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  • Bitcoin, Despite All its Problems, Could Revolutionize Property Rights

    Weak or nonexistent property rights lead to low economic productivity. Citizens of countries that do not protect property rights must necessarily spend much energy, thought, and time in an anxious effort to secure what little production they can manage. Many innovations and business models are unfeasible without property rights because they will be destroyed (or, more often, deterred) by one or another form of theft. Even a marginal improvement in access to property rights should drive the economic equilibria of many countries in the direction of wealth creation.

    Because it is decentralized, significantly easier to transport, store, or hide, and—this is crucial to augmenting property rights—significantly more difficult to seize than any traditional asset, Bitcoin delivers a real improvement in property rights at a comparatively modest cost (risk due to price volatility + transaction fees).

    However, Bitcoin is not a better currency (at least not in its current technical implementation). In fact, it probably will never quite be able to compete with centralized solutions in terms of speed and efficiency. Bitcoin is a bank account that is hard to track and hard to seize. The hard-to-track and hard-to-seize features are where the bulk of the real current value (speculation aside) originates.

    Beyond black market applications, Bitcoin has utility and value because most of the world’s population lives in countries that do not uphold property rights.

    The average human on planet Earth lives in serious uncertainty about whether his property will be his tomorrow. (This interactive map is from Index of Economic Freedom published by the Heritage Foundation, click here to play with it)

    What Bitcoin Provides

    1. Provides a last resort store of value—and means of escaping with some assets—for people living in politically unstable or oppressive countries.
    2. Makes people more confident and more likely to be productive by providing a hedge against expropriation, hyper-inflation, theft, divorce (comical but true), and so on—meaning that people can work hard to accumulate wealth, with the confidence that they will be able to keep some portion of it, despite being the victim of some political turmoil or the target of some (in)justice.*
    3. Provides a means to streamline the pervasive and often necessary evasion of taxes, bureaucracy, and regulation in poorly governed countries.**

    *It is important not to underestimate this. Uncertainty discourages people from working hard and taking risks. First world countries owe a significant part of their productivity and wealth to the rule of law and property rights. Any shift in that direction should also increase the amount of economic activity in a country that is normally a dangerous place to be successful.

    **Having done business in China and India, I speak from personal experience when I say that nearly every businessperson and any typical middle-class citizen in these countries is guilty of regularly, or at least occasionally, breaking tax laws, bribery, and so forth, to get by.

    This is not just a third world phenomenon. At one point in my food cart manufacturing days, we worked with two Egyptian food cart partners in New York (they jointly ran several dozen food carts in Manhattan) who—in a bid to report as little income as possible to the IRS, a universal practice among small cash businesses in the city—stored tens of thousands of dollars inside a wall, only to find part of the money eaten by rats several months later (they, of course, only realized what had happened after hotly accusing each other of theft).

    Giving People a Way Out

    It is difficult for those of us living in peaceful Western democracies, and occasionally grumbling about taxes, to understand how front-and-center property rights issues can be.

    Bitcoin provides a last resort for individuals and communities contending with hyper-inflation, capital controls, corrupt courts, extortion, and expropriation of all kinds.

     

    Try selling your small business and leaving Zimbabwe.

    Or take a stroll to the ATM to try and withdraw your hard-earned savings in an attempt to spend them before the currency loses 80 percent of its value.

    It’s no surprise that by October of 2017 (note that articles above are both from 2016) Quartz reported that Bitcoin is breaking all kinds of price records in cash-strapped Zimbabwe.”

    The Bitcoin network, despite its many imperfections, is proving itself as, at least, a moderate improvement in access to property rights and financial freedom for much of humanity.

    Property rights issues cast a shadow that spans the entire income spectrum—whether you are a middle-class entrepreneur in Zimbabwe, who is not legally allowed to leave the country with more than $1000 in cash as the political and economic situation descends into uncertainty, or the world-famous investor Prince Alwaleed.

    Ironically, shortly before being detained indefinitely and very likely expropriated by the despotic Saudi “government,” Prince Alwaleed called Bitcoin an “Enron in the making.”

    Although it’s very possible that Bitcoin’s price has run far ahead of its underlying value (and certainly many of the people bidding it up—including myself on occasion—are speculators, not users), the Prince’s bubble ended up bursting first.

    While people like Prince Alwaleed obviously have access to more traditional methods of evading capital controls and expropriation (offshore banking valued at well over $15 trillion, shell companies, and so on), it is clear that Bitcoin—and perhaps the even-less traceable cryptocurrencies like Monero, Dash, and Zcash—is at minimum a useful new gadget in the offshore banking arsenal.

    Bitcoin is even more useful for criminals (who in all likelihood made up the first critical mass of its users). But they are a rather small market compared to the enormous potential market of law-abiding and semi-law abiding citizens hedging against expropriation, unreasonably high taxes, unfair lawsuits in corrupt courts, capital controls, and so on.

    Obviously, Bitcoin is not a silver bullet—the classic $5 wrench XKCD meme says it all:

    Governments, fair or corrupt, still have plenty of very effective ways of detecting income, collecting taxes, expropriating property, and carrying on all manner of other financial/economic despotism. One cannot live on Bitcoin alone. The government can still take your house, your car, your land, and so on. However, decentralized cryptocurrencies do have the potential to shift the equilibrium noticeably in favor of the individual.

    My own parents were forced to give up all of their possessions when they left the USSR. In fact, they had to pay a fee in order to leave. Had cryptocurrency existed in the 1980s, they would have surely sold their Moscow apartment and other assets for whatever they could get in Bitcoin. In the event, I think they managed to smuggle several thousand dollars worth of gold sewed into the lining of a fur coat.

    [Side note: It was popular among people emigrating from the USSR to have gold dental work installed in a bid to carry out at least something of value… imagine what the USSR would have been like if this was possible.]

    Communist countries are a perfect storm for cryptocurrency—subsidized electricity and zero property rights. Venezuela is the best example.

    However, even China, which is hardly Communist, only allows private citizens to take $50,000/year out of the country. Unsurprisingly there is a general, and well-founded, anxiety among wealthy Chinese that the government will take away what they have earned. Chinese money has been a huge driver of Bitcoin’s price.

    Even banning Bitcoin-RMB exchanges cannot stop the outflow completely.

    Valuation

    IWhen reckoning the long term (years, not months) market cap potential of Bitcoin and other competing cryptos, it is important to consider not just its black market use cases or its competition with gold (gold has ~$7T market cap) and offshore banking ($15–30T market cap), but also the new value it may create if it proves, in the long term, to be a better mousetrap for individuals in their struggles with corrupt and ineffective governments/social structures everywhere.

    Not only does Bitcoin create value by providing a new, albeit imperfect, way to secure existing wealth, it will likely encourage the creation of new wealth by individuals living under otherwise discouraging political regimes. Even governments may trend toward better behavior as they find themselves forced to contend with Bitcoin. I can’t make any price predictions—there is still no certainty that cryptocurrencies will stand the test of time and scale—but the next decade of the cryptocurrency industry’s growth should be interesting to watch.

    Disclosure: I have been holding BTC and some other cryptos on and off since some time after India withdrew large cash notes from circulation—which got me thinking along the lines above.

    Reprinted from Medium.


    Michael Dubrovsky

    Michael Dubrovsky is a libertarian-leaning systems engineer interested in science, entrepreneurship, history, and economics. He was the co-founder of several startups—most notably MOVE Systems—and has experience establishing manufacturing operations both in China and the American Midwest. Michael is currently working on a cryptocurrency mining protocol project and planning to begin graduate studies in Materials Science. You can find more of his blog posts on Medium, where he applies meandering first principles analysis to a range of topics from woodworking to Net Neutrality.

    This article was originally published on FEE.org. Read the original article.



  • Bitcoin Cynics Are on the Wrong Side of History

    “If you’re stupid enough to buy [Bitcoin], you’ll pay the price for it one day.”

    – Jamie Dimon, CEO of JP Morgan Chase, 2017

    _________________________________________________________________

    On March 10, 1876, a new invention sent an invisible electrical signal through a pair of copper wires. On the other end of those wires, the signal was converted to sound waves and Alexander Graham Bell’s assistant heard the now-famous words: “Watson – come here – I want to see you.”

    Later that same year, across the Atlantic, the chief engineer at the British Post Office boldly claimed that “The Americans have need for the telephone, but we do not. We have plenty of messenger boys.”

    Meanwhile, over in America, the President of the Western Union Telegraph Company asserted that “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication.”

     

    Today, given the prominence of the telephone in our everyday lives, these assertions, made by some of the top executives and experts in the field of communication, seem remarkably absurd. And yet, at the time, they didn’t sound so ridiculous.

    History is replete with entrepreneurs and inventors who have pushed the envelope of innovation and invention to the very edge of human imagination and maybe a little beyond. But new ways of doing things have a natural tendency to obfuscate the old ways, and there are always individuals and groups that benefit from the status quo who are quick to dismiss, and sometimes even condemn, new contraptions and revolutionary ideas.

    The Birth of Bitcoin

    On January 3, 2009, an anonymous developer known as Satoshi Nakamoto mined the first 50 bitcoin and created the Bitcoin Genesis Block. Since then, Bitcoin has provided the basic blueprint for hundreds of other currencies and platforms and has inspired the creation of an uncountable number of blockchain-based solutions to real-world problems.

    But what is Bitcoin and why would I have the audacity to compare it to something as revolutionary as the telephone?

    In short, Bitcoin uses public-key cryptography to create a decentralized, permissionless, publicly-viewable blockchain that serves as an immutable ledger, keeping track of who owns bitcoin and how much, all without a central, governing authority.

    While this sounds complicated (and it is), don’t worry. Knowing cryptography and understanding the details of how a blockchain works are not necessary prerequisites to use and benefit from the technology any more than one needs to know how an internal combustion engine works in order to drive a car or how TCP/IP works in order to use the internet.

    Why Bitcoin? Why Now?

    But what use does the world have for a new type of digital money when we already perform near-instantaneous digital transactions with dollars, euros, and yuan via Paypal, Visa, and other financial institutions?

     

    There are many reasons, including the desire of some people for increased privacy and anonymity in their transactions, more autonomous control over their own digital assets, and the obsolescence of the need for third parties to provide the necessary trust factor between two parties in order to perform a transaction. These are all great reasons why so many people view cryptocurrencies as superior to government-issued, fiat currencies. But there is another reason, one that I think is the most important.

    Much of human history has been dominated by powerful, centralized governments that have been responsible for hundreds of millions of deaths through democide and war in the last century alone. Most of these deaths were made possible by governments’ ability to finance killing on an immense scale by monopolizing the supply of money, printing massive amounts of it, and declaring by fiat that their citizens had to use it, or else.

    That system, that grotesquely bloated machine, incessantly spinning its morbid motor of merciless monstrosity, is thankfully coming to an end.

    The Dawn of a New Era

    The decentralization and democratization of money and banking through cryptocurrencies and platforms like Bitcoin, Litecoin, Ethereum, and Dash threatens the very foundation that makes possible large-scale murder, draconian limitations on international trade, and heavy government regulations on markets across the globe that cause so much destruction of the achievements of yesterday while simultaneously obstructing the progress of tomorrow.

    The proverbial shots have been fired and a bloodless coup d’état of sorts, led by internet nerds, hackers, libertarians, entrepreneurs, and outright geniuses is underway.

    Revolutions do not typically happen overnight, especially