Bitcoin and the May scale of monetary hardness

The current price of bitcoin is only justified if there is a significant probability of bitcoin taking over the world, and substantially replacing other assets that are less easily transferable and/or more subject to the caprice and violence of an increasingly disorderly, unpredictable, destructive, and anarchic state.

If it does take over, will rise a hell of a lot further.

For example, investing in real estate rental property is lucrative, with steady modest income and impressive capital appreciation – but it is subject to the Ferguson effect. One fine day you find that the police protecting your investment have been deemed racist, now have a bunch of fat blue haired lesbians from the federal government supervising them at twelve thousand dollars per day per fatso to cure their horrid racism, and the police have pulled back to give the mob room to burn your property, and maim and rape your tenants. Your male tenants then leave, ashamed of their horrible racism, and your female tenants never paid the rent themselves anyway.

It would be nice to have your assets in a form that perhaps was unlikely to generate value, but did not need to be defended.

If, at the time of Caesar, a wealthy Roman invested in income producing properties, what would his wealth be worth now?

Absolutely nothing.

And this has been typical over most of the world throughout most of time, including most of the world during most of the twentieth century. If, on the other hand, he buried gold in a hole in the ground, what would it be worth now?

About what it was worth then.

But right now today, bitcoin is hitting its scaling limits hard. If scaling is not solved, the current price of bitcoin is difficult to justify. If scaling is not fixed, the price will collapse eventually.

The current plan, or perhaps it is merely a hope, rather than a plan, is the Lightning Network. The Lightning Network, if ever implemented successfully, will be able to handle and exceed Visa scale levels of transactions and Visa speed.

But money in the Lightning Network will, like Paypal money or credit card money, like Visa card money, be soft money, soft bitcoin. At the cost of a fee and some delay, you will be able to convert it into hard bitcoin. You will be able to convert hard bitcoin into Lightning Network bitcoin quickly and for no fee. Transfers from Lightning Network Bitcoin to hard Bitcoin will still be subject to scaling limits. But perhaps these limits will be acceptable when we only do such transfers infrequently and for very large sums.

Your hard bitcoin is represented by a secret key and a public key, by a collection of secret keys and public keys. (Unless, of course, it is an account at a bitcoin exchange, as it usually is, in which case it is a promise to deliver bitcoin by some guy whose only known assets are a business suit he purchased from a Chinese supplier on Ebay and two airline travel bags.)

Your Lightning Network bitcoin will be represented by an account at an exchange. And if the exchange goes down, or decides to mess with you, you will be out of pocket. Which makes it soft money. Rather like Paypal or that account on the bitcoin exchange operated by some guy with two airline travel bags who is presently located in the nicest international business hotel in Outer Mongolia, which is not actually all that nice as international business hotels go. (You did put your bitcoin into a wallet where you have real control, right?)

So here is the May Scale of monetary hardness, updated to include Bitcoin and a hypothetical future Lightning Network Bitcoin:

May Scale of monetary hardness
Hardness
Hard
1
Street cash, gold, US dollars, Bitcoins where you hold the secret keys
2
Street cash, euro currencies, japan
3
Street cash, other regions
4
Interbank transfers of various sorts (wires etc), bank checks
5
personal checks
6
Consumer-level electronic account transfers (eg bPay)
7
Business-account-level retail transfer systems, bitcoins on the hypothetical future Lightning Network
Soft
8
Paypal and similar ‘new money’ entities, bitcoins on a bitcoin exchange controlled by your username and password login
9
Credit cards

The difference between hard money and soft money is that people are always happy to take hard money, not so happy to take soft money. Always willing to give you soft money for hard money, not so keen to give you hard money for soft money.

45 Responses to “Bitcoin and the May scale of monetary hardness”

  1. […] Bitcoin and the May scale of monetary hardness […]

  2. Mister Grumpus says:

    Of course it’s just begging for fractional reserve all over again, but what do you think about some sovereigns (like Russia, China and India, maybe) going in together on a Swift-ready currency that’s “backed” by some mixed inventory of bitcoins, gold, oil, etc?

    Too amateur?

  3. Cloudswrest says:

    Hey Jim,

    Check out this dickhead! “Neonazi BTC Tracker @NeonaziWallets” on Twitter. People need to set up a server that generates a unique bitcoin address for each donation. Using a fixed address is making it easy for people to track alt-right financing.

  4. Oliver Cromwell says:

    “But money in the Lightning Network will, like Paypal money or credit card money, like Visa card money, be soft money, soft bitcoin. At the cost of a fee and some delay, you will be able to convert it into hard bitcoin. You will be able to convert hard bitcoin into Lightning Network bitcoin quickly and for no fee. Transfers from Lightning Network Bitcoin to hard Bitcoin will still be subject to scaling limits. But perhaps these limits will be acceptable when we only do such transfers infrequently and for very large sums.”

    Does this imply that it is a much better idea to buy $0 or $100,000 of bitcoins than to buy $1,000 of bitcoins?

    • jim says:

      Does not mean anything yet, because the Lightning Network does not yet exist, and may never exist.

      • Oliver Cromwell says:

        What can stop it existing? It does not require any change to the bitcoin code base.

        • jim says:

          A network is not just a piece of code, its an entire ecology of businesses and relationships.

          Not trivial to organize.

          And I cannot seem to find the code.

          • Oliver Cromwell says:

            It is in the collective interest, and there is a lot of money behind this. Is it a code problem? Surely it is a social problem. You are a man who says a lot of unpopular but true things to a small audience of the type of people Lenin would have shot etc.

            Do you still believe that a bitcoin transaction costs $1,000? If not why not? If so where did this number come from?

          • Oliver Cromwell says:

            In January ’16 official sources say a bitcoin could be sold for $434, and the transaction fee was 7c, so selling a one bitcoin investment would incur a 0.016% transaction fee. Today, official sources say a bitcoin can be sold for $15,800 and the transaction fee is $27.20, so selling a one bitcoin investment will incur a 0.17% transaction fee. If this trend continues, bitcoin will be owned by the 100 or so biggest holders, as you would prefer, because all smaller stakes will become impossible to sell at a profit. The usable currency will then be soft money backed by these large holders, and they will keep the soft money providers in line to maintain the value of bitcoin.

            Therefore I should not buy bitcoin.

            Since the soft money won’t come into existence until there are few enough large holders that they can effectively coordinate, I cannot make much money out of buying the soft currency as an early adopted either.

            How do I make money out of this situation? I do not know.

            • Oliver Cromwell says:

              I was considering to invest $1k, which is a negligible loss to me. At current trends, $1k will become comparable to the official transaction fee some time in March 2018.

              How much of the recent bubble is driven by investments of this size? I am seeing adverts on youtube for people to invest their IRAs in bitcoin. The dumb money is going to get slaughtered. Or bitcoin is going to get slaughtered, and the dumb money will think it has been slaughtered, but will have had a lucky escape.

              • Oliver Cromwell says:

                I am reading bitcoin forums. People who cannot write correct English are saying that it is not a problem. Or it is a problem and someone should do something about this sort of thing, which is just awful really. They are all going to get slaughtered. And these are the top 1% of bitcoin investors by knowledge and interest.

                But if I had $10m, I would have a good chance of having $100m next year.

            • jim says:

              The soaring transaction cost represents bitcoin hitting its scaling limits. If scaling limits not fixed, transaction costs will continue to soar, killing bitcoin.

              The hypothetical lightning network will, hypothetically, relieve the scaling problem, causing hard money transaction costs to drop.

              • Oliver Cromwell says:

                If 100 people each own 100,000 bitcoins, and 11m bitcoins become worthless, those 100 people can back a soft currency of their own with bitcoin, since they can afford to transfer 10,000 bitcoins to the soft currency issuing company even when normal people cannot afford to buy a can of coke with bitcoin for 0.0000006 BTC. So bitcoin does not die, but becomes a soft currency backed by people whose incentives are better aligned with the users than those of the USG, a formalist solution.

                Which suggests bitcoin won’t die, but the return that can be captured by normie investors is limited, and most normie investors (who are unaware or uncomprehending of the transaction cost problem) will lose everything before they realise they have lost anything.

            • jim says:

              Looks good, but current documentation indicates that this is pre-alpha. It is more an adequately detailed design document, than completed code.

              However, I was wrong to rate it as as soft as Paypal. The designed features make it substantially harder than Paypal, though still substantially softer than transactions on the blockchain.

              It is substantially harder than a bitcoin account at a bitcoin exchange controlled by your user name and password. It is as hard as it can be while still gaining scaling at the cost of hardness.

              Still has scaling limits, which may in future be relaxed at the cost of further softening.

  5. Carlylean Restorationist says:

    We should be sceptical of Bitcoin. It’s right-wing activism, or to put it another way, “agorism”.

    Just as a community of prepper types out in the wilds may think it’s rebellious and heroic to run an untaxed, unregulated business outside the statist paradigm, Bitcoiners think it’s just swell to have a decentralised, anarchic network with nobody in charge: what could go wrong!

    Well the tax man for starters, and government bans.

    Righties know the current authorities are unstable, unsustainable, chaotic, tyrannical and inept, but the answer isn’t ever to law-break.

    All those pro-marijuana libertarians and raw milk enthusiasts can take up their rightful position on the Left. We have no place there.

    • jim says:

      Compliance with state authority makes sense in a high functioning state. In a high functioning state laws are few, are reasonable to comply with, and are vigorously enforced. Currently we have a low functioning state, with the result that resistance to state authority grows ever easier, while compliance with state authority grows ever costlier.

      Under these circumstances, rejecting law breaking is like rejecting PUA.

      Obviously King, Church, family, and society forcing monogamy on women with a big stick is better than PUA, but PUA is a whole lot better than being cucked. PUA is obviously not the reactionary solution, but being cucked is even less the reactionary solution.

      And similarly, as the dark age slowly approaches, and the left singularity rapidly approaches, the answer is lawbreaking.

      • Mister Grumpus says:

        Even ancient Roman and Sumerian laws are still on the books somewhere.

      • Carlylean Restorationist says:

        That kind of forthright honesty and integrity is a large part of why we trust you.

        Thank you for your important and valuable work Jim.

        More thought required on the agorist thing. For me personally, I tend to draw the line way before anything like Bitcoin, but I entirely take your point. After all, possession of physical cash is increasingly seen as likely evidence of criminality. In fact having any money at all and not blowing it all on garbage *is increasingly seen as evidence of criminality*.
        This said, if obedience of the law hinges on our agreeing with it, that right there is the road to democracy and there’s a large part of me that rebels against that tendency.

        More thought (and meditation) required. Thank you for challenging me!

        • Carlylean Restorationist says:

          (as for PUA, forget it… if it’s a choice between monk-like celibacy and worthless, counter-productive cummies-sex with people you don’t respect, I’ll take the Rule every time…. but each to his own, or rather the opposite ^^)

          • jim says:

            That reasoning gets you to MGTOW.

            And MGTOW does not look very reactionary.

            I reply to your reasoning at some length here.

            • Carlylean Restorationist says:

              Yes you’re right. MGTOW is the primacy of the atomised individual and his happiness, financial wellbeing and so on.

              Dammit you’re a source of deep questioning: why can’t you be a comfortable echo-chamber? ^^

              OK so agorism, beyond a certain point of regulatory stupidity, becomes defensible; and PUA, in conditions in which the alternative is mass MGTOWing, becomes necessary.

              Yep I can’t counter it so I’ll have to reluctantly concede and adapt QQ

              Thanks, I think lol

            • glosoli says:

              ‘The difference between hard money and soft money is that people are always happy to take hard money, not so happy to take soft money. Always willing to give you soft money for hard money, not so keen to give you hard money for soft money.’

              Ignoring the table and its contents for now, the statement above makes no sense. People, generally, make do for most of their lives with whatever currency and money is issued by the sovereign of their nation. On the occasion of the sovereign getting into trouble, those people will slowly, then very quickly, rush to be rid of that money, and will seek to hold any physical asset. Eventually, if the sovereign isn’t careful, its currency becomes worthless.

              So, there is no *always* in these things, as most currencies work for centuries, and slowly but surely are inflated away, and (to date) they all end up vanishing eventually.

              Also, people today definitely would not exchange their currency for bitcoin. People don’t understand it, they don’t trust it, they read about millions being stolen, or vanishing into thin air, so they won’t touch it with a barge-pole.

              Finally, any table that has gold and the US dollar in the same section, rated as equally hard, needs to be destroyed as it’s a crap table. Does no one remember the 1970s?

              • Carlylean Restorationist says:

                Glosoli you’re onto something about authority, and the Reactosphere ought to understand this better.

                Jim’s case for ‘agorism’ (in the case of money at the very least but also more generally) is not unreasonable at all and I for one am having to think again about what no longer looks like an open&shut case.

                Nevertheless your insight is valuable: people use whatever money their rulers tell them to use – and there’s absolutely nothing wrong with that.

                Now when they have wise rulers, they’ll tend to be using milled coinage with an anti-shaving design, like in the 17th century in Britain. If their rulers and their advisors are wise, the King (James II) will be listening to smart people (Newton and Locke) who’ll be advising *against* popular measures and in favour of hard money. In the British case, resist calls for “a pound is a pound is a pound” and insist on silver weight instead, in order to defeat Gresham’s Law.

                We don’t have wise rulers so what we tend to get is whatever crap makes it easiest to run a gibsmedat republic. That means inflation, because it makes spending and (especially) borrowing easier, increasing the tax take and the GDP figures while destroying the future, which matters not at all when you’re out of office in under a decade.

                Gold *seems* like good hard money to us because the régimes we’re familiar with who used it were sound. It needn’t be so. There’s no reason whatsoever why a 100% gold standard couldn’t be inflationary as hell, and not just in freak cases like central American gold coming back on boats, but in more mundane cases like the exchange value of your note for the metal changes by Royal Fiat.

                Don’t listen to the Austrians: intrinsic value and regression to real world usefulness is nonsense. A pure digital-only fiat currency delivered by a sound government would be harder than any gold standard you’ve ever heard of.

                Cryptocurrency is a different story. Regardless of whether people like me change our minds about the inherent virtue of lawfulness under conditions of stupidity, agorism in the money supply is a horrible idea. I just checked and there are currently

                17 cryptocurrencies (each with its own blockchain, hence 26 million or whatever it is units) with a market capitalisation of more than one BILLION dollars
                and
                83 with a market capitalisation of more than a hundred million.

                Let me just spell out the implications of this: a viable cryptocurrency is one that persuades multiple people to part with large amounts of money. A hundred million dollars COUNTS.

                That means there are, as of today, eight-three times as many ‘units of sound money’ in circulation as when Bitcoin was running solo.

                That’s in how many years: ten? Less? A LOT less?

                Come onnnnnn this is hyperinflationary whackjob funnymoney. Weimar Germany had nothing on this level of stupidity.

                • Carlylean Restorationist says:

                  (For anyone sceptical of my claim about unsound gold standards, look no further than the UK again. From 1920, the silver content of the money HALVED overnight. Even earlier than that, under Victoria herself, the brass threepenny bit was introduced alongside its sterling silver counterpart. The former was a devaluation of the exchange rate of currency for metal (in effect, because the old shillings were the same in the shops as the new ones, even though anyone who hoarded the good ones was wise in light of long-term inflation). The latter was just naked inflation of the money supply, and 3d old money was a lot in 1900.

                  Anyone baulking at my calling John Locke ‘wise’, I concede right away, but compared to Paul Krugman he was a genius.

                • jim says:

                  The vast majority of these are undoubtedly scams, and all but one will turn into scams. But in the meantime, they have enabled a lot alt-right activities to function, that otherwise would have been silenced.

                  Some of them are honest plans to revolutionize the world, and all of these but one will fail, and in the process of failing turn into scams, ponzi schemes, multi level marketing schemes, and ponzi schemes being multi level marketed.

                  And, chances are, one of them will succeed, and make its early adopters very rich indeed.

                  We want a strong state, that does the things a state should do, and refrains from doing the things a state should not do.

                  The existing state is the opposite of this, meddling in everything except that which it should be minding.

                  Anarchy is one solution. A good King is a better solution. But we lack a good King.

                  And even the best of Kings should not attempt to govern more than a mortal can govern, which is so little that many would feel that the result was rather close to anarchy.

                  Indeed, Kings fell because they attempted to govern too much, in the process creating dangerously powerful administrators, dangerously close to the throne.

              • glosoli says:

                You’re spot on about the gold standard.
                Gold is as soft as fiat when in the hands of a government that is spending more than it can afford.

                And that’s why the euro is better.
                It is neither soft nor hard, but perfectly tensile.
                It will allow neither inflation nor deflation.
                It does not rely on any sovereign for its credibility, but its management committee.
                It also has marked-to-market gold reserves.
                Go read the archives at the Goldtrail, the thoughts of Another are worth reading, also some of the FOFOA blog, up until c. 2014, when he lost his way.

                • Carlylean Restorationist says:

                  Well yeah, Spencer said it’d make sense to repurpose the EU rather than put our hopes in leftist multi-culti secession movements that just want to turn up the gibs.

                  Secession’s a libertarian fetish. There was nothing wrong with the Habsburgs and Bourbons. Jim’s idea of an American Empire is the same thing.

                  Don’t know about the Euro currency. There are problems with localism conflicting with centralism, but as time progresses and ever closer political union becomes a reality, these will go away. Everyone assumes the end state of the EU will be Brezhnev (and I tend to agree) but it’s also quite possible it’ll be Ron Paulistan, just with sensible regulations to stop the kebabs putting teenage girls in your food.

  6. bitcoinz says:

    “You will be able to convert hard bitcoin into Lightning Network bitcoin quickly and for no fee. Transfers from Lightning Network Bitcoin to hard Bitcoin will still be subject to scaling limits.”

    Huh? Both of those are just bitcoin transactions.

    • jim says:

      Bitcoin transactions are getting slow and costly because bitcoin has hit its scaling limits hard.

      The lightning network will provide a different and more scalable bitcoin transaction that is faster and cheaper, but finalizing a channel still runs into the increasingly expensive, slow, and unreliable bitcoin scaling limits.

    • Dave says:

      https://medium.com/@jonaldfyookball/mathematical-proof-that-the-lightning-network-cannot-be-a-decentralized-bitcoin-scaling-solution-1b8147650800

      TL;DR Lightning Network cannot work without being highly centralized, which defeats the whole purpose of Bitcoin.

      • pdimov says:

        Why does it defeat the whole purpose of Bitcoin?

        • Dave says:

          Because centralized networks are easy for governments to regulate and tax. Governments really, really don’t want people stashing money where they can’t see it.

          • pdimov says:

            Defying the state via bitcoin is like defying the state via seasteading. Completely fictional.

      • jim says:

        The argument is incorrect.

        Assume one thousand bitcoin exchanges. Assume one billion people using the Lightning network.

        Assume each exchange has a Lightning Connection to one million people. It also has a Lightning Connection to each of the other nine hundred and ninety nine exchanges.

        Then any person can reach any other person in three hops.

        • Dave says:

          That layout is described in the document as ‘”decentralized” (with centralized hubs)’ under “What LN will actually look like”. Good luck getting your BTC back when the government seizes your hub.

          • Eli says:

            Something along these lines was described here:

            https://www.reddit.com/r/btc/comments/5ybx32/how_the_lightning_network_could_ultimately/

            Ultimately, I think BitCoin etc can be a very useful solution for relatively small number of participants: something like size of a Swiss canton. I am not convinced whether a system like that is functional (in the way it was envisioned by its founders) at a truly huge scale.

            • Dave says:

              Crypto-currencies will always be useful for concealing illegal activities, but they need to be less traceable than Bitcoin. Something with money-laundering at the base layer, so e.g. each block records only how much each account gained or lost, without saying whose money went where.

            • jim says:

              That is the scaling problem.

              Bitcoin is now running slap bang into the scaling problem, but the fact that it is now hitting the scaling problem is an enormous success that is inspiring people to work on fixing that problem.

          • Carlylean Restorationist says:

            Spot on Dave. Bitcoin is right-wing activism.

            There’s something of the Charlottesville about Bitcoin when the very idea of the government trying to seize it and you trying to prevent the government doing so crops up at all in the first place.
            If you’re trying to resist then you’re going down the wrong path.

            Passivism requires that you avoid all forms of right-wing activism. (I would personally even include arguing with bad ideas. Just provide good ideas separately, as in this blog.)

            Ultimately Bitcoin’s a fight against the state and its money system (and those who stand to lose if that system goes away).

            A network of hubs and people connecting to them has been around for decades. Napster was basically that model, and Kazaa and all the other similar systems. They all eventually go the same way:

            1. They end up attracting very unsavoury characters
            2. The state crushes them and the public cheers

            Bitcoin’s no different, and just as file-sharing was antinomial, so’s Bitcoin. The central idea is to have anarchist competing currencies. Anarchism’s ultimately left-wing.

  7. glosoli says:

    Investing.com just removed govt bonds from their standard market info box and replaced it with cryptos.

    Another sign of the bubble.

  8. Carlylean Restorationist says:

    Another way of looking at it is that in an Austrian boom, all sorts of ‘investments’ start to look sensible.

    Peter Schiff likes to talk about the auto loans bubble and the student loans bubble, but there are far more: buy to let properties are the most obvious – why on Earth would any non-specialist decide to be a landlord?!!! It’s nigh-on impossible to evict and you need years of experience to know how to actually collect rents, let alone do your own plumbing and fit windows from scratch….

    Then there’s peer-to-peer finance: hey I know, I’ll lend my life’s savings out to a bunch of losers I’ve never met so they can re-fit their kitchen cos the bank won’t lend it to them lol o….k……..

    Then there’s all the stupid subscription services: is paying per view on top of a paid subscription service to watch dated films really an essential piece of expenditure?

    Then there’s the food and drink bubble – in what universe does anybody want a side order with a hot dog? And in what universe is a hot dog worth £11?

    What the hell’s up with chorizo pork flavoured crisps (chips to you Americans) and why should anyone pay £2 for a bag?

    Why exactly must one dine at a coffee shop every day before and during work, and since when did gourmet drinks come in cardboard cups and since when did coffee cost £4?

    Then there’s the fanciness bubble: why exactly MUST you rip your floor out and replace it?

    All of these are symptoms of the same malaise: people have a false impression of their own wealth and success.

    Bitcoin and the like is just the kind of mad nonsense that starts to look sane and desirable when all the above are considered normal – heck almost mandatory along with four foreign holidays a year for people working minimum wage!

    When people look back and shake their heads at £30 Domino’s Pizza deliveries, they’ll see Bitcoin for what it really was: play money, with real money.

Leave a Reply