Wednesday, December 27, 2017

bitcoin, what all the fuss is really about.

i have started a bitcoin wallet. very small. maybe dollar cost average over time. however, the experience is causing me to reflect on wha da fuck!?

purportedly, the 'fuck', is about global payments, or wealth-mobility, or black-market payments, or money-laundering. however, learning about how the blockchain thing works and how banks work and how currency works, or not, i have come to the conclusion that the 'fuck' is not about any of those things. the fuck is about deflationary currency.

so wdf is deflationary currency!?

first let's understand inflationary currency. john q citizen, works a day and saves a dollar. so what does he do? he deposits that dollar in a savings account in a bank - to save for a rainy day or a new saxaphone or something. the bank, in exchange for a cut of profits called interest, loans out jq's dollar to someone else who wants to buy a motorcycle or something. ok, well and good. jq is making money on idle savings in the form of interest payments and someone else is enjoying their new motorcycle and paying interest. all is good, what could go wrong?

here's how the shit happens. once the bank loans jq's dollar out for the new motorcycle there are now two dollars in circulation:  jq's dollar on record in his savings account and the dollar loaned to the purchaser of the motorcycle. so now there are two dollars out there for jq's one dollar, that's a 2:1 dilution of moola (divide in half and give back 1%???) but wait, it gets better! when michael motorcycle buys the bike, the motorcycle salesman, sammy, takes his payment and deposits that back in the bank! now there are three dollars in circulation for jq's one dollar deposit. now, the bank has an additional dollar on record for jq's one dollar deposit, that it can loan out... and they do. this process multiplies the bank's cash on deposit while diluting the depositer's buying power.

basically, the bank is loaning money into existence. that's how they actually talk. it don't require a federal bank thingy, that's just the tip of the iceberg, the normal process of loaning out OPM (other people's money) literally fabricates money and dilutes the currency. this is a time-honored system for going to hell that everyone just kinda acquiesces to. as long as everybody doesn't want to withdraw their savings at the same time then no problem. right? well, kinda, sorta, no. ok, the bank-run problem is mostly squashed by the gumint forcing banks to not get too cray-cray - they tell the banks that they got to slow down, and not loan out all of their OPM - keep a little on reserve, just in case. ok, well and good, mostly. however, for you, john q, this all means that your dollar on deposit is ultimately a losing proposition because it enables dilution of your currency and thus the dread inflation. you think you are making out on interest but, in the end, inflation always exceeds whatever meager interest you are making because the system is so rigged!

enter bitcoin.

now, with bitcoin. your money is your money. it sits in your 'wallet' and can't be loaned out by the bank because they would have to know your private encryption keys and then deduct that money from your wallet, so you are not thinking of spending it. so, with bitcoin, the banks can't loan money into existence and that's a game-changer. that protects the value of your money from dilution and is, thus, anti-inflationary. now anti-inflationary is marketed as deflationary, i think, mostly to sneak this past bankers and politicians.

that's not to say that borrowing and lending don't happen. it's more of a peer-to-peer thing, though. you want to borrow 100 bitcoins? well, i can loan them to you for x-amount of interest. you get the bitcoins, my savings account is reduced, but you pay me back with interest over time. that's how its supposed to work. no money gets loaned into existence. no dilution, no games.

am i totally cray-cray?


  1. Mostly correct. Bitcoin is mined into existence so there is some dilution, but not to the same extent as fractional reserve lending. Also...if you are saving for a saxophone and anticipate paying in dollars, you probably have a pretty good idea what your desired saxophone will cost, even a year out, in dollars. Can you predict, also a year out, the cost in bitcoins for a saxophone? What if the seller of the saxophone doesn't accept bitcoins as payment? So, it's still a long way from being a true currency for a lot of reasons. I would say at this point bitcoin is more analogous to the early days of baseball cards as an investment and the other blockchain currencies are kind of like the other brands of baseball cards that came into existence keeping Topps from being the only game in town. The extreme bitcoin mining costs, in the form of electricity, are also kind of troubling.

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