Tuesday, November 08, 2011

Bitcoin: Gold of the Future

Six months ago, while visiting San Francisco, I met a successful entrepreneur for dinner to discuss and trade Bitcoins.  He had recently sold his most-recent startup to one of the Big Four.  I assumed he viewed Bitcoin as a startup and wanted in on the ground floor.  It turns out, he was a goldbug whose main interest was Bitcoin as a "better gold."  It's one of the more productive analogies offering some insight into how Bitcoin might develop.

Viewing Bitcoin as digital gold is not a new idea.  Satoshi Nakamoto, who created Bitcoin, says it is partly an implementation of Nick Szabo's bit gold proposal.  Satoshi also uses gold analogies to describe the economics of Bitcoin mining and Bitcoin's adoption as a currency.  I'll draw some further parallels.

Why Gold?

Gold has been used as a currency and store of value for thousands of years, so it has history on its side. It's fungible, durable and easily recognizable.  The supply is moderately predictable and, because of relatively low industrial use, the demand is somewhat more predictable than other precious metals.  The supply grows slowly (about 2% annually).  Gold also has a high value density, being one of the most expensive commodities per weight.  When holding physical gold, there is no counter-party risk, unlike bonds and fiat currencies.

Why Not Gold?

Gold isn't perfect as a currency or store of value.  As a physical good, it must be conveyed with expensive, secure transportation.  Surprise discoveries can dramatically affect the supply.  For instance, 12 million ounces of gold entered the market during five years of the California Gold Rush (sea water contains another 15,000 tons of gold deposits).  Gold can also be destroyed in accidental fires or lost at sea.  Although industrial demand is lower than other commodities, roughly 60% of newly mined gold becomes jewelry.  Changes in jewelry demand can have substantial effects on gold prices.  Some argue that gold mining also has non-trivial environmental costs.

Why Bitcoin?

Bitcoin has nearly every strength that gold does.  Bitcoins are fungible.  They're easily recognizable (by Bitcoin software) and durable (with reasonable data backups).  The supply is almost perfectly predictable.  Bitcoin has no industrial or jewelry uses so demand is less affected by economic conditions.  It possesses almost arbitrary value density.  A single microSD card, weighing 1.5 grams, could hold millions of dollars worth of Bitcoins, if desired.  As a digital commodity, Bitcoin is also immune to counter-party risk.

Many of gold's weaknesses are Bitcoin's strengths.  As a digital good, Bitcoin can be transported securely and cheaply to nearly any location in the world instantly.  The Bitcoin network adapts rapidly to maintain predictable supply in the face of surprise mining advances.  Assuming good data backups, Bitcoins aren't destroyed in a fire and won't be "lost at sea."  Electricity used for Bitcoin mining offers a substantially lower environmental footprint than gold (a subject for another article).  Bitcoin's impact is low enough that an environmental group opposed to gold mining advocates Bitcoin as a replacement for gold.

Why Not Bitcoin (Now)?

If Bitcoin is so much better than gold, why aren't we all using it?  One of gold's major strengths is that it has stood the test of time.  Through thousands of years, it has shown itself a resilient store of value and a useful currency.  Bitcoin has less than three years under its belt.  If Bitcoin were gold, we'd still be in the early stone age carrying gold flecks in a leather pouch.  There aren't any assay offices, there aren't any minted coins, there aren't massive mining operations or liquid futures markets.  There are still doubters claiming they can one day turn lead into gold.  With real gold, those issues were settled long ago.  With Bitcoin, those issues are still to be settled and might never be settled at all.

Even if Bitcoin had a lengthy history to support its utility and resilience, the current inflation rate stands around 35% annually (similar to gold-rush-induced inflation in the 1850s).  In 2017, the inflation rate will drop below typical fiat currencies.  In 2021, it will finally drop below gold's production rate.  Unless you have a long time horizon and a high risk tolerance, right now is not the time to buy Bitcoin.

To date, the world has mined 5.3 billion troy ounces of gold.  Dividing the US M2 money supply by that number, gives a price for gold of $1,792 per oz, within a few cents of today's gold spot price.  To date, the network has mined 7.624 million Bitcoins.  A similar calculation yields a price of $1.24 million per Bitcoin. When all is said and done, there will be somewhat less than 21 million Bitcoins in existence (through carelessness, some have been lost along the way).  Even at that volume, the calculated price would be $452,000 per coin.

Like the '49ers of old, we began this discussion in San Francisco.  I'm not saying the parallels are exact, but having a few flecks in a leather pouch sounds like a reasonable idea to me.

Wednesday, October 12, 2011

Dart Hits Some Bullseyes

On Monday, Google announced a new programming language named Dart.  It aims to be faster than JavaScript and better suited to large scale software projects.  After thinking about the language for the last couple days, I think Google's engineers have started a compelling replacement for JavaScript.

Any client-side web programming language will be used by programmers from all backgrounds.  Dart's optional typing lets both static typing enthusiasts and dynamic language enthusiasts have what they want (with some minor compromises).  Throughout this article, I've linked to Dart code samples on the Dartboard so you can try for yourself.

"I Hate Static Types"

Many web developers come from a dynamic languages background and actively dislike static typing.  Many more probably have no idea what static types are and simply grew up writing JavaScript code.  Both groups of developer should be happy with Dart.  They never have to enter a type declaration and Dart is still an improvement over JavaScript.

Dart provides block scoped variables rather than the function scoped variables used in JavaScript.  Accidentally overwriting a function scoped variable is one of the most common JavaScript errors I encounter.  It's more likely to become a problem as functions evolve and grow.  With Dart, for example, this is less likely to happen.

Dart also provides a succinct function syntax rather the verbose JavaScript one.  As often as client-side programming uses callback functions, this sort of code is a pleasant change of pace.

Dart even has string interpolation.  Anyone who's programmed in Perl and JavaScript for longer than 5 minutes knows how nice this will be.

Some developers may not care, but Dart provides immutable variables with compile time errors.  As far as I can tell, JavaScript "const" just silently ignores subsequent assignments.  I've debugged quite a few JavaScript programs where code modified a variable it shouldn't have.  Declaring a final variable and receiving an error would have saved me lots of debugger time.

Dart makes some other improvements which aren't as noticeable.  For example, Dart's namespace rules should eliminate bugs from global variables.  The language spec makes several accommodations which should eventually make Dart run faster than all current JavaScript engines.  Lars Bak, who developed the super-fast V8 JavaScript engine is one of Dart's main developers.  He ought to know a thing or two about making a language that can run fast.  Dart's library system also allows for optimizations that could substantially improve website load times someday.

Even if Dart just used dynamic typing, these changes alone are enough for me to switch.

"I Love Static Types"

Many other web developers come from a static typing background and want types when developing for the browser.  GWT and Closure Compiler show how far these developers will go to have their static types.  Dart's type system gets them most of what they want.

One benefit of static typing is describing a developer's intentions.  JavaScript developers often use specially formatted comments for this purpose.  One can think of Dart type annotations as a more succinct version of the same thing.  Since Dart type annotations don't change a program's semantics, they really are just fancy comments.  As always, the comments can be wrong if your tools don't enforce otherwise.

The Dart compiler performs type checking.  If you want to catch type problems at compile time, just pay attention to the warnings (hover over line 4).  Even though they're not errors, the compiler did the hard work for you. Dart also provides a development mode for runtime type checking.  These checks are disabled in production, but it reminds me of the well-tested robustness principle, applied to programming languages.

Since type annotations are part of the language, it's likely that future tools will handle type inference.  Closure Compiler already does this for JavaScript, so the tools will probably arrive soon.  Type annotations also provide additional hints the JIT could use to further improve performance.  With JavaScript, the JIT must rely entirely on its own observations.

Be Patient

Many of Dart's critics act as though the language is finished.  Yes, the Dart to JS compiler produces horribly bloated JavaScript.  No, Dart doesn't have mixins.  Yes, Dart's VM is slow.  A quick glance at the version number (0.01) suggests we should be patient.  The Dart issue tracker and mailing list are full of good discussions about solving these problems.  The language designers are open to evolving and improving the language.

Dart isn't perfect and can't be perfect, but I think it will become a meaningful, valuable improvement over JavaScript

Friday, September 30, 2011

Easily Anonymous Bitcoins

There have been some healthy reminders recently that Bitcoin isn't anonymous out of the box.  I've gotten the impression that sentiment has swung the other direction toward thinking that Bitcoin anonymity is very difficult to attain.  As xkcd humorously reminds us, we should think about security and anonymity practically.  If you buy marijuana with Bitcoin and your neighbors can smell the evidence every Friday night, Bitcoin's anonymity isn't your problem.  It's fairly easy to anonymize Bitcoin enough that it's not the weak link.

  • install Tor and use it for all subsequent browsing steps
  • visit Instawallet to anonymously create a Bitcoin wallet
  • List $100 cash for sale on Silk Road Market
  • Mail the cash through any US Postal Service drop box
  • When the Silk Road bitcoin payment arrives, withdraw it to your Instawallet
You can now spend Bitcoins from this Instawallet with complete anonymity.  Instawallet doesn't know who you are (because of Tor).  Silk Road doesn't know who you are (because of Tor).  The USPS doesn't know who you are (anonymous drop boxes).  The person who sold you Bitcoins doesn't know who you are (anonymous US mail).

Slightly more complicated: buy a Bitcoin mining rig and connect to a mining pool through Tor.  Newly mined coins are completely anonymous.  You can send them to your Instawallet or to a Bitcoin client running behind Tor.

There are hundreds of variations on these techniques, but the results are the same.  High power forensics and digital surveillance might be able to pierce the anonymity veil.  At that point, your attacker is probably motivated enough that Bitcoin anonymity is the least of your worries.

Thursday, September 01, 2011

On Tax Breaks

For those who don't know my biases, I support the notion that that government is best which governs least.  The question in this post is how to apply that principle to specific tax policy decisions.


On a regular basis, governments propose to exempt certain favored activities from taxation.  Some libertarians support these tax breaks because it reduces the government's overall tax revenue.  I think the market manipulation embodied in targeted tax breaks exceeds any benefit from reduced revenue.  If existing tax breaks can be removed in a revenue neutral way, that's ideal.  If not, I think the market is still better off to have them removed; even if it means higher government revenue in the short term.

A Vain Street Thug

Consider the following scenarios:

  • A street thug walks up to me and says, "I'll shoot you unless you give me $20". He then spends $20 to have his shoes polished
  • A street thug walks up to me and says, "I'll shoot you unless you give me $20 or polish my shoes"

The first scenario mirrors taxation.  We pay taxes because of threatened force.  Both the tax revenue and subsequent expenditures appear in government budgets for all to debate.

The second scenario is like a tax break.  To retain my money, I must act as the government directs.  Neither my lost labor nor his polished shoes appear in the government budgets.

In both cases, the government manipulates the market to obtain its desired result.  In one case it's transparent and obvious.  In the second, it's hidden behind a facade of choice.  The offer to polish his shoes doesn't make the thug's hold up any less objectionable.

Wind Production Tax Credits

Here's a real example.  Uncle Sam offers a 2.2¢ per KWh tax credit for producing electricity from wind. Depending on the time of year and local market conditions, the tax credit alone can exceed revenue from selling the electricity.  Even when electricity rates are high, wind farms aren't profitable enough to use the entire tax credit themselves, so they sell their tax credits to investors who use the credits to offset their own tax liability.  Obviously, the wind farmers aren't "keeping their hard earned money", they're selling political favors granted to them by Congress.

These kinds of tax credits also create a dangerous bubble in the market.  In a free market, the price of electricity would drop as new generation capacity comes on line.  The lower electricity prices tell producers that they should reconsider any plans to build additional capacity. Highly efficient projects may proceed despite the lower prices, but inefficient projects will be abandoned before they're built.

The tax credit changes this dynamic. The credit exists at a fixed price until Congress changes it (ignoring inflation adjustments).  Anyone that builds a qualifying wind farm gets the tax credit.  As new electrical capacity goes online, the price of electricity still drops, but the tax credit stays the same.  Since the tax credit revenue accounts for such a large portion of the wind farm's total revenue, wind farmers don't hear the market's message to stop building.  They construct wind farms whether they're needed or not.  Once Congress removes the tax credit, the completed, inefficient wind farms immediately become unprofitable and are abandoned; leaving a mess for someone to clean up.

From this perspective, Wyoming's .1¢ per KWh tax on wind electricity can be seen as a 4.5% push back against Federal manipulations of the electricity market.  If Wyoming's tax were set to exactly match the Federal tax credit, it could be seen as an old-fashioned nullification of manipulative Federal policies.

Health Care Benefits and Income Tax

In 1942, Congress passed the Stabilization Act which prohibited employers from increasing wages faster than a certain rate.  Since businesses still wanted to compete for the best employees, they began offering benefits as a way to skirt the price controls.  In 1943, an administrative ruling declared these benefits exempt from income tax.  This created the third-party payer system of health care we have today.  When employees consume health care, they're doing it on their employer's dollar.  Since it's not their money, employees consume more than they otherwise would.  Employees are also less sensitive to price increases.

The subsequent rise in health care costs caused by this market manipulation provided the impetus for government health care programs like Medicaid and Medicare.  These programs now account for a substantial portion of Federal expenditures.  The wage and price controls were fortunately abandoned decades ago, but the health insurance tax break remains.

Even if eliminating this particular tax break were to increase government revenue by $200 billion annually, as some estimates state, it's hard to imagine it would be as damaging to the U.S. health care market as the manipulative tax breaks themselves have been.

Encouraging the Lobbyists

Because Congress has granted so many tax breaks in the past, people expect that they might grant tax breaks in the future.  It's hard for industry to resist the temptation of exempting themselves from taxes and leaving their competitors to carry the burden.  Those who give in to temptation hire lobbyists to lavish kickbacks on politicians who might be the slight bit inclined to carve out another loophole.  As long as this kind of power exists, it will be bought.

Keep Your Eye on the Prize

In the end, the goal is to eliminate all general taxes.  Once the income tax and sales tax is abolished, it's no longer possible to manipulate the market with tax breaks or the threat of higher tax rates.  Until that day, I think a flatter, broader tax structure, which requires everyone to feel the pain, is the option least harmful option.

Saturday, June 11, 2011

Bitcoin: Resilient Internet Payment

I blogged six months ago about why Bitcoin matters. Since that time, I've developed some services with Bitcoin and had two of them shutdown by PayPal freezing my account. I've also sold thousands of dollars worth of Bitcoins in cash sales on the street. I've come to the conclusion that my earlier statement about Bitcoin being "resilient in the face of disaster" may be Bitcoin's most important attribute.


Bitcoin has seven main features. Critics usually choose one feature, argue that it doesn't hold and conclude that Bitcoin will fail. I think any three of these features could fail simultaneously and the currency would still succeed. Consider it an architectural margin of safety. The seven features are:
  1. Predictable supply
  2. Anonymous payments
  3. Permanent payments
  4. Fast payments
  5. Low transaction fees
  6. Easy cross-border transfers
  7. All purchases allowed
Most of these features are well documented elsewhere so I won't explain them further. Fast payments (#4) may need some clarification. When I accept a credit card payment, it clears in a couple seconds. That corresponds exactly to a Bitcoin transaction arriving. After 180 days the credit card payment is essentially permanent. For Bitcoin, permanence takes about 1 hour. In that sense, Bitcoin is faster than credit card networks.


The Bitcoin investors I've worked with care almost entirely about the limited, predictable supply. Some of them are gold bugs or real estate mavens. They've gotten rich on the limited supply of those commodities and see similar opportunities with Bitcoin. Nearly ever feature except the inflation caps could fail and they'd still be happy. A deflationary spiral is their dream come true.

As this demographic holds greater Bitcoin wealth, anonymous payments and easy cross-border transfers will become more important. Bitcoin has potential to become the Swiss numbered account of the future.

Online Retailers

For businesses selling goods and services online, predictable supply is arguably irrelevant. As long as there's no hyperinflation, they'll do fine. However, they care deeply about features 3-6. Fraud and payment processing fees are substantial costs to their business. I know of at least one Bitcoin vendor who offers a 5% discount for Bitcoin purchases because Bitcoin eliminates those two transaction costs.

I've bought and sold services with Bitcoin dozens of times with people outside the United States. In each case, the experience was more pleasant and less expensive than using PayPal or a credit card. Features 1, 2 and 7 were completely irrelevant to these transactions.

Unpopular Commerce

The Internet has been a boon for unpopular commerce such as pornography, gambling, electronic cigarettes and now illegal drugs. Because the commerce is unpopular, many buyers want their orders placed anonymously (feature #2). Pornography and gambling have substantially higher chargeback rates than other industries (#3). Many mainstream payment processors prohibit transactions for these services (#7). In all three cases, Bitcoin provides a solution.

Other Bitcoin features are icing on the cake. They could be removed without reducing Bitcoin's utility for unpopular commerce.


It now seems common for governments to control dissident groups through the financial system. Banks and payment providers are threatened with punishment if they handle funds on behalf of dissidents. Features 2, 3, 6-7 appeal to these groups. Other features could fail and Bitcoin would still be useful for WikiLeaks or LulzSec (both of which accept BTC donations) or funding underground churches in China.


I don't presume to know all groups which might benefit from Bitcoin. I suspect that each of them will want a subset of Bitcoin's possible features. As long as that's the case, Bitcoin has a good chance of succeeding.