Friday, August 5, 2011

Bitcoin: Why it Matters More than the US Debt

In the beginning there was poverty.

Then one day our species started cooperating with each other, and we developed barter. You have fish, I have grain, we each want what the other has: lets make a deal.

A few moons later, people recognized that some barter goods were commonly desired by many people.  And because many people desired them, they became valued not only for their intrinsic value, but as 'trade goods'.  You have fish, I have grain, but I want fur, and you want fruit:  we sell our goods to each other (and anyone else) for tobacco! Then we use the tobacco to buy what we each desire.

Many more moons pass, and some trade goods are recognized as being more universally accepted, easy to transport, and more convenient.  Thus man's lust for gold and silver begins.

Then one of the most important inventions of all time happened: accountancy!

Soon a mark in a clay tablet, or scrap of paper became 'as good as gold' (because you could trade them for gold), and man's lust for paper began...well among a few anyway. :)

One fine day it was discovered that the gold really wasn't needed at all.  Since paper is more convenient than gold, few people ever traded it in.  And as long as everyone else knew that everyone else wanted the pieces of paper, the paper itself had value.  Tada! The birth of 'Fiat Currency' like todays 'Dollars, Yen, and Rubbles'.

Then came the computer and the internet, and together they changed everything yet again. One didn't even need the paper anymore.  The paper with marks became bits stored electronically on a computer somewhere on the web.  As long as you have the password to an online banking account you can buy anything.

But there is a dark side to the current Fiat Currency regime:  One has to trust that the guy with the printing press (digital or real) won't print out more money, and sad to say, no entity yet has lived up to this trust.  :(

Ever wonder where all those extra dollars come from when prices keep going higher and higher?  In 1959 there were $138.9 billion dollars total floating around.  Today there are $1947.4 billion dollars in circulation.  Note that this is using the M1 count of money (a relatively conservative accounting).   Those dollars didn't just appear miraculously.  Note that inflation of the monetary base doesn't hurt too bad as long as it is predictable (sort of like a faucet that leaks a small amount).  The real fear is that at some point the US Government will simply decide to turn on the printing press to print its way out of its obligations (and with the latest financial crises, the US proved to the world it was willing to go down that road, so it isn't even a theoretical possibility, it already happened).

There is also the somewhat darker side of having to utilize the services of a public institution like a bank or using a credit card,  to spend one's money.  There are always some transactions (like playing online poker, or buying certain psychoactive chemicals) that a powerful chunk of society feels is wrong.  And so pressure can be applied to stop those financial transactions by force of law (and you better believe those banks and credit card companies that want to stay in business will obey those laws).  This makes those transactions riskier and costlier to everyone (even those who don't participate).  Think about prohibition, the rise of powerful criminal organisations, and why that was not a happy thing.

And then there is privacy.  In my own mind I believe I'm a pretty respectable citizen, however I don't do everything in the public eye (as a curtesy to others I shut the bathroom door).  And maybe there are even some things where my sense of morality doesn't line up with the powers that be (I think poker is an excellent game, one that tests one's ability to make good choices under pressure without all the facts, but some feel otherwise for one reason or another).

Fortunately humans are nothing if not inventive.  And so finally, so many moons after the first trade of fish for grain, we are experimenting with our first widely accepted P2P currency: Bitcoin.

Bitcoin is unique in that it has proven that one can unlink a currency from the control of a central authority, and have it work in real world conditions.  There is no entity that can control the total number of Bitcoins that will be available.  None.  It is all based on math, and the innovative idea of a publicly held register.  In effect, everyone watches everyone else, and so no-one can do anything nasty, like spend money that isn't theirs, or try to create more Bitcoins than the math allows.  It is early days yet, and while Bitcoin itself may eventually go the way of the Shekel, the idea of P2P currency looks like it is hear to stay.

So why do I think it is so darn important?

Simply put: it is the beginning of the end of large centralized governments, the ascendancy of a non-centralized economic systems, more power to the people in general, and there is no way to stop it.

Why is it the end of large centralized government?  Because it is likely to be the end of taxes related to financial transactions (which are most taxes, like income, or sales tax).  These taxes are relatively easy to collect now, when transaction data is centralized and controlled by a small number of institutions.  P2P currency destroys the need for these institutions, and thus makes collection much more costly.  Also, it destroys the ability of the government to 'steal' money through inflating the currency (printing money), but really that is secondary.

Note that it isn't the end of all government, just the end of big, far away government.

Concrete examples:

1. Payroll taxes:  I can agree with my employer to work for minimum wage in dollars, with the rest of my earnings taken in bitcoin.  If I am an independent contractor, not even the fiction of minimum wage employment is needed.

2. Sales taxes:  I have a hard time believing that cash operated businesses currently report all sales transactions.  In effect, all financial transactions will be similar to todays cash transactions.  It will be up to the business to self-report, and internet-based businesses are likely not to report, and so will out-compete those businesses that do (similar to Amazon vs one's local Target store today only more so).

3. Business Income Taxes:  Businesses that take in P2P currencies will have the option of not reporting the income, or of over-reporting expenses (ala kickbacks).

Over time things like the above erode the governments ability to coerce payment, even from entities willing to pay (because those willing entities will soon go bust, because they won't be able to compete).

Note that certain types of taxes are still viable, but they are the most 'painful' in that the government entities have to send out a bill and demand that must be paid or else.

1. Property taxes
2. License taxes
3. Poll taxes

So government itself isn't likely to go away, but it is going to shrink dramatically -or- will become much more authoritarian.  I could be wrong, but I just don't see the US government successfully instituting those sorts of controls on its population.  Which leaves only one other option:  a smaller government.

Imagine a government if you will, without the ability to coerce payment of taxes, or restrict who you do business with.  A government without the power to meddle with the economy in a significant way (No FED, no US Dollar, no ability to easily tax, no social security or other welfare programs).  That is a very different government than the one we have now.

All that because some dude in Japan named Nakamoto published a paper with a bit of math in it.  Amazing really.

And then there is the really cool stuff this new monetary technology makes possible!

1.  Micropayments are finally viable!  Current bitcoin transaction costs are currently 0.0005 BTC.  That currently translates to around $0.005 (around half a penny).

2.  Dramatically lower transaction cost for buyers/sellers, making all web transactions cheaper (that half a penny is regardless of the size of the transaction, unlike credit card transactions that usually are 1-2% of the total + $0.50 or more).

3.  Non-human entities can make and accept payments.  Not only can your dog have a 'bitcoin wallet', but so could an independent piece of software.  Imagine that, a piece of software living out there on the web buying CPU cycles to stay alive, and selling its services to the highest bidder.  The start of real artificial life, perhaps the genesus of our ultimate successors.

4.  True mesh networks!  Anybody with a WIFI router could become a temporary ISP to their neighbors, or to a passing motorist.  I would buy a few minutes of WIFI time for a few pennies, I imagine others would too.  Add things like 802.22 and things start to get real interesting, real quick.

All of that is just barely starting to nibble on the 'big picture' of the change.  This is a fundamental reworking of the entire world economy and political landscape at a single stroke.  Sort of like the dawn of the internet, only faster and more dramatic.  In general, the world becomes much closer to the one imagined by the early cyberpunk writers like Gibson and Stephenson.  Way more wild west and just generally weird.  Harsher, but also more beautiful, astounding and generally more exciting.

Welcome to the future my friends.

If you liked this post please encourage me. :)

Bitcoin address: 1K2M9ivsJ1NBCekTCxUghdQF299mudihNn

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