Bitcoin: Like Gold or Like a Currency?

Valuing the various bitcoin forks

Breaking News: Segwit2x fork has been postponed indefinitely


Some say bitcoin acts more as digital gold then as a currency, more as a store of value than as a medium of exchange. It is very interesting to look at the various bitcoin forks with this question in mind.

Everything in life and in finance is a tradeoff. Gold works well as a long term store of value, but not so well as a medium of exchange. The US dollar works very well as a medium of exchange, but not well as a store of value in the long term. Even the Federal Reserve and other central banks hold gold as a reserve asset. It represents the bottom of the inverted money pyramid.

Now bitcoin is from its beginning more like gold in the sense that it is an asset with limited, predetermined supply. Dollars and other fiat currencies are debt-based since they come into existence when new loans are made, and their continual supply growth is rather assured; usually inflation occurs to varying degrees. See the Money 3.0 article for a longer discussion of this point.

Image: Silver ice cream fork, De Young Museum

There are 4 versions of bitcoin, 3 currently, and one possible fork. That was scheduled later this month as Bitcoin 2x (or B2X) a possible fork due to partial adoption of Segwit 2x, but it has now been indefinitely postponed due to lack of support.

As of today, approximate values for the 3 existing forks are:

Bitcoin BTC $7200

Bitcoin Cash BCH $630

Bitcoin Gold BTG $140

And Bitcoin 2x B2X had future values around $1600 before plunging on the announcement that it is now postponed.

All these cryptocurrencies have a supply of around 16.6 million accounting units, and all are limited to 21 million as the ultimate supply. And yet their prices are very different. Bitcoin has a first mover advantage but is that the whole story? How does one value BCH and BTG relative to BTC? In principle the various versions have both asset and currency characteristics.

Each of the alternatives to the original bitcoin is designed to facilitate faster, less expensive transactions. And this makes it more like a currency than a reserve asset.

BTC can be looked at like a large denomination bill, not as easily spent, although it is much easier to break into change than large bills are. Bitcoin Cash differs from BTC because it has a much larger blocksize, 8 MB. Bitcoin Gold differs in adopting a GPU-friendly mining algorithm, Equihash, rather than SHA-256 used by the others, which requires custom ASICs.

Bitcoin 2x adopts Segwit2x with a larger 2 MB block size.

Each of these three alternative coins is designed so that the system can process transactions more quickly and at lower cost, and so, along the spectrum of digital gold to currency, each is closer to a currency than the original BTC.

And that, somewhat counter-intuitively, is why original BTC retains a higher value.

In particular, the Bitcoin Gold is actually least like gold of all of these, since it will have the most accessible and thus fastest mining algorithm, and presumably could end up with the lowest transaction fees.


Image credit:

The respective values of the 3 or 4 types of bitcoin reflect this view. Bitcoin is the “slowest” and has the lowest velocity (slowest turnover) and highest value. Bitcoin Gold appears to be the most rapid and with lowest transaction fees, and thus has the lowest value.

Bitcoin Cash and a possible future Bitcoin 2x are between the two extremes. Since Bitcoin Cash has much larger blocks it has substantial miner support. Bitcoin 2x is favored by the user community that wants to facilitate more efficient transactions.

If you have a gold coin and some fiat currency, which do you spend first? You bought the gold coin in expectation that it would preserve its value and increase in terms of the number of currency units per coin.

So HODL (hold on for dear life) BTC, and spend or convert BTG and BCH seems the way to go for now. As always one should monitor how the different cryptocurrencies are developing in comparison to each other, in this very dynamic and volatile marketplace.


Evolutionary Forks and Dividends

What is a fork?

It is early days in evolutionary terms for cryptocurrency. Bitcoin has not been around even a decade. Ethereum has only been here for a few years. The respective economies of these and other cryptocurrencies have been growing at triple digit percentage rates.

A given blockchain can be thought of as a continuing line of a particular species. A new blockchain, e.g. Ethereum with new attributes is a new species of cryptocurrency. A fork in a blockchain, such as the recent Bitcoin Cash, is also a new species, but perhaps one can say that it belongs to the same genus.

Mayr’s concept of species is that of representatives of the same breeding population. They are in some sense on the same continual chain.

A fork is an evolutionary branch in response to environmental pressure. The pressure arises due to the developing needs of the ecosystem for cryptocurrencies overall and for individual cryptocurrencies.



The pressure that gives rise to evolution in the cryptocurrency ecosystem arises from the need to scale cryptocurrency to higher transaction rates and to more diverse use cases. For example, there is the very general use case of smart contracts, that led to the creation of Ethereum.

How new currencies are created or are forked results from the technological requirements and how those are interpreted and implemented by particular members of the development community. This is a political arena since miners, developers, exchanges, merchants, and other groups have different interests.

We have just had the Bitcoin Cash fork and are now facing possible forks for Bitcoin Gold and Segwit2x (Segwit was adopted without a fork in August).

It is difficult to determine which fork or species will be the most successful in the long run; but the original or main branch can have an advantage. Overall forks can be seen as strengthening the ecosystem as a whole since total value seems to rise after forks. After the Bitcoin Cash (BCH) fork the original Bitcoin (BTC) increased in value, and one could also collect the BCH on a one per one BTC held basis as a dividend. 

More generally, this has been borne out by the continually increasing market capitalization of the set of cryptocurrencies, currently having reached around $160 billion (roughly a Buffet plus a Gates).

For investors in cryptocurrency one can view forks as special dividends. Those who held Bitcoin through the Bitcoin Cash fork received a dividend of several hundred dollars per BTC. Sometimes numbered prints or copies are valuable as well.


Above is not our view, but that of @BitcoinWrld

What you do (hold, sell all, sell half) with your dividends is up to you and your views on individual forks; we make no recommendations here. But the dividends are there to receive, along with possible capital appreciation as the cryptocurrency economy continues to grow rapidly.

Ethereum: Smarter than a Fifth Grader?

Ethereum is described in Wikipedia as an “an open-source, public, blockchain-based distributed computing platform featuring smart contract functionality“.

How does it differ from Bitcoin? Well Bitcoin is open-source, public, distributed, and block-chain based. The difference is principally found in the terms “computing platform” and “smart contract functionality”. And there are other differences as well.

Ethereum is only two years old. It was the brainchild of wunderkind Vitalik Buterin, a Bitcoin developer, and while initial funds for the project were raised in mid-2014, the network went live in mid-2015. A foundation under Swiss law manages Ethereum.

The motivation was to have better scaling than Bitcoin, both horizontally, in terms of transaction speed, and vertically, in terms of use cases supported (implemented via smart contracts). It also has a better specified development plan, with 0, 1, and 2 versions of the software having been implemented, and version 3 (Metropolis) currently in testing.

It has been a great success, and Ether, the coin of Ethereum, now has the number two market cap among all cryptocurrencies at around $29 billion. Its value has risen dramatically during 2017, rising from $8 to $300.



Ethereum logo CC-BY-3.0


There are two types of accounts in Etherland. One can have a regular cryptocurrency account, or an account can represent a smart contract. There is a virtual machine (EVM) that is said to be “Turing complete” and that supports multiple scripting languages in which contract rules can be specified.

The idea of smart contracts has been around for over two decades; blockchain with broad programmability on the chain provides a very useful technology for their implementation.

Smart contracts allow value to be exchanged between agents without existing trusted relationships. Sort of like escrow, but much more streamlined. The basic idea is to cut out the expense and complications associated with middlemen.

Use cases being explored for such smart contracts include:

  • Real estate leases or purchases
  • Securities settlement
  • Supply chain management
  • Governance, including voting
  • Intellectual property protection

The number of currently existing use cases is few at present, however, and they tend to be simple and related to the Ether coin itself. Some have argued that smart contracts are much harder to implement in practice than many imagine. A recent interesting one is Prism Exchange, which allows you to hold a variety of altcoins across multiple exchanges from a single application.


Ether is much quicker to mine than Bitcoin, and can process 25 transactions per second. Transaction fees are also much lower than Bitcoin, around 8 times lower currently. Blocks are generated every 12 seconds, as opposed to the 10 minute target with Bitcoin.

Like Bitcoin, Ether is mined via Proof of Work, but the intent is to move to Proof of Stake (some measure of ownership) over time. A different cryptographic hash problem, Ethash, is solved, and with this hash Ether does not benefit greatly from mining with ASICs and is therefore accessible to CPU and especially to GPU mining. “Ethash PoW is memory hard, making it basically ASIC resistant.”

Basically the algorithm is designed to consume memory bandwidth and to be GPU-friendly. So it is good news for Nvidia and AMD and Intel.

Enterprise Ethereum Alliance

The Enterprise Ethereum Alliance has grown to over 150 organizations as members and includes some of the most important technology companies and largest banks. Its purpose is to address enterprise requirements for smart contracts and blockchains. The founding members are shown in the graphic below. Mastercard and Cisco are two major companies who have also joined recently.

Banks, in particular, have interest in permissioned blockchains, so that they can retain control of their customer relationships. There is a natural tension between open distributed trust of the blockchain and centralized trust that banks provide today.

It is an exciting time. How blockchain will be deployed by the financial industry, and how it will disrupt the industry are open questions. Smart contracts allow blockchain to be even more disruptive because they provide the tools for disintermediation. Jamie Dimon may not want his traders to trade Bitcoin, but he sure wants a seat at the Ethereum “smart contracts” table.


A Golden Fork

What do Bitcoin and Gold have in common? They are both assets. Both have limited supply that grows only slowly. Both can be seen as a form of money since they are stores of value and can be used as a medium of exchange. Both are liquid and divisible, although Bitcoin is much more easily divided. And both are unlike fiat money, in that they are debt-free. Both are ‘mined’, gold is physically mined, and Bitcoin is ‘mined’ via cryptographic hash algorithms (proof of work).



But what is Bitcoin Gold? It is neither gold, nor the current Bitcoin. Rather it is a proposed fork of Bitcoin, designed to make mining easier, and accessible to more people. And it could happen very soon, just three weeks from now.

The chief backer is CEO of a Hong Kong-based company, Jack Liao, and he indicates the motivation behind Bitcoin Gold is for it to be complementary to Bitcoin and to grow the community of miners, to allow the Bitcoin ecosystem to move away from its present centralization in a few mining pools.

It is not clear how well the proposal has been developed, and how many miners, current or new, will back it. But the intent is to allow mining by GPUs, rather than the specialized ASICs highly optimized for the SHA-256 hashing used by both Bitcoin and Bitcoin Cash.

Instead it will use the Equihash algorithm, that is GPU-friendly rather than ASIC-friendly, since it demands substantial utilization of memory and memory bandwidth. This could allow for a much broader community of miners since GPUs from Nvidia and AMD are so widely deployed.

The primary cryptocurrency usage of GPUs today is for mining Ethereum. But since Ethereum is scheduled to move away from proof of work and to adopt proof of stake next year, Bitcoin Gold could be the most important new target for GPU-based mining.

The developers of Bitcoin Gold intend to remain aligned with Core and Segwit roadmaps.

Everyone holding Bitcoin, with a suitable private wallet at the beginning of August, received a ‘free’ dividend of Bitcoin Cash. The major exchanges ended up supporting access to users’ Bitcoin Cash, some sooner, others later. Now everyone holding Bitcoin with a suitable private wallet on October 25th stands to receive a free dividend of Bitcoin Gold (BTG) as well.


Cryptocurrency a Bridge to the Future

Bitcoin, and cryptocurrencies more generally, can be a bridge to a better monetary future for the globe. In almost every nation today, fiat currency managed by a central bank is the norm. This is money that is inherently inflationary by design. Since central banks are controlled by national governments, and governments routinely run substantial deficits, the banks promote inflation in order to benefit their governments.

In our current low growth environment, the Federal Reserve has grown the money supply (M2 money stock) 4.9% during the past year when inflation is running at 2% or less. They are operating on an equation of around 2% inflation plus 2% to 3% GDP real growth for about 5% monetary growth.

Bitcoin has a very controlled and low absolute inflation, much less than 1%. There are currently 16.6 million bitcoins available, and there will never be more than 21 million, and that does not occur until over 100 years from now. In practice, Bitcoin is currently deflationary since the economy around Bitcoin is currently increasing very rapidly, at triple digit rates. It has been gaining value against fiat currencies rapidly, albeit with very high volatility.

Bitcoin meets the attributes of currency, see Money 3.0 article. It is not debt-based, as are all currently circulating fiat moneys, paper and digital money backed by nothing but debt (Money 2.0).

Akashi Kaikyo bridge is the world’s longest suspension bridge. GFDL license.

The entire financial system was at risk of collapse in 2008 due to accumulated debts and risky and fraudulent derivatives built on top of those debts. Trillions of dollars of wealth were destroyed, with Americans losing 40% of their net worth during a 3 year period.

In addition, the system is well-designed for the money center banking elites to pull more and more wealth into their own hands, through financial techniques that create no real wealth. Those who get to create the money lend it out and accrue the highest benefits.

A more stable system is required, and Bitcoin could play an important role, as an asset-based, not debt-based, currency. Dollars and Euros come into creation as new loans are issued by commercial banks. Central banks manage the reserve and equity requirements of those banks, but a large amount of leverage is inherent in the fractional reserve system.

Bitcoin comes into creation as a result of the mining process, that occurs as new transactions are forged into the blockchain. Bitcoin creation is a direct result of the operation of the economy around the cryptocurrency. Bitcoins are ‘minted’, not ‘printed’. Like fiat currency they have value due to scarcity and utility, and dependent on the growth of their economy.

Bitcoin and other cryptocurrencies can be the basis for more honest money, as well as for decreased transaction costs, and higher efficiency. Banking will change forever. Like fiat currency, bitcoin can be borrowed and it can be lent.

Those who are involved in Bitcoin today, a “peer-to-peer cash” are pioneering a future that could be a more stable, more honest monetary system. Today Bitcoin is young, has plenty of growing pains, and volatility, but it is now 8 years old and maturing rapidly.

J-Coin Prediction: it will be a Bonsai among alt-coins

One of the largest banks in Japan, Mizuho, along with other Japanese banks is looking to get into the blockchain game. CNBC reports “Japanese banks are thinking of making their own cryptocurrency”.

Except they are not, based on the information released so far. This will be mobile Yen, a use of blockchain to allow mobile users to spend Yen and send Yen. Mobile money. Not that there is anything wrong with mobile money, an electronic wallet, it can be quite useful.

This is not Nakamoto consenus, this is not mining of currency. It is a tethered currency. This is not an open source, globally distributed ledger with trust resident in the algorithm, the ledger, and the community.

I was married to a Japanese lady for over a quarter century, and have lived and worked in Japan. I know the Japanese mindset. This will be a highly constrained ‘currency’.

No doubt with all the constraints, and as a complete tether to the Yen, and with large banks behind it, they will be able to gain Japanese government approval.

Bonsai, courtesy of

But I do not expect this to be a true cryptocurrency. It will require a permissioned ledger, controlled by central authorities, the large banks.

Cryptocurrency wants to be free, wild, and out of the box. Satoshi’s vision is more along these lines:

Courtesy of JoJan, CC-BY-SA-3.0

Jamie Dimon must be kicking himself. “J-Coin”, why did I not think of that?

Jamie Dimon is afraid

First they ignore you, then they ridicule you, then they fight you, goes the saying.


JP Morgan (not Jamie Dimon)

Jamie Dimon is CEO of JP Morgan Chase, arguably the most important money center bank. He recently called Bitcoin a “fraud”.

It certainly is not a fraud. It is in fact a more advanced form of money our fiat currency; it is Money 3.0.

JP Morgan Chase, the combined bank, has been around since 1799 (Chase portion), over 200 years, and has a market cap of around $331 billion. Bitcoin and other cryptocurrencies have been around for less than 9 years and have a market cap of around $130 billion. That is over 1/2 of Visa’s market cap.

It would not be a surprise to see the total cryptocurrency market cap exceed that of JPM by the end of the decade.

Why did Jamie call Bitcoin a “fraud”? Because he knows he has to fight it. Cryptocurrency, or the Internet of Money as Andreas Antonopoulos likes to call it, is a steamroller that will severely disrupt banking as practiced today.

Who is really happy with their bank? You think it is your money you have in your bank, right? No, you have lent your money to the bank so they can lend it to others and make hefty profits on the spread. Why don’t you lend directly? You can use Bitcoin to do that, or dollars as well, through direct lending sites.

Try taking all of your savings and checking funds out of your bank tomorrow in cash. They probably won’t let you if you have more than $10,000. They have know-your-customer regulations and anti-money laundering regulations and many other restrictions. They don’t keep much cash on hand. You might hear “we can give you $2500 today, then come back next week”.

In his book Internet of Money, Antonopoulos tells a story about how he gave a talk at the Deutsche Bank. This is the equivalent of the Federal Reserve, for Germany, their national bank. He asked to be paid in Bitcoin; they couldn’t do it. Ok, could they send him dollars to his US bank. Okay SWIFT code, etc. Without going through all the gory details, the whole transaction took 16 days! His bank in the U.S. said, who is the Deutsche Bank?

You can easily transfer a few thousand dollars or more via Bitcoin in an hour or so. If you haven’t used Bitcoin yet, now is the time to learn about it, it will only grow in importance.

The real frauds here? JP Morgan and Jamie Dimon. They have paid over $30 billion in fines for multiple financial crimes since the Great Recession. Around 10% of their company market cap.




Money 3.0: Cryptocurrencies

Recently, Jamie Dimon called Bitcoin a ‘fraud’. This coming from the CEO of JP Morgan, the bank that has been fined more than any other, save one, for financial crimes since the Great Recession of 2008. His statement reeks of hypocrisy since JPM is a member of the Enterprise Ethereum Alliance, his traders have been trading Bitcoin related ETN securities, and his firm has applied for patents using blockchain technology.

By the way the Enterprise Ethereum Alliance has well over 100 members including Microsoft and Mastercard. Serious players understand that cryptocurrencies are a big deal. The market cap of all cryptocurrencies is currently in the neighborhood of $150 billion, around 2/3 the market cap of Visa. And this has all happened in only eight years’ time.

So why do I say cryptocurrencies like Bitcoin and Ethereum are Money 3.0? And what are Money 1.0 and Money 2.0?

First what is Money? It is amazing how few people can give a definition, other than pulling out a bill from their wallet, or referring to the numbers in their checking account statement. And how does money get created in our modern economy? Very few actually understand the process. Most people say government creates it. Governments can, and do, but most money is not created directly by the government. What the government does is validate money, they define a single type of money for their nation. They print currency, but most money today is digital, residing in bank balance sheets, and most money creation occurs as banks issue new loans.

Throughout history there have been many forms of money, but two forms have dominated. The first form, Money 1.0, was the dominant form for millennia. It was coins made of precious metals, in particular gold and silver, and ‘base’ metals such as copper and bronze. According to the St. Louis Federal Reserve, money must have six properties: durability, portability, divisibility, uniformity, limited supply,  and acceptability.

They sound a bit like goldbugs when they write it that way. These are all useful attributes of the thing that is used for money, be it gold or paper. But it doesn’t quite get to the most essential three properties of money. It must serve as:

1. A unit of account

2. A store of value, and

3. A medium of exchange

Money is whatever can be used as a socially agreed upon unit of account and medium of exchange. It also should retain its value, not depreciate quickly, so that it can be used next month and next year as well. Notice I say socially. Societies agree upon what is used as money, and nation states in recent centuries have taken the lead in that definition. In order to be conveniently exchanged, then the six properties above come into play. Durability and limited supply allow the retention of value. Portability and divisibility make it easier to exchange. Uniformity makes it a useful unit of account, as does acceptability.

We all have to more or less agree on what the accounting unit is. That is actually the starting point for money, agreeing on the standard measure. The government can decree the accounting unit, and can demand taxes be paid in that unit. That is government fiat, and can apply for either coined money of precious or base metals (Money 1.0) or paper money (Money 2.0).

Roman gold Solidus coin. York Museums Trust. CC-BY-SA 4.0

The US dollar was originally defined to contain a certain weight of silver, and aligned to the Spanish dollar (originally Austrian  thaler) or ‘pieces of eight’ that was widely used in New World trade. The US dollar has also been defined against gold, with an official act in 1900 following nearly 3 decades of defacto gold standard following the Civil War. Of course the gold standard is now entirely gone after being discarded in two phases, under Roosevelt in 1933 and Nixon in 1971. The remnants of the bimetallic standard of the late 19th century remain in present-day dimes and quarters that used to contain silver even until 1965, retain the color, but have been entirely debased.

No nation remains on a Money 1.0 standard of precious metals, all have moved to Money 2.0, fiat paper money. If they did they would lose their gold, and they prefer to melt it into bars and store it in central bank vaults as a reserve. So as Warren Buffet says, we dig it up in mines, melt it down into bars, and bury it again in vaults.

With paper money, there must be fiat, as nobody wants pieces of paper that have no value. The days of gold certificates and silver certificates as circulating currency are long gone, although I remember silver certificate dollar bills from my youth. The value comes from the legal tender requirements that the paper be accepted by businesses, be used for taxes, and from the government’s printing process to make counterfeiting difficult plus the government’s overall management of the money supply (usually through interest rate policies) to limit loss of value due to inflation.

The technology of high quality paper engraving, augmented with serial numbers, threads and holograms, and the technology of central banks, allow fiat money to work. The vast majority of nations have central banks to lend to the commercial banks in times of crisis and to manage the banking system and money supply indirectly.

So those are Money 1.0 and Money 2.0. In summary:

Money 1.0 – Public or private, asset-based, intrinsic value, coins or bars of precious metal

Bureau of Engraving and Printing, U.S. Dept. of Treasury

Money 2.0 – Public and sovereign, debt-based, no intrinsic value, paper and digital.

Most Money 2.0 is digital, with the circulating currency representing a small percentage. Money mostly comes into circulation not through the printing press, but when banks make new loans. If a bank creates an auto loan, it credits the checking account of its customer digitally. Banks are allowed to make new loans within the limits of their central bank authority determined reserves and equity capital requirements.

Note as an aside that Money 1.0 and Money 2.0 can coexist. We mostly have Money 2.0 in the United States, but there was a small amount of silver coinage money circulating alongside up until the 1960s. This is an important principle, since we are beginning to see the coexistence of Money 2.0 and Money 3.0.

What about Money 3.0? Cryptocurrencies are purely digital, whereas Money 2.0, fiat and debt-based money, is mostly digital.

Why Money 3.0? Technologists and advocates of non-fiat money were concerned about the risks of centralized monetary systems dominated by central banks and by money center banks engaged in fraudulent activities around mortgages and other lending with derivatives including CDOs, CDSs and more. The corrupt system lead to the Great Recession of 2008. Everyone in the society suffered, but the banks were bailed out by enormous government loans.

There were more than 50 attempts at creating a digital crypotcurrency prior to the year 2000. None succeeded. One was gold-based and known as e-gold. It was shut down in 2009 by the US government, because it ran afoul of stricter money laundering regulations. It was also subject to repeated thefts of accounts from Russian and other criminal hackers.

A successful non-fiat cryptocurrency must provide a single secure ledger of entries to protect against counterfeiting and double spending. It must have a method of commiting a single instance of a transaction to this secure ledger that is publicly shared, and is known as the blockchain. It must have a built-in automated “central banking” function that determines the money supply.

Satoshi Nakamoto’s brilliance was to combine a number of existing ideas around public/private key cryptography, distributed ledgers, and a mining algorithm with “proof of work” that rewarded miners for solving a difficult cryptographic hash problem. Transactions are signed with private keys. All bitcoins reside in the distributed ledger. The owner has a wallet with the key that allows them to transfer bitcoin in arbitrary amounts to someone else and thus confers ownership.

The supply is limited with a maximum at 21 million bitcoins that will not be reached until well into the 22nd century. New bitcoin comes into existence in conjunction with the mining of blocks of transactions. The successful miner is rewarded with an allocation of new coins, presently 12.5 coins per block of approximately 2000 transactions. So here we have the central banking function and a digital minting or mining process for the ‘coins’ which are really just ledger entries.

We describe this Nakamoto consensus algorithm and the mining process in more detail at

Now we have not just Bitcoin, but Ethereum, Bitcoin Cash (which is a recent fork of Bitcoin with large block size), Ripple, Litecoin and hundreds more cryptocurrencies. We have new coins being created rapidly in conjunction with new applications and ICOs – initial coin offerings.

The largest of these, those with market caps in the billions of dollars, meet the three requirements for money. Unit of account. Medium of Exchange. Store of value. Their limitations at present relate to the latter two attributes. They are accepted as medium of exchange in some environments, but relatively few compared to existing fiat currencies. And as a result of that their value is less stable and determined more by investment and speculative demand. Their ultimate value will be determined by the cryptocurrency economy as uses cases, applications, and acceptance grow.

They are child currencies, developing and growing, but far from the maturity of an existing national fiat currency. The value should continue to grow for the long term, however since transaction volumes are increasing very rapidly.

So now we have in the world:

Money 3.0 – Private and globally distributed, asset-based, digital only.

Money 3.0 holds much promise. It can remove a lot of cost and friction from the financial system. Trying sending a check or ACH transfer to your sister and having the transaction complete on the weekend. Send her some bitcoin? She will get it even on Sunday at 3 am around an hour or so after you send it. Bitcoin is 24 by 7 by 365. And with very limited fees within the Bitcoin economy. Most of the cost is in moving Bitcoin to fiat or vice versa.

It is not based on debt, so does not have the instability of debt or counterparty risk. The only real risk is security, which holds as well for your banking balances. The other risk is to the value as governments and politicians feel threatened. But at the end of the day, they can only regulate it, but not eliminate it. The technology is too widely available to anyone.

Money 3.0 is not poised to replace Money 2.0 anytime soon, although in a number of ways it is superior. They will coexist. At some point a small country will convert their currency to Money 3.0, by building a blockchain-based peso or some such. A number of central banks, large and small, are already studying this issue.

Many have talked about global currencies in the past. The US dollar has global impact for trade and the price of key commodities, but you have to exchange it when you cross borders. The Euro has been a boon for commerce, trade, and travel in many countries within Europe. Gold historically had a global role but was difficult to move and verify as to weight and purity.

Bitcoin has no weight and purity issues. It transcends borders. It, Ether, and the other cryptocurrencies are indeed the first global currencies.

Economic Backdrop Technology for 2017

Backpedaling of Globalization (Part 1)

OrionX provides research into IT market sectors with a focus on AI, Big Data, HPC, Data Center, and IoT sectors. We see these as highly inter-related. We also seek to understand the economic environment that affects investment into IT sectors, and how these key IT sectors affect our economy and our world more generally in our current Information Age. This article is the first of two on the economic backdrop facing IT vendors and consumers.

Fundamentally, the main backdrop to global economies is digitization and the acceleration of the Information Age. While this naturally bodes well for the IT industry, it requires visionary and effective policies, investments, and regulations. Digitization promotes globalization. It also promotes automation. To understand how this will truly impact IT we need to take a deeper look at the interplay of digitization and global economic forces.

The last great era of globalization, during the Industrial Age, was powered by fast transportation with steamships and railroads at the end of the 19th century. And instantaneous communication was enabled with the invention of the telegraph and telephone. These technologies were key to the Industrial Age.

Scheduled Airline Traffic 2009, Credit: Jpatakol, CC BY-SA 3.0

Now, thanks to the rapid advances of semiconductor technology — doubling in power every two years in accordance with Moore’s law — we are in the Information Age. Fast networks, rapid data processing, and vast pools of storage are the foundational technologies supporting global supply chains, offshoring, and collaborative business across international boundaries. Information Age technologies have not only led us to the Internet, but to Smartphones, Social Media, Big Data, Artificial Intelligence and the Internet of Things.

The power of digitization has done more than give birth to new technologies — these technologies have caused realignment in politics, in economics, and in the world order. The Information Age has also given us the Euro, arguably hastened the demise of the Soviet Union, allowed India to regain historical prominence and enabled China to become an economic powerhouse — lifting hundreds of millions out of poverty. And on the other side of the coin, technology is also being used by governments to limit freedom of expression and was critical to the creation of the massive deregulated debt that led to the Great Recession at the end of the last decade.

These changes during this Information Age and the bulk of this globalization wave have all happened primarily within the space of a single generation, during just the last three decades. The pace has been accelerating with data and information doubling every couple of years. OrionX believes that there was more technological progress in the first part of this century than in the entire 20th century. Disruption and dislocations have been part of the game, with the old industrial models of large national enterprises, lifetime employment, and secure pensions collapsing during the last twenty years. And the pace continues to accelerate.

The postwar world order was not designed around the Information Age. Indeed, the concept of the nation-state that has predominated over the last few centuries was not designed with the Information Age in mind. This new era of globalization has decreased dependency on individual nations’ infrastructure, enabling worldwide sourcing. Many adventurous people from overseas have travelled to the US and other Western nations to study and then have gone on to create new enterprises in their host countries. World class teams can be quickly assembled across national boundaries. Although globalization has brought many of us together across these boundaries (and this is especially true in our IT community), it has also sharpened cultural differences and led to new and renewed conflicts, most notably between radical Islamists and the West, but also within Western institutions and nations as well.

Artificial Intelligence as the premier technology

AI is the killer application domain going forward. While it has been around as a research activity for over half a century it is now coming into widespread ‘industrial scale’ use due to advances in machine learning capabilities that are in turn enabled by fast hardware and Big Data. It is key to robotics and to drones. It is not only displacing workers in manufacturing but is beginning to upend knowledge work in many fields. It will be disruptive — both positively and negatively — in ways we cannot yet imagine.

Credit decisions, employment screening, health monitoring and diagnosis, matchmaking, advertising choices and copywriting, movie scripts, assisted shopping and travel planning are just a few examples of consumer oriented applications that are happening today. And we have not yet mentioned the “auto-automobile” or self-driving cars. As this technology rolls out it will drastically change our lifestyles, including commuting, and it will overturn the automotive insurance and parking industries. Many lives will be saved, most traffic jams eliminated, and insurance losses will drop by an order of magnitude.

Warfare is headed toward increasing utilization of drones and robotics. While today these systems have humans in the loop, fully autonomous systems are being researched by many nations. “There is absolutely an arms race in autonomous systems underway” says John Arquilla, professor at the U.S. Naval Postgraduate School. The substitution of robots for soldiers on the battlefield has the potential to save many lives, for both combatants and civilians. Conversely, it also presents the possibility for terrorizing civilian populations, as has already been imagined in many films.

Cyberwarfare is taking off and presents many challenges, with nations attempting to reach some sort of accommodation regarding what types of peacetime cyber snooping are ‘acceptable’. In a real war, the cyber battlefield will be the first locus of engagement in the effort to take down the opponents’ information-gathering capability and elements of their military and civilian infrastructure. Notably, cyberwarfare techniques are now actively being used to interfere in elections.


World Bank protest, Jakarta, Credit: Jonathon McIntosh, CC BY 2.0

Every business function can be disintermediated, resulting in significant dislocation. Now we are experiencing a clear backlash against aspects of globalization in the developed world, primarily in Europe and North America. Those who found security in the industrial world have lost jobs and pensions. Good manufacturing jobs in the U.S. moved to China, or Mexico, or in the case of Southern Europe, were lost to German efficiency (including their openness to immigration), and the loss of some national sovereignty due to the Euro and common European Union regulation.

Nationalism is on the rise. The trend toward freer trade has halted and is headed in reverse. In the UK, which had stayed out of the Euro, the decision to fully depart the European Union was made by the voters, shocking the political establishment. Nationalist and populist candidates are polling strongly in Italy and France. Europe is still experiencing a banking crisis, exacerbated by the contradictions of the Eurozone. Austere policies and debt overhang have intensified the dislocations from the Information Age.

And in the US, a populist real estate mogul has conquered the Republican party and won the Presidency. He appealed to displaced workers with his nationalistic policies on trade and immigration, which are now being rolled out. Isolationism and the trend towards made in America are increasing, or at least there is an impetus toward more tariffs and more restricted trade deals.

President Trump is on a mission to bring manufacturing back from China, Mexico and other locales. Most of this is permanently lost, much more of it to automation (80% say two economists from Ball State University) than to offshoring, but what happens at the margins matters.

The trend with globalization had been toward larger trading blocs and deals, with the Eurozone as a single market as the exemplar and with proposals such as the presumably dead-on-arrival Trans-Pacific Partnership. Now the direction in the US and the UK is toward one-on-one negotiations with individual nations.

In the next article of this two-part series we will explore the outlook for 2017 in the different major global economic regions: North America, Europe, and Asia.

NIRP Prep at Jackson Hole

Looks like the Fed is greasing the skids for negative interest rate policy (NIRP) while simultaneously threating to raise the Funds rate one or more times before year end. Getting the tail gunner in position. Here’s Vice Chairman Stanley Fischer being interviewed by Tom Keene of Bloomberg (empashis mine).
MR. KEENE: What did you learn about negative rates in the crucible of the markets? What have you learned in the last number of months?

DR. FISCHER: Well, we’ve learned that the central banks which are implementing them – there were four or five of them – basically think they’re quite successful and are staying with their approach, possibly with the exception of Japan. They’re thinking it through, and they have said they’ll come back to try and make negative rates work better. So we’re in a world where they seem to work. I think one of the most interesting developments I’ve seen in theory is a paper that says, yes, they work up to a certain point and then they become counterproductive.

MR. KEENE: Precisely. Yes, that’s a critical point. I mean we have within the interviews of Bloomberg Surveillance that Francine Lacqua and I have had, Olivier Blanchard [former Bank of England Governor during the crisis and a friend] calls them an outright scam. Granted, he’s not a public official anymore, I understand that. There is a raging debate about the efficacy of negative interest rates for central banks, for governments, and again for banking itself. What about the efficacy of negative rates for savers and the people of these different nations?

DR. FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.

MR. KEENE: What did you learn about negative rates in the crucible of the markets? What have you learned in the last number of months?

DR. FISCHER: Well, we’ve learned that the central banks which are implementing them – there were four or five of them – basically think they’re quite successful and are staying with their approach, possibly with the exception of Japan. They’re thinking it through, and they have said they’ll come back to try and make negative rates work better. So we’re in a world where they seem to work. I think one of the most interesting developments I’ve seen in theory is a paper that says, yes, they work up to a certain point and then they become counterproductive.

MR. KEENE: Precisely. Yes, that’s a critical point. I mean we have within the interviews of Bloomberg Surveillance that Francine Lacqua and I have had, Olivier Blanchard [former Bank of England Governor during the crisis and a friend] calls them an outright scam. Granted, he’s not a public official anymore, I understand that. There is a raging debate about the efficacy of negative interest rates for central banks, for governments, and again for banking itself. What about the efficacy of negative rates for savers and the people of these different nations?

DR. FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.

Fischer, Yellen, and Dudley making tradeoffs in Jackson Hole


Well screw the savers, you’ll just have to grin and bear it, we have to make trade-offs in favor of (wealthy) investors. You know, the kind that have significant net worth in equities. Not savers or workers, homeowners, or car buyers, or students with loans. Investors are what matter. That’s who they work for.

John Mauldin in his September 4th newsletter “Monetary Mountain Madness” was angrier than I’ve ever seen (read) him, “They are sacrificing mom-and-pop middle America, the hard workers who have played by the rules and retired and saved and now want to live out their lives enjoying their grandkids and a little well-deserved relaxation, and they find they can’t do that because the Federal Reserve thinks that protecting Wall Street and wealthy investors and bankers is more important.” This sentiment is from a Republican who derives his income mainly from welloff investors. Basically he says they are putting NIRP in their toolkit in advance of the next recession.

You might want to hold on to some of your positive coupon bonds.