Friday, January 11, 2013

The Trillion-Dollar Bitcoin

After the dollar hyperinflates and we
redefine $1T = 1 BTC
I have to admit, I got out of Bitcoins in early 2012, after Congress managed to kick the debt-ceiling can down the road in exchange for the fiscal-cliff contingency plan with its "sequester" monstrosity.  At that point, I felt that the dollar was at least out of imminent danger of collapse, and frankly, I needed the money.  As of today it is still too hard to pay one's rent, and most other real-world bills and daily living expenses, directly in Bitcoins.

However, now I am reinvesting in Bitcoins again.  Why?  Because, although we just managed to blunt the fiscal cliff and dodge the sequestration bullet for another two months, we are now on the verge of another debt-ceiling crisis which has everyone so worried that we are seriously talking about printing (well, minting) money to pay our bills.

I would like to note, for the record, that even before Beowulf's famous comment about the Trillion-dollar coin idea, publicized on the Pragmatic Capitalism blog, kicked off massive attention to what's now the #MintTheCoin meme, I was already Tweeting to lamestream media outlets asking why Treasury couldn't just start printing money again, like we did in the old days.  Unfortunately, my question was ignored at the time.  (Mass media has totally forgotten how to do deep analytical investigative journalism any more, which is why we need bloggers.)

So anyway, fast-forward 18 months, and here we are with the debt ceiling looming again, but thankfully, this time, the seignorage option is catching some attention from serious people.  Personally, I think its immediate economic impact is overblown, since in practice there isn't much difference between the Fed doing quantitative easing by buying up Treasury notes in exchange for reserve account credits (as it has been doing for some time now), versus the Fed directly crediting Treasury's account in exchange for a metal token instead of a bond - other than the technicality that the coin isn't a "debt," which gets around the debt ceiling - but I do worry that for the Treasury to directly create that much money would have a significant symbolic / psychological impact, which would disturb international investors, and cause them to reconsider whether they really want to be long in dollar-valued assets in an era where the traditional sovereign privilege of seignorage is being so openly and full-throatedly exercised by our government.  Even the fact that we are talking about it may be making them a bit nervous.  As the coinage option is further discussed, and certainly if it is actually exercised, the dollar and its derivatives will likely fall against other asset classes, and although this may have some short-term benefits in terms of making U.S. exports more competitive, other nations will surely retaliate, perhaps by devaluing their own currencies as well.  The end game of this kind of competition is well-known and has historically been rather bloody, as readers of the book This Time Is Different will know.  Often, a currency war tends to escalate into a war of the bombs-and-bullets variety quite readily.

In any event, a war (of either the currency or traditional variety) between the world's major economies would certainly cause massive chaos, and individuals will (if they are smart) be looking for ways to securely protect their assets.  As I have advocated previously, the digital "crypto-currency" Bitcoin is one of the best answers.  Bitcoins are unregulated, readily available in exchange for cash (nowadays, if you don't want to muck about with exchanges, a trip to the local Chase bank, Wal-Mart, CVS pharmacy, or Albertson's grocery store is all you need to get started) and they can be securely stashed away and backed up via multiple redundant methods.  Finally, they cannot be hyperinflated by actions of any government, nor stolen from sufficiently carefully-secured accounts by any actions short of a single adversary unilaterally taking control of most of the world's computing power.

Keeping Bitcoins Safe


A bit more about Bitcoin security.  Although many options exist, my personal preferred means of keeping my Bitcoins safe is to have several redundant forms of storage:
  • brain wallet, which is a long secret passphrase that you make up, which you use to derive your Bitcoin account private keys.  You need never give away the passphrase or private keys to anyone to receive Bitcoins into that account!  It's almost as if the Bitcoins were transmitted directly into your brain.  Brain wallets can be created in your web browser using sites like Blockchain.info, or, if you feel compelled to read their Javascript source code every time you visit to convince yourself they're not appropriating your unencrypted info, you can instead create your Brain Wallet offline using an open-source tool.
  • In case you're worried you might forget your brain-wallet passphrase, you can also print it (or your private account key) on paper and stash it somewhere safe (in a locked, fireproof safe hidden in a place that you physically control, and/or in a safety deposit box at a bank).
  • For another layer of redundancy, you can import your private key into your Bitcoin client which stores its data in encrypted files, and/or simply put the key or passphrase onto an encrypted virtual drive, which you can then backup multiple times on USB sticks or to the cloud using services such as DropboxGoogle Cloud Storage, and/or Microsoft SkyDrive.
If you do all the above, and take care not to divulge your passphrase to anyone, and you minimize the number of times you type your passphrase into a potentially compromised device attached to the network, it becomes very difficult to unwillingly lose your Bitcoins, unless one of the following, relatively unlikely scenarios occurs:
  • Someone breaks into your house, breaks into your fireproof safe, and steals your paper keys.  OR they break into your bank's safety-deposit box (if that's where your paper keys are).
  • You forget your passphrase, AND lose the key to your safe, AND lose access to your safety deposit box, AND the whole cloud goes down or you lose access to it.
  • You are tortured or threatened to compel you to divulge your brain-wallet passphrase, or the key/combination to your safe, or your encrypted drive password.
The first, physical theft scenario is the same as already exists for any physical commodity, physical key, or password, and it can be eliminated by keeping all records encrypted (if you trust your brain to remember the required passphrases without physical backup).

The second loss scenario can be mitigated by keeping more backups in more places.

The third, coercion scenario (a conceivable result of an extreme authoritarian regime's asset confiscation programme) can be mitigated by dividing up your Bitcoins amongst several different brain-wallet accounts through anonymizing services to eliminate traceability.  You can give up one of the smaller accounts to the torturers to (hopefully) satisfy them, while retaining plausible deniability that you hold any additional accounts.

Note that Bitcoin is superior to gold, in the sense that, with gold, the brain-wallet option does not exist.  If you lose direct physical control of your gold, you are always vulnerable to possible loss, whereas you can never lose direct physical control of your Bitcoin brain wallet, unless you forget your passphrase. 

Gold is perhaps superior to Bitcoin in a scenario wherein the entire Internet ceases to function (although theoretically the Bitcoin protocol could be ported to work by exchanging USB sticks, or sending smoke signals).  However, a future without the Internet is arguably too horrifying to further contemplate.

The Trillion-Dollar Bitcoin



A typical result of hyperinflation of fiat currency
by a sovereign government.
As more and more people come to realize, thanks to the #MintTheCoin campaign, that fiat currencies are inherently vulnerable to being debased by sovereign governments in times of scarcity, I think that gradually more and more people will turn to solutions such as Bitcoin.  In the event of a severe currency war, in which major economies repeatedly pull the rug out from under each others' debts via debasement, it could easily happen that the value of the US dollar eventually goes the way of Zimbabwe, and meanwhile, the value of Bitcoin rises and rises, in proportion to its popularity, until eventually, a single Bitcoin literally becomes worth a trillion dollars.  As I have previously argued, at some point, it becomes logical for nations to simply adopt Bitcoin itself as legal tender (or base their currency on it) to escape the hyperinflation trap.  So, maybe today's trillion-dollar "commemorative" platinum coin will eventually become backed by a nice solid 1 BTC of crypto-money in the US Treasury's brain wallets, which amount will by then have become worth the equivalent of only about $200,000 in today's dollars.

It's still a pretty good return for only an ounce of platinum.

P.S.  As of this writing, the price of 1 BTC in US dollars has already risen by about $1, or about 7.5%, in just the last couple of weeks - a period during which #MintTheCoin was becoming increasingly widely discussed.  At US$14.23, it is nearing an 18-month high.

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