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Me: MISTER HAM! Get here this instant! What, pray may I ask, is the meaning of this? Mr. Ham: What? You mean the new signboard? That's just H.L. Ham's new motto, "We call the bottoms". Like, in the old days, houses would adopt some reminder of their deeds... Me: No, that's not what I'm talking about! Why is Mr. Fish shaking his booty on the receptionist's desk? Mr. Ham: We don't discriminate between types of bottoms. And hey, he's turning a profit. Excuse me a moment. Ladies, ladies! Put your tips here, I'm his manager - you wouldn't want him to slip on all those dollar bills and hurt himself, would you? Much obliged. *tips hat* See youse again soon! Me: ...Nevertheless, this behaviour is not in keeping with the decorum expected of a respectable investment firm. Mr. Ham: This tells me that you haven't been involved with very many extremely respectable investment firms. But fine. *yells* Mr. Fish, you can take a break now. Happy? Me: That'll do. Where's Mr. Robo? What Is Going On Here? Mr. Ham: Before I answer that, you're aware of what has been happening to Bitcoin prices lately, are you not? Me: Definitely. We were talking about US$565 last weekend, if I recall rightly, and it's bouncing about US$620 now. I have to give it to you, we're not far from your US$700 year-on target already, and it's barely June.  All aboard! (Source: archive.4plebs.org) Mr. Ham: *smugly* That goes without saying. Combined with the selloff from the US$1200+ top that you... I mean, we recommended, this makes a near 5x return in six months. Passable, I suppose. Say, if you peasants want to hitch a ride someda... alright, I'm sorry, I'm sorry! Put me down! Me: Your manners have not improved alongside your portfolio, Mr. Ham. But returning to Mr. Robo - where is he? Mr. Ham: Come, I'll show you. *opens side door* *Mr. Robo is seated immobile before a wall-mounted terminal, his unblinking eyes fixated on the occasional jerky movements of the tiny green and red lines displayed onscreen. A thin stream of drool runs down his chin* Mr. Ham: *lights a cigar* Creepy, huh? He's been like that since it crossed the US$600 barrier. Before that, he was standing on the sofa shouting "Mr. Gorbachev, tear down this wall!" - and then it happened. Bitfinex led to US$630. There was some heavy breathing and rubbing himself for a while following that, before he entered his current state. I pop in every now and then to check that he's still alive. Me: First time, I see. Mr. Ham: Yeah, I remember my own - the follies of youth, eh? Then, I had sprung half of my savings, together with a friend, on an "exclusive tip", and the feelings I got as I watched it inch up, teasing me, then back off ever so slightly before shooting up again... ah, bliss. It was only much later that I realised that I had been watching the wrong terminal, but hey. Anyway, as one investor to another - any new thoughts? Me: Aren't you gonna get your notepad out, as usual? Mr. Ham: *pulling a disgusted face* Oh no, it's not as if I would ever copy your ideas. In any case, I've bugged the whole place. Saves so much trouble. What? We trust each other, right? Would the NSA be so upfront with you? Me: *sighs* Whatever. To be honest, it's all gone a bit too smoothly, following last December's guidelines - both major turning points were spot on, and if the principles used then hold, we should be on course to blow past US$700 in short order. Sure, patterns don't always hold, but how does that Buffett quote on efficient markets go? "...Observing correctly that the market was frequently efficient, (academics) went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day". You could nitpick on the specifics, but it remains that the bloody obvious has happened - for this period, at least. The genre savviness enveloping this market has developed to the extent that people are already calling the size of the next bubble, and talking about the FOMO, or fear of missing out, that will drive it. Yes, this churn works until it doesn't, but the nice thing is that if you get inside early enough, you'll probably exit vastly better off than if you had sat out totally, even if you get the final ending wrong - and as a bonus, there doesn't have to be a last chapter, that is if Bitcoin does plateau out rather higher than its current price. Those who have bowed still need to have some standards, after all. Translated: I like bubbles, you should too! Mr. Ham: There has indeed been constant merchant adoption, the latest by Dish Network, the biggest satellite TV provider in America, thanks to employee prodding. Me: There's that, but what truly amazed, and convinced me that cryptos would stick around for a while yet, was the price struggling to tank into even the upper range of my US$200-400 target, despite the largest exchange for the currency imploding in flames. Existential threats don't come much bigger than that. What is it they say - 大难不死, 必有后福. And if investors weren't even all that concerned when a good percentage of their brethren went down with all hands, why would they be particularly concerned at the news that there might have been extra hanky-panky underneath? Mr. Ham: Not that I was ever surprised, mind. Me: Yeah, it would be far more notable if nobody had tried to manipulate the market. You avoid a lot of that by not being overly sensitive to minor moves. Some have gone as far as to suggest that part of the recent increases was due to short squeezing of the many bears that were trying to eke profits from a gradual slump, but we can't be certain here. Mr. Ham: Sí, sometimes the bull wins, señor. What Is Bitcoin? - Confucius say one, not I say one Me: But before we go on, one thing has to be cleared up - what is Bitcoin? As commented back in 2011, there was no particular reason why Bitcoin should succeed - its scarcity, while near-fully deterministic, remains artificial. The protocol can be, and has indeed been, cloned endlessly to create an unlimited number of competing coin-variants. No less than the CEO of J.P. Morgan has subscribed to this argument: "It's a terrible store of value. It could be replicated over and over." Oh, and it's been "used for illicit purposes". Tsk tsk. However, Bitcoin's value then embarked on an inexorable rise in the intervening years, defying naysayers at each turn. My updated take last year, then, was that in practice, sunk capital and hashing power has its own "attractive force". We can try to explain this another way. Take gold - there is much dispute over whether it is suited to be a modern-day currency, but I would gather that even those who condemn it as a "barbarous relic" tend to have to admit that it is valuable. If you compare the value of gold against paper currency - not stocks or other investments - it is evident that over the long term, it has almost always paid off to be in bullion rather than bucks. Of course, there were likely better investment vehicles - at times even fixed deposits - than gold throughout, but the point stands: holding pure fiat money over the years is simply a losing deal, no matter how you look at it. But this brings us to - what is gold? Raw material, for a start Yes, it's a metal with some useful industrial properties. However, its demand in this respect would account for at most a tiny fraction of its agreed value. Yes, it's nice and shiny, but as with most jewellery, one can get an imitation piece that is nigh-indistinguishable even under close inspection for much, much less than the real deal. Indeed, as the more logical among us have oft noted, there is no rational reason why it should be at US$1300 an ounce or thereabouts - not that they would sell it to you at any less if they had any, mind. Back to Bitcoin. With the price going up, you'll hear all sorts of justifications as to why it's worth US$500, US$1000, US$5000 or any sum the proponent so wishes. Security though all the work invested in the blockchain, miners cry. Fundamental theoretical breakthrough, technologists cry. Transactions without fees, merchants cry. Stick it to the government, libertarians cry. All of the above and because it'll cure cancer, prevent hunger and usher in a new era of world peace, speculators cry. Oh, and make them rich in the process. Thing is, of all of the above, it is the speculators who are probably closest to grasping the essence of Bitcoin. One by one - for security, the system's sound as far as I can make out, but with nontrivial usability issues, assuming we use it without intermediaries. Also, the setup burns a lot of energy. Okay, winter heating, fine. True, it's a novel bit of theory, but I can say with some assurance that I come across new stuff in my inbox each day - say, picked at random, this paper about theoretical guarantees for broadcast networks - but this hardly ever translates into cold hard cash, as more than one lead researcher applying for grant funding can tell you. As for eliminating merchant fees, which can come to an appreciable percentage on existing networks such as Visa and Mastercard, it should be noted that those fees pay in part for consumer protections such as chargebacks. Many fervent Bitcoin supporters are apparently insisting that no reversals is a good thing, but I daresay that at least some of them will be singing a different tune when a rogue vendor vanishes. That said, Bitcoin does have the tools to be a competitor in this space, and can perhaps drive fees down in the future. On to thumbing noses at The Man - true, you probably could get away with quite a bit, but as the arrest of the founder of Silk Road demonstrates, there's only so much thumbing one can do before it's worth the Feds' while to come after you. For most, the magnitude of tax evasion possible with Bitcoins is likely comparable to that of running a cash-heavy business. The mom and pop store down the street can probably underdeclare a thousand or two, but do something like run a mining farm, and I'd say that some men in dark suits will be checking the electricity meter and tapping on a calculator. Finally, there's been talk about Bitcoin helping Africa, and saving remittance fees for poor, exploited workers. It's hard to speak against such noble causes, so I'll leave it at that. On the equality bit, Iceland's tried it with Auroracoin, with citizens assigned said coins using their national ID. Let's just say that it hasn't gone well, because for all the fellowship thrown about in cryptoland, equality probably was never the main driver. Iceland has had an interesting economic story, though - we may return to it later. Not that you want to say any of this to true believers, mind. A leading professor of computer science from Brazil has not had an easy time of it on the pertinent forums, having previously derided it as a pyramid scheme. Translated from the original Portuguese: "...Bitcoins have no value in themselves: they are only worth what people believe they are worth. While people are willing to buy them, they will have a market, and while there is a market, speculators will be interested in buying them. But this value, being entirely fictitious, is completely arbitrary, and sooner or later collapses to zero." Stolfi is in good company here, since this is mostly what Dimon, the abovementioned CEO of J.P. Morgan - and doubtless many others - have said. Thing is, however, this is true for many commodities. You could substitute "gold" or "diamonds" for "Bitcoin", "almost no value" for "no value" and "nearly entirely fictitious" for "entirely fictitious", and the intent of the statement would still hold. Or: maybe the price of such luxury commodities, as compared to their actual utility, is insanity; but if so, it has been a fairly reliable insanity. Haven't we just seen this? Now, I am not saying that Bitcoin must succeed - there remain a fair amount of question marks. I am just observing that in practice, perceived value tends to have an inertia about it. I can't prove it strictly, but in my opinion, if you regard Bitcoin primarily as a commodity store of value, particularly in an economic climate in some countries that is desperately seeking outlets for such - thus the property bubbles etc - you shouldn't go too far wrong. There's probably room alongside all the established gleaming, sparkly stuff for something you can transport with you in your head, if with caveats. There are some smaller subgames involved - you probably don't want to be known as having cornered too many of the available Bitcoins, for example, as the upcoming Bitcoin trusts are hopefully aware of, given that the coins are indeed completely virtual. As for the rest... it wouldn't be fun to just give away all of one's reasoning at a go, I'd say. Next: What It Is (Part Two)
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