost no money. They have $400 million less than they did a week ago.
Think "Mt. Gox."
The old way kills Bitcoin:It the old way decides to use a lot of actual and coordinated violence, they may disrupt the Bitcoin market badly. They will have to do this more or less worldwide, which will not be easy -- but if they cage enough people, they can probably pull it off.
They do not have to "kill it off." Mt. Gox did that for them. But if they ever decide to kill it off, they can easily do it. The central banks will simply declare a rule that member banks may not traffic with firms using bitcoins.
There are electronic-based ways of hurting Bitcoin badly, but these will succeed only if Bitcoin users choose not to adapt.That said, if Team Violence Money goes full Stalin, the weak and the cowardly will flee Bitcoin. The brave and the desperate will continue, of course, but Bitcoin will remain a shadow of its former self.
Bitcoins never had enough self to cast a shadow. They are now much thinner -- cadaver-like.
Think "Mt. Gox."
But even if that does happen, the idea of crypto-currency will remain, and new currencies will keep popping up.
So what?
Why? Because the genie is out of the bottle. At this point, anyone who has paid any attention knows that crypto-currencies work. That will never again be in doubt while history is recorded.
Crypto-currencies work like Mt. Gox.
Furthermore, creating new crypto-currencies is almost trivial. And since mining these currencies can be highly profitable, there will be no shortage of hungry boys and girls willing to take a little risk.
People with real money choose not to deal with boys and girls. They deal with adults. Adults want real money.
In order to keep their fiat money systems intact, the operators of the old way will have to keep people very confused while making sure they never get interested in questions of truth or morality. Because if they do -- and if they ever examine violence-based money -- they will rebel against it.
This is religion talking. This is not the free market talking. The free market is in your wallet: a credit card. The free market is in your wallet: a $20 bill. The free market is Forex: $5 trillion worth of transactions per day. These are what people have decided to use. To get them to change their minds will be a long and arduous task. There will have to be benefits for switching. When people think "benefits," they don't think "Mt. Gox."
So, even if they seem to win, the old way will never truly get past crypto-currencies.Crypto-currencies are here to stay.
Think "Mt. Gox."