Dear Bitcoin "Wealth Preservers", You are Doing it Wrong

The Point

by Fay Dress for Soren K. Group

Can you, the reader, substitute Bitcoin for Gold in this statement made by a pre-sellout Alan Greenspan?


We  cannot. 

Bitcoin is Not Money ( and Neither is FIAT)

Here is why we cannot:  Bitcoin is a medium of transfer. It is not money yet. It will likely NEVER  be money.

While it shares one excellent characteristic with Gold right now, that being it is a borderless  currency, it will not sustain that quality as envious governments, banks, and corporations will demand it be reeled in. And as such, it will NEVER  be a substitute for Gold. And we are aware that the use of superlatives is ALWAYS a sign  that an argument is specious.  So be it.

Bitcoin shares with Gold for the moment the ability to unshackle people's economic freedom, but it is ludicrous to think it could satisfy the other requirements needed to be called money let alone the other qualities that make gold the best example of the definition of "Money" itself.

  1. Medium of exchange: Bitcoin satisfies this. It is used as a means to transfer your Rubles to Dollars without being "watched". Not unlike how the USD is used to convert your chicken sales into a purchased cadillac. But different in the sense the Government is watching that trade and will not let you sell your chickens to that guy in Haiti even though he is offering a higher price. 
  2. Unit of account: Bitcoin is too volatile, and not "commonly accepted" as a standard - although that may change as it evolves. just know that volatility undermines confidence in a currency (Zimbabwe, Reichmarks etc)
  3. Store of value: Bitcoin does not hold its value over time. Yes it is growing in value, but that is precisely what we mean. It is also NOT a convenient way to store wealth. Just ask the guy expatriating Yuan to Australia to convert it to  USD and his Bitcoins drop 20% in 5 minutes. Stability is key. And Bitcoin has none of that.

FIAT is a horrible long term store of value. Bitcoin is a horrible short term store of value

Do a Sharpe vs Sortino ratio comparison on both BITCOIN and all FIAT to make our volatility point. We are sure the Sharpe ratio will show up as lower in both  Bitcoin and FIAT than their Sortino ratios. And the Sortino ratios will show most volatility in Bitcoin is to the upside, while all FIAT will show volatility to the downside.  

The USD:  slowly sucking you dry.

?Sharpe Ratio says "Low Volatility!!" ; Sortino Ratio Replies: Yea but it is all to the downside Post Bretton Woods 

Bitcoin: All upside, unless of course you store your wealth in it today and are fine with it being +/- 20 % when  you go to buy lunch with  it.

We are not going to even show you a BTC chart because it will be obsolete by the time  you read this. Suffice to say, until recently, it was alsmost all upside volatility if you mearued it in months. Now it is also showing some downside volatility. But overall, it is more than likely that BTCs Sortino ratio is awesome over its life. Lets put our savings in it. I'll buy Christmas presents with it in 6 months. What could go wrong?  Ok Fine. Here is a chart. It's what you all came here for  isnt't it? The shiny new thing?


Both FIAT and Bitcoin are Fraudulent Money

Thus based on volatility analysis Bitcoin would be a new hedge fund with a short tremendously positive reason to invest. FIAT is a hedge fund that loses money every year. Yet we keep allocating our assets to it. Both are poor investments for different reasons. Neither is a store of value. 

Assuming it does become stable over time, do you think a government will permit Bitcoin  to be money? Any central banker who does not abuse his dictatorial privilege, whether rationalized b/c of some monetary dogma (Yellen) or  being just plain self-interested (Any Leftist LATAM dictator survival)is not worth his salt as a CBer

It would be easier for China to print 1Trillion Yuan, buy Bitcoins with it, then sell those same coins. This is how easily it would be to destroy confidence in a new currency that is just a medium of transfer so far. Who cares if China loses money on the exit? And they have ways to make sure they do not lose money we are sure. Bitcoins are currently capped. FIAT is not.

To the extent that Bitcoin rallies it is probably a good  proxy for demand to leave a country. But what do you do after you've gotten out of your Venezuelan Bolivars? You put them in the FIAT of the country you deem as having a more stable currency. To keep your wealth in Bitcoins would be like remaining in a doorway between  universes. Sure you could spend them but you'd be hostage to the 100% volatility if you used it as a store of value instead of a transitional medium of exchange from one FIAT to another. Those who buy and hold Bitcoins are likely the speculative class inadvertantly betting on collapse of economies and wealth moving around. That is fine. But do not tell us it is money. At least not yet anyway.  It is used practically as a pipeline to some other asset. And that is a medium of exchange.

We'd suggest you take your expatriated Venezuelan wealth and on the other end change it to gold. For when you look at it, No FIAT currency is a store  of value. The  volatility of FIAT may be low, but by no  means does it hold purchasing power.  

Gold on the other hand does. So if you are buying BTC as a subsitute  for Gold because it is enjoying the rallytaht you'd hoped Gold would get when the world figured out FIAT was fraud; then  your premise is wrong. Money is a store of wealth with stable buying power  over time. If BTC collapses with your wealth and you've bought on  this premise, then  good luck. Not only will you have confused a Nasdaq stock  with a store of value, you will have no wealth left to actually buy something that protects your  buying power.. you know GOLD.

So, Where the hell is blockchain product with the Gold front end? To  be fair, if a good one even existed ( we haven't done the work yet) do you think the financial powers and their lackey media shills would discuss it as a viable store of wealth and a liquid  medium of exchange? Not likely.

Short of a trade indexed USD, Gold is the best way to hedge your buying power whether it be inflation or deflation you are scared of. Diatribe over.



Recco - Read

Yet more proof we have much to learn below. This is scary to us and a wake-up call to our own naivete on our hope for even the technicological ability to remove a human intermediary in Blockchain exists. It may not.

Blockchain: Almost Everything You Read Is Wrong

Blockchain needs no 'Human Trust Intermediation' - so long as you confine yourself to Bitcoin.- Steve Wilson


by Soren K. Group

The article is worthy for reading whether you are a Blockchain  wonk or not. It explains why Blockchain is NOT going to cure cancer. For us, as semi-wonks we agree.  But the last part of the article was new info  to us. We had labored under the assumption that Blockchain itself was a catalyst for a banking revolution for 2 reasons. 1- Ledger technology lowers clearing turn-around time and thus makes double transactions all but impossible. (Still true) 2- Its ledger tech obviates the human centralization needed for "trust" verification. (Not so much). Now we need to re-examine. And that is the reason for our headline. To examine what we've assumed in the context of this new white-paper:

First: Blockchain May Need Bitcoin- In the last part of the author's article, he describes that Blockchain without Bitcoin as its front-end does NOT eliminate the need for "trustee" type oversight. We do not claim to know if this is true or not. But it does force us to examine everything we thought we knew about the Blockchain ledger mechanism and our thought that it alone removed the need for centralized "trust" in human form.  We do know that corporations are now creating their own products using Blockchain. That fact tells us the Banks are looking to co-opt the tech for cost reduction for sure. But now we must add into our calculus that they might not be disintermediated by their own success at all when their branded products are implemented

Second: We Feel Bitcoin is Doomed in the U.S.- one of the two things that make Blockchain attractive to us is its ability to remove a need for human/ corporate centralized "trustees". (The other quality is its removal of clearing risk and potential  "double dipping" transactions). If Blockchain's disitntermediation ability is intrinsically tied to using Bitcoin as its front end, then all may be lost in this  "Banking revolution".

For we "know" Bitcoin will not be allowed to prosper here. We feel strongly that once Bitcoin is seen as a threat to the US banking industry (and/or they do not have their own product up and running thereby ring-fencing their own client base) the paid for politicians will be ruthless in stopping it. Banks will reject money for Bitcoin  transactions on the grounds of "know your client". The Government will back this up.  Lawmakers and Fed shills like Ken Rogoff will use "But the criminals are using it!" to ban its use. Trust JPM's Blockchain product! etc etc. 

If what Mr.  Wilson says is true, and additionally  there is no future chance of a front-end asset that uses Blockchain as its pipeline being completely non-dependent on  centralized "trustee" oversight in design; then Blockchain is going to be a corporate tool for branding and  lowering cost and increasing profit margins for them only. And Bitcoin will crash on the rocks of the U.S. if it attempts to supplant Banking's most important franchises. 


Author  Steve Wilson for

Almost everything you read about the blockchain is wrong. No new technology since the Internet itself has excited so many pundits, but blockchain just doesn’t do what most people seem to think it does. We’re all used to hype, and we can forgive genuine enthusiasm for shiny new technologies, but many of the claims being made for blockchain are just beyond the pale. It's not going to stamp out corruption in Africa; it's not going to crowdsource policing of the financial system; it's not going to give firefighters unlimited communication channels. So just what is it about blockchain?

The blockchain only does one thing (and it doesn’t even do that very well). It provides a way to verify the order in which entries are made to a ledger, without any centralized authority. In so doing, blockchain solves what security experts thought was an unsolvable problem – preventing the double spend of electronic cash without a central monetary authority. It’s an extraordinary solution, and it comes at an extraordinary price. A large proportion of the entire world’s computing resource has been put to work contributing to the consensus algorithm that continuously watches the state of the ledger. And it has to be so, in order to ward off brute force criminal attack.

How did an extravagant and very technical solution to a very specific problem capture the imagination of so many? Perhaps it’s been so long since the early noughties’ tech wreck that we’ve lost our herd immunity to the viral idea that technology can beget trust. Perhaps, as Arthur C. Clarke said, any sufficiently advanced technology looks like magic. Perhaps because the crypto currency Bitcoin really does have characteristics that could disrupt banking (and all the world hates the banks) blockchain by extension is taken to be universally disruptive. Or perhaps blockchain has simply (but simplistically) legitimized the utopian dream of decentralized computing.

Blockchain is antiauthoritarian and ruthlessly “trust-free”. The blockchain algorithm is rooted in politics; it was expressly designed to work without needing to trust any entity or coalition. Anyone at all can join the blockchain community and be part of the revolution.

The point of the blockchain is to track every single Bitcoin movement, detecting and rejecting double spends. Yet the blockchain APIs also allow other auxiliary data to be written into Bitcoin transactions, and thus tracked. So the suggested applications for blockchain extend far beyond payments, to the management of almost any asset imaginable, from land titles and intellectual property, to precious stones and medical records.

From a design perspective, the most troubling aspect of most non-payments proposals for the blockchain is the failure to explain why it’s better than a regular database. Blockchain does offer enormous redundancy and tamper resistance, thanks to a copy of the ledger staying up-to-date on thousands of computers all around the world, but why is that so much better than a digitally signed database with a good backup?

Remember what blockchain was specifically designed to do: resolve the order of entries in the ledger, in a peer-to-peer mode, without an administrator. When it comes to all-round security, blockchain falls short. It’s neither necessary nor sufficient for any enterprise security application I’ve yet seen. For instance, there is no native encryption for confidentiality; neither is there any access control for reading transactions, or writing new ones. The security qualities of confidentiality, authentication and, above all, authorization, all need to be layered on top of the basic architecture. ‘So what’ you might think; aren’t all security systems layered? Well yes, but the important missing layers undo some of the core assumptions blockchain is founded on, and that’s bad for the security architecture. In particular, as mentioned, blockchain needs massive scale, but access control, “permissioned” chains, and the hybrid private chains and side chains (put forward to meld the freedom of blockchain to the structures of business) all compromise the system’s integrity and fraud resistance.

And then there’s the slippery notion of trust. By “trust”, cryptographers mean “out of band” or manual mechanisms, over and above the pure math and software, that deliver a security promise. Blockchain needs none of that (Edit: Human Trustee mediation- Soren] - so long as you confine yourself to Bitcoin. Many carefree commentators like to say blockchain and Bitcoin are different things, yet the connection runs deeper than they know. Bitcoins are the only things that are actually “on” the blockchain. When people refer to putting land titles or diamonds “on the blockchain”, they’re using a short hand that belies blockchain’s limitations. To represent any physical thing in the ledger requires firstly a schema – a formal agreement about which symbols in the data structure correspond to what property in the real world – and secondly a process to bind the owner of that property to the special private key (known in the trade as a Bitcoin wallet) used to sign each ledger entry. Who does that binding? How exactly do diamond traders, land dealers, doctors and lawyers get their blockchain keys in the first place? How does the world know who’s who? These questions bring us back to the sorts of hierarchical authorities that blockchain was supposed to get rid of.

There is no utopia in blockchain. The truth is that when we fold real world management, permissions, authorities and trust, back on top of the blockchain, we undo the decentralization at the heart of the design. If we can’t get away from administrators then the idealistic peer-to-peer consensus algorithm of blockchain is academic, and simply too much to bear.

I’ve been studying blockchain for two years now. My latest in-depth report was recently published by Constellation Research.

Read more by Soren K.Group

Read more by Soren K.Group