To Max Keiser & Stacy Herbert – Sorry Bitcoin is for Suckers

I love Max and Stacy on the Kaiser Report but Max has two key blindpsots – Gold – and its cryptographic equivalent – BitCoin.

Setting aside the rumours for a moment that Max invented it on his show he recently attacked those who said that ‘bitcoin was backed by nothing’ by saying that ‘bitcoin is backed by cryptography’.

Both wrong – all money, nominarian or not, is always backed by the future physical production of goods or services.  That is lesson 101 of the credit theory of money – for a primer see Greabers 5000 years of debt.  Indeed all anti-neoclassicals – of which Max is a prime example – seem to hold to this theory.

Money is advanced as credit, to fund some future operation which will yield a greater output of goods or services to create growth.  Moving into it is the opportunity cost of buying some other good or currency.

To invest in bitcoin mining we need a pc and electricity – they are what back it – so if you were to advance me credit to do so you would need to be sure my mining operation would make money.

However look here for the definitive calculator for  the expected profitability of mining – looking at cost of pc and electricity against return rates from mining – being a late player to the game you can’t make money unless you get the pc for free and the electricity for free – which is why so many bitcoin ops are from botnets.  But if this became universal then bitcoin mining would become a cost free operation mining would go through the roof and we would get bitcoin hyperinflation and a collapse in the currency.  It would be the equivalent of Spanish treasure ships returning from the indies and collapsing the Spanish economy as a result.

Indeed I would challenge someone to do a model of say – 25% of the worlds population getting into bitcoin, what would it do to price per bitcoin or electricity costs for mining?

There is a fallback argument, that bitcoin should just be seen as a store of value and hedge against inflation to other currencies.  That is a better argument, though of course there is no safe haven anywhere any more and any that is seen to be is likely to suffer huge capital flows inwards – such as the Swiss Franc, and in due course suffer a collapse especially as that currency is leveraged.  For this reason paper gold, a phantom is doomed to collapse and be a big a credit moment as a sovereign default (if you do the math of paper gold leverage from physical).  As Warren Buffet says ‘Gold is for Smucks’  – even more physical gold as there is a storage cost- demurrage – so you lose a % of its value every year.

I hear now stories of traders who have thought this through and are doing things like buying farms and forests in places like Scotland as ‘the only safe store of wealth’ .  Not so much a hedge against uncertainty but a forest against it.

Note:  This is in good part a write up of a friendly twitdebate with Stacy.

37 thoughts on “To Max Keiser & Stacy Herbert – Sorry Bitcoin is for Suckers

  1. Mining activity in raw computing power is matched at set moments, so it does not matter whether there is one computer solving puzzles or 100,000. If the former, the puzzle becomes easier; if the latter, the puzzle becomes harder to solve. It has nothing to do with the amount of bitcoins that will enter the system.

    Tying mining to hyperinflation makes clear you do not properly understand the concept of Bitcoin. Bitcoin does not hyperinflate: you can calculate right now when and how much bitcoins will be created until the maximum of 21 million bitcoins have been created. After that, miners need to seek their profit from payment fees.

    The paragraph on gold tells the old boring (and faulty) story. Gold cannot be printed by central banks. Central banks are printing like hell right now. Result: gold will remain good as long as the real interest rate remains negative.

    But please be my guest and keep holding on to stocks and US Treasuries. The system will love you for that. Whether bitcoin succeeds or not, at least participants got to choose a voluntary system (like, in a proper free society).

    Side note: it is David Graeber: Debt, the first 5,000 years (recommenced).

    • Bitcoin would of course hyper-inflate if the cryptography were cracked or if it become too easy, Having a fixed sum makes no difference, after all gold based specie has caused hyperinflation – and massive recessions and votality – on many occasions. Gold bugs read your history.

      • well in that case anything you own that you ever want to trade to anyone is only good for ” the future physical production of goods or services.” Could be gold, bitcoins, furniture, food, or your body.

        “But if this became universal then bitcoin mining would become a cost free operation mining would go through the roof and we would get bitcoin hyperinflation and a collapse in the currency. ”

        Bitcoin mining is a zero sum game. If twice as many people try to mine, the total amount produced remains the same.

        “However look here for the definitive calculator for the expected profitability of mining – looking at cost of pc and electricity against return rates from mining – being a late player to the game you can’t make money unless you get the pc for free and the electricity for free ”

        Your claim is based on the current value of bitcoin. You are not considering at all what the past mined value would be for the earned bitcoins if the market decides that price is going up. Know why the margins are so slim right now? Because of healthy competition in a free market for mining.

      • Bad argument, gold is a fixed physical asset didn’t stop hyperinflation in the Spanish conquests – and if twice as many people do try to mine it makes precisely my point that you wont make any money. If the market decides the price is going up’ so its success depends on ponzi pricing then!!!! Just like house price inflation – one mug born a minute if its success depends on speculation of prices going up forever.

      • “To invest in bitcoin mining we need a pc and electricity – they are what back it”

        False. Electricity and “mining” don’t back Bitcoin any more than electricity and mining back gold. Nothing backs either Bitcoin or gold – they are commodities with value because they are useful. They do not require backing. Paper monies benefit from backing because the paper is not worth as much as the face value – so it’s linked to a commodity. But gold and bitcoin are already the commodity – they don’t require linking to a secondary commodity.

        The author also doesn’t seem to understand how Bitcoin mining works. You can’t have inflation higher than the preset rate of 50 coins per 10 minutes, no matter how many miners are mining, or how cheap their electricity, etc.

        And this article still didn’t seem to present any compelling case why “Bitcoin is for suckers.” If one understands how money is arrived at within a marketplace, then one should understand the value of both gold and bitcoin as such money. They’re useful, they have the properties for good exchange, and they’re scarce. One could argue whether Bitcoin is or is not superior to gold, but to say Bitcoin is for suckers is disingenuous at best and dangerously ignorant at worst.

      • All commodity based minimg requires you to mine – which requires an energy source & capital to buy – which has an opportunity cost. Physical mining energy _ feeding the workers +mining gear +land, bit coin pc +energy, and the cost of this has an opportunity cost elsewhere in the economy.

        I admit though I knew about the physical limit on the number of bitcoins I did not know about the rate limit – something you don’t get in physical mining. But this makes my point even more, because if say a million more people get into mining the RoR of a mining investment falls aysmptotically – hence a mugs game even more.

        For those who still think it isnt for mugs do the maths on one of the several websites that calculate electricity costs and mining rate of return. Why would anyone but a mug make an investment without calculating the rate of return.

      • “For those who still think it isnt for mugs do the maths on one of the several websites that calculate electricity costs and mining rate of return. Why would anyone but a mug make an investment without calculating the rate of return.”

        You are still contradicting yourself. You say a future higher price with higher profitability is somehow a ‘ponzi’, as if things that rise in value are scams, but then at the same time you are using the Mining Calculator as your investment guide. The mining calculator is based on the currency price. Why would the current price be any more valid of a measure for you? The current price was a price from the past that has risen.

      • If you base any investment decision on the assumption that a price will rise over and above its projected cash flow then you are a mug – all bubbles are made from people who follow the herd. Think about it for a moment bitcoins will only rise in value if people are piling into the market wanting to buy them, which attracts a swarm of people wanting to produce them. But as the rate of production of bitcoins is fixed the rate of return of bitcoins will fall if they do. People will be forced to give up their positions as people get out of the market. The price falls, and people panic and sell. Just like any bubbly asset market like real estate, boom and bust. If you assume that the price will rise forever exponentially, it cant that would in a few years require huge positions, all such markets will fall as assuredly as they rise.

        You don’t seem to understand the definition of a ponsi market and how it is different from a market where prices rise more slowly than discounted cash flow projections – read some Minksy/Kingdelberger etc. then come back and tell me if I am wrong.

      • “Think about it for a moment bitcoins will only rise in value if people are piling into the market wanting to buy them, which attracts a swarm of people wanting to produce them. But as the rate of production of bitcoins is fixed the rate of return of bitcoins will fall if they do.”

        False. If people are piling into the market wanting to buy them, the price would be way up because of the limited supply, and the profit return would be very high for producers and sellers, which would bring in more competition until profit margins reach a healthy equilibrium.

        “People will be forced to give up their positions as people get out of the market. The price falls, and people panic and sell. Just like any bubbly asset market like real estate, boom and bust. ”

        You are describing the natural chaos of markets. I see no issue here. People can educate themselves on responsible investing, or not invest at all if they have cold feet. Understanding the concept of risks in trading is much different then saying something is a scam. Most people are looking for long term trends.

        “You don’t seem to understand the definition of a ponsi market and how it is different from a market where prices rise more slowly than discounted cash flow projections – read some Minksy/Kingdelberger etc. then come back and tell me if I am wrong.”

        Markets that go up to quickly get downward corrections. All bitcoin takes to fit your definition is for prices to rise slowly so that crashes dont happen. This is what most people are rooting for, and is also exactly what has been happing in bitcoin world lately.

      • No we are talking about a DISEQUILIBRIUM process like all asset markets – producers overproduce and prices overcorrect if scarcity/want is perceived.

        Read some Schumpeter.

        Prices have been rising slowly in Bitcoin – unlike a tyear-18 months ago – because most sensible investors have rumbled it. But if it did ever become more than of masturbatory interest to bitcoin fanbois we would see the typical overexhuberent markets reaction.

    • Pricing in the housing market fell out because it was a bad investment, bad economics. Dont go throwing around ‘ponzi’ and anything that goes up in value, or you just spread generalized fear to everyone about investing in anything.

    • “Prices have been rising slowly in Bitcoin – unlike a tyear-18 months ago – because most sensible investors have rumbled it. But if it did ever become more than of masturbatory interest to bitcoin fanbois we would see the typical overexhuberent markets reaction.”

      SO WHAT? You want to help others, then put out a post telling others to buy them cheap now before the rally comes. Then they can be first in, and they can thank you for not getting in after the rise and exuberance. Don’t try to outlaw exuberance or market corrections. We want a free market of people at choice, not regulation and protectionist clauses.

      • People can get sent to jail for miselling financial products for advising what you have suggested – buy – but its a bubble – it would also get you struck off as a financial advisor in most countries. You are saying its ok to fool and rip off grannies investing their last cent – shame on you. Its only because of the like sof investors like you that free markets have a bad name.

  2. Good writting, but your facts are all wrong. For one, your credit theory of money is only valid for credit based money. Gold and Bitcoin’s are asset based money. The asset IS the good and service. Next, your idea that bitcoin inflation and bitcoin production is tied to the number of people doing it is wrong. Bitcoin inflation is constant. Here is a clear description, stuffexists.com/numbers . Thanks for trying though! I look forward to your next article with corrections.

    • No all credit requires a counterparty – asset and credit based money are the same thing. So for example if you HP the computer and cont pay the company gets the computer – if the loan is unsecured it isnt asset based.

  3. I won’t comment on your economic theories, but you’ve made an important technical error—

    “mining would go through the roof and we would get bitcoin hyperinflation and a collapse in the currency”

    You appear to be suffering from a common misunderstanding about how Bitcoin works. The rules of the Bitcoin system require that the difficulty of mining adjusts to keep the production of Bitcoin to the programmed rate. More effort spent mining means that less Bitcoin is produced per unit of effort. Less effort spent means more bitcoin is produced per unit of effort, the difficulty goes up and down.

    As a result in theory, and practice, the expected return on mining tends to but minimal but non-zero profitability for the more efficient bulk of the miners. Effectively the process decouples the price of Bitcoin from the prices of mining hardware and electricity, at least on a sufficiently long timeframe for the two-week difficulty adjustment cycle to catch up.

    There is, of course, no such thing as a definitive calculator for mining profitability— and the one you used probably promoted your misunderstanding because the future profitability can’t be calculated (though you can probably assume it’s low if you mine efficiently, and negative if you are inefficient). Perhaps you’re also driven to this error by the mistaken belief that Bitcoin is somehow backed by the computation that goes into mining— it isn’t you cant trade bitcoin to get that computation back. The computation does contribute to Bitcoin’s value, since its what makes bitcoin transactions infeasible to reverse— but all that Bitcoin is backed by is its scarcity by design and people’s willingness to accept it in the future.

    On the subject of technical errors, I’m not aware of any evidence that a considerable amount of bitcoin mining is done by botnets. The mining process is enormously faster on recent high end GPUs or specialized hardware, most botnets appear to consist of older generation CPUs. A single ATI 7970 GPU will probably do as much mining as 200 botnet nodes. There is mining on botnets of course— the thieves care not for the inefficiency as they aren’t paying for the power, but I find it doubtful that it counts for a considerable portion of the total mining.

    • Thats just the same as declining rates of return – as in the physical economy – I wasn’t making any exotic assumptions and knew that was how BC works, with constant or increasing returns you get infinite production which blows all laws of economics.

      And yes you can predict profitability if you make assumptions about change in the variables, there is uncertainty in that, however the models show that production costs would have to fall to near zero for it to be rational – hence its a mugs game. Yes there is evidence of botnet mining and came across evidence of widespread use when I researched it 6 months ago – will post.

      • The production isn’t constant in the long term, it’s geometrically declining in the long term, piecewise constant in the medium term, and based on changes in interest in mining in the very short term.

      • See comment above – if you invest in something because its cashflow/rental price is greater than you you paid or borrowed for it (NPV) that a sound investment, bitcoin or real estate, but if you invest in it solely because you expect the asset price to rise forever above other prices in the economy that’s a ponzi, its impossible for that exponential rise to occur more than a relatively short time once many investors like you get in such a market – look at real estate booms and bust.

      • I know there is a botnet,..doesnt really matter. They dont control the network, and a lot of them were disconnected recently. They are also being obsoleted by ASIC mining.

        BTW…no one ever said they increase bitcoin price to increase FOREVER. It would stabilize out at a fair market price which most people believe is much higher then the current value.

      • “Any evidence for the assertion that it breaks the laws of markets – which go down as well as up – of is that just an assumption of boosterists.”

        I dont understand you. That what breaks the laws of markets? A bot finding a way to make cheap bitcoins is not ‘breaking the law of the market.’ The only way they are able to produce the bitcoins is by following the rules of the network. The only law they are breaking is probably a US law about installing viral software on peoples computers.

    • You fail to make the elementary distinction between backing something because its future cashflow is demmend positive and backing something because its rising in price despite its cashflow – read some Minsky and learn what a ponzi investment is

      • Are you suggesting a non-ponzi currency? How do you buy things? Are you suggesting we go back a thousand years to direct bartering? Mediums to store and transfer value have an inherent value to themselves.

      • No bartering, but because mediums to store value have a value they have a price – known as demurrage – as in Gold, and looking at the rate of return projections it is very much higher than other alternatives, such as agricultural land (no carry charge) or even physical gold. Those who originally produced bitcoin have gambled that people who have a high fear factor of inflation in paper money will pile in, and of course early entrants make a lot of money and late entrants make nothing.

      • “mediums to store value have a value they have a price – known as demurrage – as in Gold, and looking at the rate of return projections it is very much higher than other alternatives.”

        Suddenly future projections have value to you…not ponzi?

        “early entrants make a lot of money and late entrants make nothing.”

        The same can be said of all investments. Anyone who bought Apple or Google before it shot up made lots of money. Those who bought after it shot up…didnt make money. You aren’t saying much here.

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