Crypto-Cornucopia Part 4 - "Without It, You're Talking Mad Max"

Authored by Dr. D via Raul Ilargi Meijer's The Automatic Earth blog,

Part 1 "Bitcoin Is A Trust Machine" here.

Part 2 "This System Is Garbage, How Do We Fix It?" here.

Part 3 "A System With No Justice, No Order, No Rules, & No Predictability" here.

Well, all parts of the system rely on accurate record-keeping.

Look at voting rights: we had a security company where 20% more people voted than there were shares. Think you could direct corporate, even national power that way? Without records of transfer, how do you know you own it? Morgan transferred a stock to Schwab but forgot to clear it. Doesn’t that mean it’s listed in both Morgan and Schwab? In fact, didn’t you just double-count and double-value that share? Suppose you fail to clear just a few each day. Before long, compounding the double ownership leads to pension funds owning 2% fake shares, then 5%, then 10%, until stock market and the national value itself becomes unreal. And how would you unwind it?

Work backwards to 1999 where the original drop happened? Remove 10% of CALPERs or Chicago’s already devastated pension money? How about the GDP and national assets that 10% represents? Do you tell Sachs they now need to raise $100B more in capital reserves because they didn’t have the assets they thought they have? Think I’m exaggerating? There have been several companies who tired of these games and took themselves back private, buying up every share…only to find their stock trading briskly the next morning. When that can happen without even a comment, you know fraud knows no bounds, a story Financial Sense called “The Crime of the Century.” No one blinked.

But it doesn’t stop there. You don’t only buy stocks, you sell them. And you can sell them by borrowing them from a shareholder. But what if there’s no record of delivery? You can short or sell a stock without owning any. And the more you sell, the more it drives the price down and the more money you make. In fact, profits are infinite if you can sell enough that the company goes bankrupt: you never have to repay the stock at all. And this “naked” short selling can only occur if there’s openly bad recording and enough failures-to-deliver to hide it. You could literally own nothing, borrow nothing, post nothing, and with no more than insider access to an exchange, drive a company out of business. That’s how crucial recording is.

And while for appearance’s sake, they only attack and destroy small plausibly weak stocks, Overstock.com with a $1.45B market cap fought these naked short sellers for years. Publicly, openly, vocally, with the SEC. Besides eroding their capital, besides their legal fees, besides that e.g. Amazon could pay to have their competition run out of business with fraudulent shorting, the unlimited incentive to short instead of long on small companies could suppress the entire stock market, indeed the national wealth and GDP. It may account for some of the small caps underperforming their potential for years, and why an outsized portion of stock value to be in just the 5 protected FAANG or DOW 30 stocks. …We don’t know, because we have no honesty, no accounting, and nothing to compare it to. But no one cares, because it’s been going on for 20 years, and if they cared, they’d do something about it. Again, no one cares about your problems, only your solutions. Even if the nation falls.

Look at it from their point of view: if you’re a business owner, now you can’t rationally list your corporation. Your stock could be manipulated; your business could be bankrupted for no reason at all. We’ve seen the NYSE shrink as businesses start to list in more honest jurisdictions, and even Presidents can’t convince them to come back. Traders and Fund Managers retire in public interviews, telling the world there is no longer any sense or price discovery, and therefore there is market madness.

Yet we just said that to clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.

However, what if you created an honest stock market Blockchain that actually had the stock certificates and actually transferred them, cheaply and reliably without false duplication? This is what is happening in the Jamaican Stock Market. A new company can choose to list on the stock Blockchain and avoid the old system. Other companies or even the whole exchange can clean up the books, slowly, stock by stock, and move it to the new honest system. Because they’re honest? No way! No one cares about truth or honesty, clearly. Because they can sell their stock exchange as superior, solving the existing problems. Stopping fraud, theft, the stealing or crippling of companies, fake voting, depression of Main Street and outsiders in favor of Wall Street and insiders, this is what Blockchain can do. In short, it would work better, cheaper.

What else can Blockchain do?

Blockchain is just software written by programmers so it’s as versatile as any other software. So why not program things into it with a “Smart Contract”? Suppose you make a bet: IF the Packers beat the Lions on November 12, 2017, THEN I will pay you $50. You set up the contract, and the bot itself can look for the headlines and transfer the money when the conditions are met.

That’s pointless but how about this: You run a jewelry business on Etsy and need to buy $500 in beads from Hong Kong. Normally, you would need to pay an importer, a currency exchange, bank account, tire transfer, escrow account, and a lawyer, or their proxies within the system, plus two weeks’ clearing time. That’s a lot of overhead for a small transaction. In contrast, a smart contract such as Ethereum could post the value of the coin (escrow), and when Long Beach or FedEx confirms delivery, releases the Ethereum, a coin of value, to the seller in Hong Kong. Instantly. Why? The existing financial system is charging too much and doing too little. That’s a huge incentive to get around their slow, overpriced monopoly.

Once you cut the costs, have a more direct method, and reduce the time to minutes, not weeks, the choice is obvious, which may explain why Microsoft, Intel, and others are deep in ETH development. Why overpay for bad service, and support the overpriced bonuses of men who will use their power to turn on or shut off your livelihood at will? Blockchain costs less and does more. Being just software, there are many other software products serving hundreds of other business plans. These use-coins are generally called “Tokens”, whereas“Coins” are meant to be pure currencies. There are Tokens for a wide variety of business purposes: online gambling? Yes. Tokens to buy marijuana in certain states? Sure.

But how about a Token like Populous that contains the credit information of small businesses worldwide, so you can make modest income lending against their accounts receivable? You get more income, business worldwide gets better service and lower costs. Why? The existing financial system is charging too much and doing too little. How about a Token like Salt for personal loans and perfecting collateral? They will lend cash against your Cryptocurrencies, because if your loan falls short, they can sell your collateral instantly. No foreclosures, no repossessions, no overhead.

This is what banks do when they hold your savings and checking accounts, yet sell you a personal loan. But the banks are giving you no interest on savings, while charging origination fees and high interest. They’re charging too much and doing too little. Well, you say, this sounds too good to be true: a parallel system to replace our existing corrupt, broken, overpriced one. One that doesn’t have to confront existing power or reform the system, but beyond price appreciation has its own incentives to join? Surely there are problems.

Oh, yes. So many problems. The first is often mentioned: it’s fine that Bitcoin is a finite commodity with only 22M coins, and if Bitcoin were the only coin, that would work. But there are over 1,000 coins now, and more every day. Isn’t that just another avenue to unlimited issuance and inflation by unlimited, unregistered people? Well, yes and no. It’s true that anyone can start their own Bitcoin – Litecoin for example is a faster duplicate of Bitcoin – but it’s also true that anyone can start their own Facebook. MySpace certainly did.

So why don’t they? Basically because of financial inertia, the Network Effect, a coin you start and only you use is worthless. The value is in the belief that other people will use it. Without that, you’re banished to MySpace Siberia. Still, with a 1,000 coins, don’t they all compete? Yes, and that’s a good thing, not bad. This is no different than the competing Bank Notes of the 19th century. If you like this bank and believe in them, you prefer their notes to others. Or you might use one note in Missouri and another in Louisiana. So with Cryptos. You might choose Bitcoin, with slow traffic and high costs to pay for a house. But you would choose Litecoin to pay for coffee.

You already do this, no different than using cash to buy a hot dog, your debit card for groceries, and a bank transfer for a car. It’s overlooked because they’re all called “dollars,” but they’re not. One is currency, one is a short-term credit, and one is a banking ledger. Because of the Network Effect, you can’t have 1,000 equal coins and have them all work. The market will prefer some over others until there are only a few, just as AskJeeves and Infoseek gave way to Google, which may someday give way to someone else. Just as you can’t start a new Google today, there are only a few top coins, easily updated, and little space for new coins.

In addition, the “1,000 coins” are not actually coins. Most of the new coins are Tokens, which are not “currencies” like Bitcoin and a means of exchange, but business models and services. Like Bank Notes, the market is self-limiting, but evolving. But if there are a variety of coins, and like Litecoin they can suddenly appear and change, what reassurance do you have that your Bitcoin “money” is worth anything? Like 19th century Bank Notes or AskJeeves, your responsibility is to be aware of the market and the changing values and react accordingly. And in a mature market, “everyone knows” the histories and reputations, but in a young market, like Dell and Gateway in 1992, no one knows. But that’s also why there is more profit now as well as more risk. But we’re also watching volatility and risk in Pounds, Lira, Gold, or even outright defaults like Argentine Pesos or Rubles. We already carry that risk, but it’s familiar and taken for granted.

If coins can just “change” and “fork” whenever they want, then isn’t it like buying Australian Dollars, then waking up and finding they’re Yen? Yes and no. Like other cryptos, Bitcoin is just software written by men. So a group of developers may think Bitcoin should remain the same while the old team thinks it should be improved so much that they do the work, write the updates, and release it. Well you have a “fork”, but what happens next is the Network Effect. So you’re a miner and a user of Bitcoin. You now have a choice: do you use the new software, the old software, or both? Everyone expected one to be adopted, and the old one to wither into oblivion. Since a Fork gives you one unit of each, the eventual outcome was a wash within the user group. But that doesn’t seem to be happening.

Ethereum forked, and Ethereum Classic still exists, and trades steadily but far less. Bitcoin Cash Forked and although 1/10th the price, both are trading briskly. No one knows what will happen, because it’s never existed before. So yes, you could wake up and find you don’t like what Bitcoin decided to do, just as you could wake up and not like your new bank manager or CFO of Dell, and then you sell that asset and choose another. That’s your responsibility. That’s competition.

Besides unexpectedly finding both forks have value, there is an upside to the downside. If some new advance in speed or encryption appears in Litecoin or Dash, Bitcoin can also adopt it. This not only improves the market, but reduces sudden upsets as new advances shouldn’t unseat popular coins but are adopted by them. Indeed, this was the purpose of Bitcoin Cash fork: to improve speed and cost. Yet now they both exist for different purposes in the market. Another objection is that cryptos depend on electricity and an expensive, functioning Internet. True. But while I’m no fan of technology, which is full of problems, so does everything else. Without electricity, the western world would stop, with no water, no heat, and no light.

Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.

Comments

algol_dog zorba THE GREEK Sat, 12/09/2017 - 23:14 Permalink

I'm starting to see the millennial's generational function and role to figuring this whole thing out, and finally, dare I say, liberating this world of the evil and corruption of the world's monetary system. The same way my generation came up with the internet and how are parents never really grasped it, so it is the same with this blockchain technology and the boomers. It's ironic that the majority of participants on ZH whine of fraud and eventual blow up of crypto's, yet complain ceaselessly on the corruption and manipulation of the state, in all manner and ways. It's time to realize this may be a huge opportunity. If you aren't part of the solution you'll be part of the problem. This technology and its iterations is at the least a step in the right direction towards liberation. 

In reply to by zorba THE GREEK

BeforeChaos algol_dog Sat, 12/09/2017 - 23:40 Permalink

algo_dog: Some excellent points and with regards to a store of wealth, it seems logical that there is a place for both the old PMs and the new Crypts. Quite possibly the new being required to liberate the old. In other words, it seems a mistake to believe any system stands alone, rather in this blender process they're all going to be effected and likely parts and pieces of all will come out on the other side.

In reply to by algol_dog

qlander algol_dog Sun, 12/10/2017 - 07:27 Permalink

I'm an old fart myself, but looking at my gold and silver over the years just sit there and tarnish, doing the old two steps forward three steps back time after time, I got over my intitial fear of Tulip Mania and took a proper look under the hood of this blockchain technology.That was a good five years back now, but I instantly knew that the future had a good slap up the side of the head comming it's way, especially that of the entrenched financial hegemony.People can critisise and whine all they like, but you can't turn back a tide or shout down a storm, it just don't give two shits for your opinion and most don't know shit from clay when commenting on Crypto in the first instance.Go take a proper look at it, see what it is and how it works, what it offers. Then take an ounce or two and get ahead of the curve. 

In reply to by algol_dog

fattail Putrid_Scum Sun, 12/10/2017 - 09:39 Permalink

At no point in the section on crypto did he mention the role of government.  He did mention the 19th century bank notes.  That along with gold and silver would have all been competing mediums of exchange, until the federal government fixed that with the federal reserve act, gold confiscation, gold devaluation, removal of silver from the money supply, and finally going off of the gold standard.  Currently, they are pushing the removal of cash from the money supply since it represents a store of value in a deflationary economy.  Allowing the citizens to store their crypto electronic currency offline encrypted out of their control is not something they will want. Do you really think the US government, and every other government on the planet is going to want their graft and corruption resticted by letting the free market control the supply and value of money?  That answer is NO.A very simple tax on crypto transactions, and a confiscatory capital gains tax on all crypto currencies is coming. These guys are playing against the house, which is run by the most cruel and vile mafia the world has ever seen, who own flying killer robots.  i don't see how they can win.On a  side note.  The article on the concentration of ownership in bitcoin was interesting, right before the CME starts trading on bitcoin futures.  A few strong hands dumping bitcoin could do a lot to the market psychology of all the new bitcoin traders.

In reply to by Putrid_Scum

nmewn Sat, 12/09/2017 - 20:57 Permalink

BitCoin, moar BitCoin, career minimum wage earners and 44,000 "lost" US troops somewhere on the planet.Ok, got it weekend Tylers. I'm going to go ahead and add to my carbon credits by putting another log on the fire...just put it on my account, I'm good for it ;-)

Rhal jmack Sat, 12/09/2017 - 21:36 Permalink

Oh, the trauma. BTC has crashed to two-day lows! I'll have to off myself.Oh ya, by the time I can do that BTC will be back up.If you understand this article, you'll see why the current system is doomed. No escape.I don't advise spending a lot on crypto currencies, but you're blind if you don't get at least a little.

In reply to by jmack

FreeNewEnergy Rhal Sat, 12/09/2017 - 22:29 Permalink

Seriously. This^^^^I first considered buying bitcoin when it was around $60. Then, before I knew it, it was $400. I still own none, and it's $14000 or something. If it "crashed" to $10,000 or $200, I'm a buyer, because the alternative (remember this meme from the last presidential election) is much worse.I voted for Trump. I'll buy some bitcoin, though I still believe that silver under $16 is a stone-cold steal.I could be wrong.

In reply to by Rhal

aloha_snakbar Sat, 12/09/2017 - 21:04 Permalink

One BitCon article forks into another, into another, into another, into another, into another, into another, into another, ad nauseum...welcome to Zero Coin, the new spokesWhores for everything BitCon 

moobra Sat, 12/09/2017 - 21:17 Permalink

Yes governments really want TOTAL tracking of your money but not theirs.You know. Things like black budgets for secret weapons. Arms for "freedom fighters". The assassination team's Xmas lunch. The money from poppy production.Yep. Gubmint will LERV crypto and will embrace it completely.

DjangoCat moobra Sat, 12/09/2017 - 22:21 Permalink

Gubmint are late to the party and way behind.  The likes of the CIA and the NSA could be interested, but seems to me they are just watching and blackmailing (NSA) or running guns and drugs using HSBC and BCCI and....and (place bank name here) to move the funds (CIA).Crypto has come up through the anarcho capitalist libertarian geek crypto hacker community.  Not the same, and you cannot tell me they have any affinity to each other at all.The thing about psychopaths is they are not very smart (GWB), and probably could not think up the 4d chess you find implicit in the crypto craze.

In reply to by moobra