Posted 08 Nov 2012
Some supposed monetary theorists assert that Bitcoin is not tangible. This is no doubt a problem due to the prison house of language the human mind dwells in when trying to convey ideas. But this conclusion is either the result of confused definitions or incorrect being based on several faulty premises and flawed logical reasoning. Bitcoins are tangible assets.
Those who took my advice 11 months ago have returns of about 175% in FRN$ and 156% in gold.
In The Great Credit Contraction, which was written in 2008 before Bitcoin was invented, on page 12 I attempt to provide some definitions to lubricate the discussion for practical purposes and distinguish between money, money substitutes, illusions and currency.
Currency can be either money, money substitutes or an illusion and is the instrument or tool we use to perform ordinary daily transactions. "Money must have intrinsic value by being a tangible asset. ... An illusion is a negotiable instrument that promises nothing and has no intrinsic value."
The use of the adjective intrinsic is in the sense of belonging naturally or being essential and not that is has a particular value because value is subjective based on human action. This is used in contrast to an illusion which has extrinsic value.
To further clarify the characteristic, the market tends to place value on currency because of its scarcity and the issue is whether that scarcity is intrinsic or extrinsic. For example, gold is intrinsically scarce based on the laws of physics and chemistry whereas FRN$ or Euros are extrinsically scarce based on the laws of men with regards to counterfeiting, etc.
One common analogy I like to use when explaining Bitcoin is that Bitcoin is to math what gold is to physics or chemistry. Money fashioned from gold is composed of atoms while money (not just currency!) fashioned from math is composed of numbers.
A few years ago I was in Tampa Bay, Florida having dinner with Eric King of King World News and he said, "You are a philosopher." Well, there is a long line of monetary scientists who were also philosophers so perhaps after reading this section you may agree that Mr. King was correct in his assertion.
Critical to this discussion is the issue whether corporealness is either an element or a factor for tangibility in the context of monetary theory. In other words, can something be tangible and incorporeal?
First, it is important to get the definitions correct. The Greek word tetagon means to touch lightly and is the root for tangible and tangent.
The word tangent was first used by the Danish mathematician Thomas Fincke in his 1583 work "Geomietria Rotundi" and meant "to touch", obviously in an abstracted sense, and was used in the sphere of knowledge known as geometry with regards to tangent lines and tangent planes.
The etymology of tangibility shows that in the late 14th century it was used as a "tangible thing, something perceived or presented to the senses".
Second, it was not until hundreds of years later that the word tangibility was also used to describe corporeal items which could likewise be physically touched. But even the distinguishment between the corporeal and non-corporeal gets fuzzy at the quantum mechanic level because of Planck's constant. And this branch could lead down a very deep rabbit whole with: Dubito, ergo cogito, ergo sum.
Consequently, it appears from historical usage that corporealness is not an element for tangibility.
And I would argue, while begging the question what is real, that (1) anything real or definite is tangible and (2) that tangibility can operate on a sliding scale with some things being more tangible than others over the time continuum axis.
So, there are figments of the imagination like flying spaghetti monsters which are not tangible. Then there are extremely tangible things, or in other words having a long time decay period, like hydrogen or gold and concepts or processes like gravity, electricity, algebra, geometry and calculus. And finally there are tangible things which have a short time decay period like currency from Yugoslavia where the tangibility is much more limited in the space-time continuum.
And what would be supremely tangible truths of the universe? Numbers, if they can be perceived or presented to your senses. For example, a gold coin or fish food would be tangible to a goldfish but numbers would not because the goldfish is incapable of perceiving numbers. Mathematical law is based on purely logical proof where as even Newtonian physical law may be subject to revision based on additional theory or observation like with Einstein's relativity.
There is a difference between gold and a legal claim to gold.
In this exchange, Felix de la Cova, who is Spanish so his use of English words may be limited due to it not being his native language, cross-examines James Turk of GoldMoney in regards to Bitcoin, gold, GoldMoney's payment system and Information Age transactions.
3:31 - James Turk: I will bring up something a little bit more fundamental. First of all, I recognize the points that you are making and I do think that preventing the double spend is a brilliant advancement in the nature of currency. ... Where I have issues is that Bitcoin is not a tangible asset.
If I have a piece of silver or a piece of gold in my hand it is a tangible asset and if I use that to purchase from you an asset or good or service the exchange is extinguished at the moment that those assets are exchanged for one another because you are giving a tangible asset in exchange for a tangible asset. But what has happened in the last few hundred years is that currency has moved from being a tangible asset to being a financial asset. A financial asset has counter-party risk; there is someone's promise that this currency will have value in the future.
4:38 - Felix de la Cova: Of course, but how can you use a tangible asset online?
4:42 - James Turk: Well, you use them online with GoldMoney where the tangible asset stays in the vault and the ownership of that tangible asset transfers instantaneously when you click it from your holding to someone else's holding which is the nature of the patents that were eventually granted to me.
Because what we have done with digital gold currency is create a new type of currency that enables gold to circulate without having the payment risk that is associated with a currency that is itself not a tangible asset. And that is the issue I have with Bitcoin.
This is a fairly interesting exchange from a monetary theory viewpoint but Mr. Turk is baited into the Information Age by Mr. Cova's question and quickly sinks into a logical fallacy.
The irony is that Mr. Turk's error in logic because it is GoldMoney Goldgrams which are of limited tangibility, which can be arbitrarily changed like with removal of the payment system resulting in extremely reduced liquidity, and Bitcoins that are tangible. Bitcoins, like gold, are equity based monetary instruments and not financial assets with counter-party risk.
Yes, gold is a tangible asset which is intrinsically scarce by chemical law. But legal rights resulting in ownership, are they tangible? Yes, but only in a sliding scale through the time continuum and based on the time decay period dependent upon the particular costumed criminal gang being in power. This may be why in most legal systems legal tender is treated as tangible property. The delusion is palpable.
Goldgrams, the currency that circulated and is the subject of the patents Mr. Turk references, are merely legal claims to gold held in vaults and fashioned from numbers. Thus, Goldgrams are not money but money substitutes. There is a difference between gold and a legal claim to gold. The only substantive difference between a US gold certificate and a Goldgram, which are both money substitutes, is that one can still be redeemed for physical gold. But for how long?
Thus, one issue becomes how real or definite, or in other words, how tangible those legal claims are. This is directly related to the time decay period of the legal jurisdiction where the bullion is stored.
Yes, I think they are much more tangible than other gold related instruments such as the GLD ETF, safety deposit boxes or Germany's gold held at the NY Fed. After all, that is GoldMoney's business model: to store your bullion in the safest geographic areas. Nevertheless, there are risks because a legal claim to gold is not as tangible as gold itself because it is based on the laws of men and not natural law.
Understanding the risks associated with any asset or investment is critically important for investors. Especially so when the legal underpinnings are increasingly being compromised and currency wars escalate.
For example, both the records and precious metals in the vault could be compromised through fraud, the vaults could be compromised by violence such as war, civil war, radioactive contamination (like in Goldfinger!), a sophisticated cyber attack or terrorism. Additionally, holdings can be frozen, seized or confiscated through legal channels. Worse GoldMoney has and will rollover like a submissive little poodle in obeisance to these laws of men.
Meanwhile Bitcoin has its risks but none of those. Consequently, I highly recommend all government bureaurats to get out the machine guns and shoot the math problem known as Bitcoin until it complies with subpoenas or other control freak demands. And while you are at it pass a law that stops massive damage from storms like Hurricane Sandy by causing them to dissipate. Most importantly Bitcoin allows for honey badger-like financial disintermediation through censorship-resistance while also having the lowest emission rate in the history of humanity.
So, let's start digging into the guts of Bitcoin. There is no reason to be afraid of the math; numbers do not bite. Let's bring in Prof. David Evans who holds too many degrees from MIT.
Cryptographic Hash Function
How the Bitcoin Network Provides Scarcity
Solution to how the Bitcoin network provides scarcity:
How the Double Hash provides scarcity:
Solution to how the double hash question:
The Longest Blockchain Rules
With gold bars it can be cumbersome and expensive to verify both the quantity and quality. There are service providers, like the GoldMoney Standard, which seek to make this process faster and cheaper.
So likewise there are tools which make it very easy to quickly verify the quantity and quality of bitcoins in a particular wallet address. For example, as of 7 Nov 2012 there were about 50,000 BTC leisurely relaxing in this wallet [tip: when viewing the wallet click the green box to see the current value in FRN$]. And since Bitcoin is a mere four years old, compared to four thousand years with gold, and cheaper, faster and more private than centralized currencies therefore it is reasonable to prognosticate that there will be more tools developed that will make Bitcoin easier to use which will make it more accessible to larger demographics.
On 19 December 2011 in the Solid Bitcoin Consolidation Finally Bears A Breakout I wrote:
Taking the current price of $4.00, the 200 day moving average of about $8.50 and extrapolating this upleg with a 12x 200dma top we could see a price of around $80.00 per BitCoin. Is this speculative? Yes. Would I bet on seeing $80 per BitCoin by around June or July? Maybe if the odds are around 5%. But I would take a bet for BitCoins to hit $7.50 by June or July at around a 50-70% probability.
Once again, I was right with the $7.50 price call. Those who took my advice 11 months ago have had ginormous returns of about 175% return in FRN$ and 156% in gold. Not too shabby!
So, where is the price of bitcoin going from here? Well, because of the wealth transfer and wealth generation effects therefore I think it is headed up in terms of both gold and FRN$.
First, there are a lot of uncertainties with the Federal Reserve and ECB. By analogy, once they pull the plug on the bathtub, you need to be able to calculate the difference between the water coming into the tub (QE) and the water going down the drain (balance sheet shrinkage from maturity) before you can know if the current water level (Adjusted Monetary Base) will be maintained, increase or decrease.
Second, due to this uncertainty I see reasonable arguments for the gold price to either decline or advance by around $500. Yes, we could see $1,200 gold within the next 12 months although I think there is a higher probability it will be around $2,100 by May. But this volatility does not impair the usefulness of gold as numeraire.
Third, The current price, which I keep updated with all the Key Ratios, is about 157 BTC per ounce of gold.
Fourth, let's put some supply and demand numbers in comparison. There will eventually be at most 21 million bitcoins in 2010 with about 10.5 million currently and I estimate about 2 million destroyed where the private keys have been lost. With about five billion ounces of gold above ground that equates to about 230 ounces of gold per bitcoin and about 485 ounces of gold per bitcoin if you count those ounces still in the ground.
Fifth, there is huge demand for safe and liquid assets in The Great Credit Contraction as capital burrows down the Liquidity Pyramid. As already established Bitcoin is clearly a tangible asset because it is real and definite being fashioned from numbers.
Just a few of the potential sources of demand, besides just those holders of capital looking for safe and liquid assets, are (1) tens of trillions of dollars in offshore bank accounts looking for a safe haven from tax authorities with all the expanding Tax Information Exchange Agreements and nasty reporting requirements like the FBAR and FACTA [friendly reminder that you better report your GoldMoney holdings; meanwhile Bitcoin private keys would not be reportable], (2) the $10 Tillion System D economy, (3) tens of thousands of people who think Paypal Sucks and (4) Visa, MasterCard and Paypal have blocked Wikileaks from receiving donations and showed the world that even without a court order the major payment processors will greatly hinder political speech therefore posing a tremendous risk to civil rights.
If FRN$ or gold are the blood with Visa, Mastercard, banks, etc. being the veins then Bitcoin is both the blood and the veins. Despite its incorporeal nature it is already backed by the largest distributed computing network in the world with about 310 petaflops and therefore is one of the safest and most liquid ways for capital to be held. So, Bitcoin increases the monetary offering in terms of safety and liquidity while lowering the costs in terms of time, money and privacy. What a competitor!
Hopefully Mr. Turk was inadvertently confused about Bitcoin or still had not thoroughly thought it out despite knowing about it for at least a year and was not intentionally 'talking his book' by disparaging this great new and ultimate 'last plane account' called Bitcoin to the detriment of those paying attention. But you should keep this potential bias and conflict of interest in mind when assessing advice from anyone else such as trust and estate attorneys, asset protection experts, offshore entity formers, etc. because Bitcoin eviscerates entire volumes of legal statutes rendering them inert. And whether a merchant accepts Bitcoin is a great litmus test of their sincerity in helping you take control of your freedom instead of just trying to charge you fees.
Even the European Central Bank has admitted on page 47 of a 55 page report focusing on Bitcoin that:
However, it can reasonably be expected that the growth of virtual currencies will most likely continue, triggered by several factors: a) the growing access to and use of the internet and the growing number of virtual community users, b) the increase of electronic commerce and in particular digital goods, which is the ideal platform for virtual currency schemes; c) the higher degree of anonymity compared to other electronic payment instruments that can be achieved by paying with virtual currencies; d) the lower transaction costs, compared with traditional payment systems; and e) the more direct and faster clearing and settlement of transactions, which is needed and desired in virtual communities.
For all of these reasons, I think that over the next 18 months we will see the price of bitcoins move to at least around 50 bitcoins per ounce of gold. Then over the next 5-10 years we will see an inversion in that price where it will take at least one ounce of gold to buy a bitcoin. And these targets are likely understated given Bitcoin's potential to go viral.
CONCLUSION
Bitcoin is no longer an imaginary currency in some science fiction novel. Bitcoin is a real tangible non-corporeal functioning protocol based on industry standard cryptography. Bitcoin has the lowest emission rate in the history of humanity.
Bitcoin is a financial black hole where visible capital goes in and does not come out. Bitcoin has attracted the attention of the most powerful monetary interests in the world resulting in a very serious 55 page report.
Bitcoin is very likely not going away anytime soon. Bitcoin is the opening of Pandora's Box and it is going to change things, big time.
Competently driving a car or flying an airplane requires both book knowledge and practical skill. This is why there is a written test and then a performance test before being credentialed.
So likewise, one major problem I see with so many of the people ignorantly pontificating about Bitcoin is that they have never used a bitcoin to buy anything.
That is like someone who has never driven a car giving advice on how to drive a car. Why believe them?
They do not have any practical experience or knowledge driving cars. They do not have a clue what they are talking about!
This is one reason I put together the Free Bitcoin Guide. It will drastically reduce your learning curve, help you get your first bitcoins and make your first purchase.
Sure, it could be easier but more developments will come with time. After all, I started recommending bitcoins when they were around $0.05 each and the learning curve and available tools were nascent.
But that is part of the reason those who followed my advice then have reaped 200x rewards instead of a mere 1.75x which is still orders of magnitude higher than the 0.0025x you can expect from Treasuries, etc..
Plus, having an economy where the average IQ and tech savviness is two standard deviations above that of normal society is very helpful when it comes to relative productivity. Do not skate where the puck is; skate where the puck is going to be. Welcome to the new world, welcome to the Awakening!
