April 22, 2014

(C) The ABC of Making the Bitcoin Investment Decision - part C first - Currency, buy the Coin!

Preamble. In the last recent months I've seen a lot of interest in the question of what makes a good Bitcoin investment. I may not be the best person to make this call, but as I'm a reluctant skeptic, I may not be the worst person either. Most of the people I speak to are either confirmed believers, or they are people who are afraid of missing the boat. In either case, they haven't got a lot of critical analysis to offer, and as I've been there several times already, it seems I might have. I've been speaking on this issue at the moment in multiple fora, so I've been forced to put my thoughts in order. (Fair Warning. Long post ahead...)

Call this my ABC of Bitcoin investment. In reverse order, C for Currency. Put your coin on the table, and read on!

The first decision that hits the erstwhile investor in Bitcoin is this: to bet on the currency or to bet on the business?

Currency or business ?

can be seen as a diversification question. If you buy the coin, you are investing in the entire market, because, as the theory goes, it goes up with the fortunes of everyone, and comes down alike.

Diversification is a good strategy, and according to the efficient market hypothesis it is the only strategy that makes sense to a non-insider. In the stock market, this means buying a stock index fund, which is hated by the banks because they can't push your trades around and make fees off you. Which alone tells you diversification is a winner, and for these and other reasons, index funds typically perform in the top half of funds.

The strategy could be considered a good thing. Buying the currency could make you a smart investor!

It is also rather unique. For example, when you bought into that Internet boom in a big way in the 1990s, or the social networking of the 2000s, it wasn't possible to "buy the net!" Then, you had to make a more precise investment decision e.g., B for Business, which I leave to another post.

This time around, you can buy the coin literally, and see afar from everyone else's tall shoulders. What could make more sense?

I would however like to raise a bit of a red flag. Buying the coin might actually make a lot less sense than at first blanche. Let's work it through.

Continue reading "(C) The ABC of Making the Bitcoin Investment Decision - part C first - Currency, buy the Coin!"
Posted by iang at 06:53 PM | Comments (1) | TrackBack (0)

podcasts on pre-Bitcoin from Bitcoin UK

Bitcoin UK has done two podcasts on the cryptocurrency history before Bitcoin:

These podcasts were done at the same time as my rant as posted on the blog a little while ago, "A very fast history of cryptocurrencies BBTC -- before Bitcoin." Interesting for those that prefer to listen more than read.

Posted by iang at 09:00 AM | Comments (0) | TrackBack (0)

April 20, 2014

Code as if everyone is the thief.

This is what financial cryptography is about (h/t to Jeroen). Copied from Qi of the TheCodelessCode:

A novice asked of master Bawan: “Say something about the Heartbleed Bug.”

Said Bawan: “Chiuyin, the Governor’s treasurer, is blind as an earthworm. A thief may give him a coin of tin, claim that it is silver and receive change. When the treasury is empty, which man is the villain? Speak right and I will spare you all blows for one week. Speak wrong and my staff will fly!”

The novice thought: if I say the thief, Bawan will surely strike me, for it is the treasurer who doles out the coins. But if I say the treasurer he will also strike me, for it is the thief who takes advantage of the situation.

When the pause grew too long, Bawan raised his staff high. Suddenly enlightened, the novice cried out: “The Governor! For who else made this blind man his treasurer?”

Bawan lowered his staff. “And who is the Governor?”

Said the novice: “All who might have cried out ‘this man is blind!’ but failed to notice, or even to examine him.”

Bawan nodded. “This is the first lesson. Too easily we praise Open Source, saying smugly to each other, ‘under ten thousand eyeballs, every bug is laid bare’. Yet when the ten thousand avert their gaze, they are no more useful than the blind man. And now that I have spared you all blows for one week, stand at ease and tell me: what is the second lesson?”

Said the novice: “Surely, I have no idea.”

Bawan promptly struck the novice’s skull with his staff. The boy fell to the floor, unconscious.

As he stepped over the prone body, Bawan remarked: “Code as if everyone is the thief.”

Posted by iang at 10:20 AM | Comments (0) | TrackBack (0)

April 18, 2014

Shots over the bow -- Haiti joins with USA to open up payments for the people

The separation of payments from banks is accelerating. News from Haiti:

The past year in Haiti has been marked by the slow pace of the earthquake recovery. But the poorest nation in the hemisphere is moving quickly on something else - setting up "mobile money" networks to allow cell phones to serve as debit cards.

The systems have the potential to allow Haitians to receive remittances from abroad, send cash to relatives across town or across the country, buy groceries and even pay for a bus ride all with a few taps of their cell phones.

Using phones to handle money payments is something we know works. It works so well that some 35% of the economy in Kenya moves this way (I forget the numbers). It works so well Kenya doesn't care about the banks freezing up the economy any more because they have an alternate system, they have resiliance in payments. It works so well that everyone can do mPesa, even the unbanked, which is most of them, bank accounts costing the same in Kenya as the west.

It works so well that mPesa has been the biggest driver to new bank accounts...

Yet mPesa hasn't been followed around the world. The reason is pretty simple -- regulatory interference. Central banks, I'm looking at you. In Kenya, the mission of "financial inclusion" won the day; in other countries around the world, central banks worked against wealth for the poorest by denying them payments on the mobile.

Is it that drastic? Yes. Were the central banks well-minded? Sure, they thought they were doing the right thing, but they were wrong. Mobile money equals wealth for the poor and there is no way around that fact. Stopping mobile money means taking money from the poor, in the big picture. Everything else is noise.

So when the poorest of the poor -- the Haitian earthquake victims were left in the mud, there were no banks left to serve them (sell them?) and the only way to get value out there turned out to be using the mobile phone.

That included, giving the users free mobile phones.

Can you see an important value point here? The value to society of getting mobile money to the poor is in excess of the price of the mobile phone.

Well, this only happens in poor countries, right? Wrong again. The financial costs that are placed on the poor of every country by the decisions of the central banks are common across all countries. Now comes Walmart, for that very express same reason:

In a move that threatens to upend another piece of the financial services industry, Walmart, the country’s largest retailer, announced on Thursday that it would allow customers to make store-to-store money transfers within the United States at cut-rate fees.

This latest offer, aimed largely at lower-income shoppers who often rely on places like check-cashing stores for simple transactions, represents another effort by the giant retailer to carve out a space in territory that once belonged exclusively to traditional banks.
Lower-income consumers have been a core demographic for Walmart, but in recent quarters those shoppers have turned increasingly to dollar stores.
More than 29 percent of households in the United States did not have a savings account in 2011, and about 10 percent of households did not have a checking account, according to a study sponsored by the Federal Deposit Insurance Corporation. And while alternative financial products give consumers access to services they might otherwise be denied, people who are shut out of the traditional banking system sometimes find themselves paying high fees for transactions as basic as cashing a check.

See the common thread with Bitcoin? Message to central banks: shut the people out, and they will eventually respond. The tide is now turning, and banks and central banks no longer have the credibility they once had to stomp on the poor. The question for the future is, which central banks will break ranks first, and align themselves with their countries and their peoples?

Posted by iang at 06:07 AM | Comments (0) | TrackBack (0)

April 08, 2014

A very fast history of cryptocurrencies BBTC -- before Bitcoin

Before Bitcoin, there was cryptocurrency. Indeed, it has a long and deep history. If only for the lessons learnt, it is worth studying, and indeed, in my ABC of Bitcoin investing, I consider not knowing anything before the paper as a red flag. Hence, a very fast history of what came before (also see podcasts 1 and 2).

The first known (to me) attempt at cryptocurrencies occurred in the Netherlands, in the late 1980s, which makes it around 25 years ago or 20BBTC. In the middle of the night, the petrol stations in the remoter areas were being raided for cash, and the operators were unhappy putting guards at risk there. But the petrol stations had to stay open overnight so that the trucks could refuel.

Someone had the bright idea of putting money onto the new-fangled smartcards that were then being trialled, and so electronic cash was born. Drivers of trucks were given these cards instead of cash, and the stations were now safer from robbery.

At the same time the dominant retailer, Albert Heijn, was pushing the banks to invent some way to allow shoppers to pay directly from their bank accounts, which became eventually to be known as POS or point-of-sale.

Even before this, David Chaum, an American Cryptographer had been investigating what it would take to create electronic cash. His views on money and privacy led him to believe that in order to do safe commerce, we would need a token money that would emulate physical coins and paper notes. Specifically, the privacy feature of being able to safely pay someone hand-to-hand, and have that transaction complete safely and privately.

As far back as 1983 or 25BBTC, David Chaum invented the blinding formula, which is an extension of the RSA algorithm still used in the web's encryption. This enables a person to pass a number across to another person, and that number to be modified by the receiver. When the receiver deposits her coin, as Chaum called it, into the bank, it bears the original signature of the mint, but it is not the same number as that which the mint signed. Chaum's invention allowed the coin to be modified untraceably without breaking the signature of the mint, hence the mint or bank was 'blind' to the transaction.

All of this interest and also the Netherlands' historically feverish attitude to privacy probably had a lot to do with David Chaum's decision to migrate to the Netherlands. When working in the late 1980s at CWI, a hotbed of cryptography and mathematics research in Amsterdam, he started DigiCash and proceeded to build his Internet money invention, employing amongst many others names that would later become famous: Stefan Brands, Niels Ferguson, Gary Howland, Marcel "BigMac" van der Peijl, Nick Szabo, and Bryce "Zooko" Wilcox-Ahearn.

The invention of blinded cash was extraordinary and it caused an unprecedented wave of press attention. Unfortunately, David Chaum and his company made some missteps, and fell foul of the central bank (De Nederlandsche Bank or DNB). The private compromise that they agreed to was that Digicash's e-cash product would only be sold to banks. This accommodation then led the company on a merry dance attempting to field a viable digital cash through many banks, ending up eventually in bankruptcy in 1998. The amount of attention in the press brought very exciting deals to the table, with Microsoft, Deutsche Bank and others, but David Chaum was unable to use them to get to the next level.

On the coattails of Digicash there were hundreds of startups per year working on this space, including my own efforts. In the mid 1990s, the attention switched from Europe to North America for two factors: the Netscape IPO had released a huge amount of VC interest, and also Europe had brought in the first regulatory clampdown on digital cash: the 1994 EU Report on Prepaid Cards, which morphed into a reaction against DigiCash.

Yet, the first great wave of cryptocurrencies spluttered and died, and was instead overtaken by a second wave of web-based monies. First Virtual was a first brief spurt of excitement, to be almost immediately replaced by Paypal which did more or less the same thing.

The difference? Paypal allowed the money to go from person to person, where as FV had insisted that to accept money you must "be a merchant," which was a popular restriction from banks and regulators, but people hated it. Paypal also leapt forward by proposing its system as being a hand-to-hand cash, literally: the first versions were on the Palm Pilot, which was extraordinarily popular with geeks. But this geek-focus was quickly abandoned as Paypal discovered that what people -- real users -- really wanted was money on the web browser. Also, having found a willing userbase in ebay community, its future was more or less guaranteed as long as it avoided the bank/regulatory minefield laid out for it.

As Paypal proved the web became the protocol of choice, even for money, so Chaum's ideas were more or less forgotten in the wider western marketplace, although the tradition was alive in Russia with WebMoney, and there were isolated pockets of interest in the crypto communities. In contrast, several ventures started up chasing a variant of Paypal's web-hybrid: gold on the web. The company that succeeded initially was called e-gold, an American-based operation that had its corporation in Nevis in the Caribbean.

e-gold was a fairly simple idea: you send in your physical gold or 'junk' silver, and they would credit e-gold to your account. Or you could buy new e-gold, by sending a wire to Florida, and they would buy and hold the physical gold. By tramping the streets and winning customers over, the founder managed to get the company into the black and up and growing by around 1999. As e-gold the currency issuer was offshore, it did not require US onshore approval, and this enabled it for a time to target the huge American market of 'goldbugs' and also a growing worldwide community of Internet traders who needed to do cross-border payments. With its popularity on the increase, the independent exchange market exploded into life in 2000, and its future seemed set.

e-gold however ran into trouble for its libertarian ideal of allowing anyone to have an account. While in theory this is a fine concept, the steady stream of ponzis, HYIPs, 'games' and other scams attracted the attention of the Feds. In 2005, e-gold's Florida offices were raided and that was the end of the currency as an effective force. The Feds also proceeded to mop up any of the competitors and exchange operations they could lay their hands on, ensuring the end of the second great wave of new monies.

In retrospect, 9/11 marked a huge shift in focus. Beforehand, the USA was fairly liberal about alternative monies, seeing them as potential business, innovation for the future. After 9/11 the view switched dramatically, albeit slowly; all cryptocurrencies were assumed to be hotbeds of terrorists and drugs dealers, and therefore valid targets for total control. It's probably fair to speculate that e-gold didn't react so well to the shift. Meanwhile, over in Europe, they were going the other way. It had become abundantly clear that the attempt to shutdown cryptocurrencies was too successful, Internet business preferred to base itself in the USA, and there had never been any evidence of the bad things they were scared of. Successive generations of the eMoney law were enacted to open up the field, but being Europeans they never really understood what a startup was, and the less-high barriers remained deal killers.

Which brings us forward to 2008, and the first public posting of the Bitcoin paper by Satoshi Nakamoto.

What's all this worth? The best way I can make this point is an appeal to authority:

Satoshi Nakamoto wrote, on releasing the code:
> You know, I think there were a lot more people interested in the 90's,
> but after more than a decade of failed Trusted Third Party based systems
> (Digicash, etc), they see it as a lost cause. I hope they can make the
> distinction that this is the first time I know of that we're trying a
> non-trust-based system.

Bitcoin is a result of history; when decisions were made, they rebounded along time and into the design. Nakamoto may have been the mother of Bitcoin, but it is a child of many fathers: David Chaum's blinded coins and the fateful compromise with DNB, e-gold's anonymous accounts and the post-9/11 realpolitik, the cypherpunks and their libertarian ideals, the banks and their industrial control policies, these were the whole cloth out of which Nakamoto cut the invention.

And, finally it must be stressed, most all successes and missteps we see here in the growing Bitcoin sector have been seen before. History is not just humming and rhyming, it's singing loudly.

Posted by iang at 07:14 PM | Comments (1) | TrackBack (0)