BitChip; The Dog that Wags the Tail and Bites Bitcoin Where it Counts.
I've written extensively about how poorly designed the Bitcoin is. There is no doubt that the Bitcoin is a major advancement is computer security, cryptology and solves a major virtual currency problem called the Byzantine General problem. There are a lot of good things about the Bitcoin. Apple does a lot of good with their computer advancements as well. The huge difference is that advancements in computer science by Apple don't threaten to bankrupt huge numbers of people. Computer advancements by Apple mostly serve to improve the lives of the entire global community. The Bitcoin does just the opposite. The Bitcoin is a wolf in sheep's clothing, a pig with lipstick, a candy-coated poison. Its design has the clear markings of a political movement, and in fact it is the product of the libertarian anti-Government anti-Federal Reserve anti-Banking competing currency theories. It should be no surprise that what gave the Bitcoin its start was its use in illicit and illegal trade. Libertarian commentators call it the Bitcoin Revolution, Viva La Bitcoin!!!
John Stossel whom I respect a lot can boil the Bitcoin benefits down into two talking points:
There are two advantages to Bitcoin.
First, it's harder to trace transactions back to people who make trades. I don't particularly care about that, because at the moment, I don't hide anything from my government...Given how my government spends money, and the way the Fed enables this by buying trillions in government bonds, I fear my dollars may someday be worth pennies. So I bought Bitcoins.
Bitcoins are digitally created - or "mined" - at a slow, fairly predictable rate. An incomprehensible (incomprehensible to me, anyway) computer algorithm limits their number.
"Bitcoins are not controlled by anybody,"
My first thought was that if the world is going to go through the monumental changes needed to disrupt the global currency system, the benefits of Bitcoin should fill a book longer than War and Peace, not be easily boiled down into two talking points.
My second thought that the first talking point isn't really a benefit at all, and even John points that out. What good is an anonymous transaction if you have nothing to hide? Anonymity of a currency shouldn't be a main goal. Currencies were developed to facilitate transactions, anonymity was an unintended side benefit. When I go to Walmart and use cash, I use cash because it is easy, not to hide the fact that I shop at Walmart. I often use cash and credit interchangeably when I shop at Walmart so sometimes they know I shop there and sometimes they don't, but until the Bitcoin I never even gave the difference a thought. Ironically, small retailers like garage sales, Craigslist merchants and street venders welcome advancement like Square that allow them to enter the world of non-anonymous credit transactions. It simply is good for business.
In politics, the truth is always suspect, and movements tend to deliberately promote the good and completely ignore the danger. Obamacare is a great example. All the candy-coated good stuff was used to sell it, and the implementation of the bad stuff was held off until after the elections. Castro came to power promising to have free and fare democratic elections. Over 50 years later people in Cuba are still waiting and waiting and waiting.
Libertarians use this argument that "the dollar has lost 95% since the creation of the Federal Reserve" to justify their cause. Clearly Mr Stossel doesn't understand the Bitcoin. The Bitcoin can lose 50% in a day, and unlike the US Dollar, will eventually be worthless. I feel 100% confident that when the Bitcoin eventually joins the many other failed virtual currencies, I will still be able to buy a McDonald's' Sausage Biscuit for $1.00. The claim that the US Dollar has lost 95% of its value since the creation of the Federal Reserve simply demonstrates how the Libertarians simply haven't taken the time to understand the system that they so strongly oppose. This blind opposition has also resulted in them creating a solution far worse than the problem. Many libertarians will go bankrupt betting on the Bitcoin. I doubt John Stossel will do a show on that however.
The second talking point of the benefits of the Bitcoin is simply wrong. The Bitcoin is 100% controlled by the programmers that designed it, and the "miners" that "print all these Bitcoins out of thin electrons." Unlike the US Dollar that Libertarians claim has no "intrinsic value," the Bitcoin doesn't have the full faith and credit of the United States fully backed by the US Marines, IRS, TSA, Black Helicopters, Fema Camps, fluorinated water system, spying drones and mind-control chemtrails. Facts are, the programmers of the Bitcoin have taken these Libertarian monetary myths and misunderstandings and used them to create a highly-flawed virtual currency. It isn't flawed because it isn't secure, it isn't flawed because it is poorly coded, it isn't flawed because of anything related to the unbelievable computer science that backs it, it is flawed because of politics.
The computer scientists that designed the Bitcoin are attempting to solve a problem manufactured by an extremely misguided anti-Fed Libertarian political movement. The Fed is responsible for centrally creating and maintaining an elastic fiat currency. The Bitcoin is designed to be a decentralized inelastic fiat currency. Both systems are fiat in nature, which is ironic considering the other currency previously favored by the Libertarians and Gold Bugs was the "hard currency" of gold. If gold was still making new highs, the Bitcoin wouldn't even exist, but when gold failed, the attention went on to the Bitcoin. Once Bitcoin's bubble pops, the return chasers will abandon the Bitcoin for the next forming bubble.
The problem is the Federal Reserve was masterfully designed, and our monetary system is the crown jewel of the world. While it is far from perfect, it easily beats all comers. The Federal Reserve is the result of studying thousands of years of monetary system history. The Federal Reserve was designed to solve many of the problems that have existed with monetary systems since the beginning of time. The most important function of the Federal Reserve, in fact the original intent of the Federal Reserve, is to act as a lender of last resort. Before the Federal Reserve the entire global banking system was dependent upon JP Morgan and his pal's willingness for "bailouts" and to stop financial panics and bank runs. One only needs to study the economic history of the 1800s and watch the movie "It's a Wonderful Life" to see what an absolute horror the banking system was before the Federal Reserve. The failure of the Federal Reserve to bail out the banks and act as a lender of last resort in 1929 is considered a major cause of the Great Depression. The Bitcoin is an effort to return the global financial system to the era of bank runs and boom and bust economic cycles.
What the Libertarians simply refuse to accept is that an elastic currency that allows a central authority to "print all this money out of thin air" is critical for a modern banking system. We have a fractional reserve system, and what Mr Bailey tries to explain to all the bank-run depositors, is that their money isn't in the bank, it has been loaned to buy homes and run businesses. The fractional reserve banking system has a well-known and obvious Achilles heel, it borrows short and lends long. As long as people live from paycheck to paycheck and take out 30-year mortgages, there is going to be eventual problems with the banking system. Shay's rebellion, and event that almost prevented the signing of the US Constitution and inspired of words "ensure domestic tranquility" in its preamble, is a result of that weakness. Farmers that borrowed loans owed in gold weren't able to pay them back when the banks demanded them, the farmers had converted the gold into seed, and wouldn't be able to pay back the gold until harvest. That disconnect in liquidity needs resulted in a revolt that almost tore this Nation apart.
Today that situation is prevented by the Federal Reserve. The Federal Reserve can print far more money than people can withdraw. There is no way or reason to have a bank run as long as the Federal Reserve exists. No one should ever fear losing a deposit in a Federal Reserve Bank (as long as they stay within FDIC limits). The Federal Reserve is so effective it even extended protection to money markets during the 2008 crisis. Had Lehman Brothers been part of the Federal Reserve System it would never have triggered the crash of 2008. Allowing a "too big to fail" bank to exist outside the Federal Reserve System is the reason for the 2008 crisis, not because the Federal Reserve existed. Libertarians simply don't grasp that concept, every ill is simply placed upon the Fed. They are like the climate scientists that see warming and blame it on CO2 and then they see cooling and blame it on CO2, no matter what the observation, they see only one cause. If all you have is a hammer, everything looks like a nail.
The other huge misunderstanding of the Libertarians is that the Fed is responsible for the debt. They love to point out how huge the Fed's balance sheet has become from "printing all this money out of thin air." Facts are, only Congress can spend money. Libertarians that claim to be the defenders of the US Constitution should be well aware of this. Simply look it up, Art 1 Sec 9 Clause 7. The US Congress spends every single penny that created the Debt, 100%. The Federal Reserve spends absolute zero US Tax Payers' dollars, zero. By focusing on the Federal Reserve as the cause of the debt guarantees that the Libertarians will never develop a solution to the debt problem, and why they pursue such misguided efforts as trying to "End the Fed." Using a doctor analogy, the Libertarian treatment of "ending the fed" to cure the debt is analogous to a physician cutting off the legs of a runner suffering from fatigue. The legs aren't the problem, the excessive running is. The patient simply needs to get some rest and a healthy diet. Congress needs to give spending a rest and do a better job with what they do spend, "Ending the Fed" won't deliver that cure. Only the voters can. Bankrupt voters that have lost 100% of their life savings due to a bank run aren't likely to be eager to vote against big spending politicians, they will likely vote for them. That is the irony of the Libertarian solution, it worsens the situation and threatens to lessen our freedoms.
The point of the above analysis wasn't to make a political statement, it was to thoroughly detail the flawed ideology that inspired the Bitcoin. Its very foundation is flawed politics. Anything designed upon a flawed foundation is bound to fail. The Bitcoin is a house built on sand. It is deliberately designed to be an inelastic currency which guarantees that is will be volatile. Volatility is the death sentence for currencies. Major merchants that accept the Bitcoin immediately convert it to local currency. People that hold the Bitcoin have no way to make long-term spending and budgeting plans, the Bitcoin is difficult to access and use, the Bitcoin doesn't work well with existing accounting systems, the Bitcoin requires special infrastructure and the Bitcoin isn't accepted for paying taxes. There are a lot of problems the Bitcoin must overcome, and for what? In my opinion merchants are allowing the tail to wag the dog with the Bitcoin. Merchants need to get ahead of this issue, and design a currency with the benefits of the Bitcoin, but without all headaches.
BitChip; The Dog that Wags the Tail and Bites Bitcoin Where it Counts:
The Bitcoin was simply designed all wrong. The Bitcoin is the result of the tail wagging the dog. A group of Libertarians and computer scientists got together to design a virtual currency that met their misguided needs. The problem is, they never really gave any consideration to what the vast majority of customers and merchants want in a virtual currency. Most consumers and merchants aren't interested in "Ending the Fed," currency speculation, extreme volatility, participating in illegal and illicit trade and global financial anarchy. Worst of all, the designers of the Bitcoin never consulted an economist, and if they did, it was an Austrian economist with a complete and utter misunderstanding of the writings of Hayek.
The #1 issue that determines the success of any virtual currency is whether or not it fulfills the needs of the vast majority of consumers and merchants that have a need for such a currency. Does the Bitcoin satisfy the needs that a virtual currency would fulfill in those eagerly looking to embrace a virtual currency? The answer is a resounding no. The Bitcoin got the world's attention, the Bitcoin started the conversation, the Bitcoin was a cold shower, the Bitcoin woke the world up, but the Bitcoin is by no means the answer, not even close.
The Bitcoin reminds me a lot of the race to solve the problem of flight. There are 3 problems that must be solved for flight: 1) Power/Thrust 2) Lift and 3) Control. In the early 1900s the entire world was fixated on this problem, it was a problem that had existed since the beginning of time, and it had yet to be solved. At the time the greatest minds of the world were working on this problem and were centered around Samuel Langley on the East Coast of the United States. Langley had every advantage, was well funded, well educated, an "expert" in the field and had access to the best and the brightest and the latest technology. Today however we remember a set of relatively uneducated brothers that worked in a low tech bicycle shop in the backwater town of Dayton Ohio. How did the Wright Brothers then solve a problem that had existed since the beginning of time and before the "experts?" They took the time to understand the problem. While the "experts" were focused on solving power and lift, the Wright Brothers were focused on control. Somehow the "experts" just seemed to assume that once they got the plane in the air they would magically be able to solve the problem of control. The "experts" were so blinded by their biases that it prevented them from ever really having a chance of solving the problem of flight. Science is the "belief in the ignorance of experts," and the Wright Brothers personify science.
How then would the Wright Brothers design a virtual currency?
Key to any currency is stability. The monetary system should effectively be invisible to the economy. The monetary system is like the oil in an engine, it isn't part of the engine but it enables the whole system to run smoothly. You never really think of the oil until you run out of it and when you do, the engine crashes. A successful virtual currency must be stable if it is going to be a success. A stable currency must be elastic. The inelastic nature of the Bitcoin guarantees its failure. Unfortunately the biases are so great against this concept that the Bitcoin believers are certain to learn a lesson their Gold Bug friends have already learned. Langley would never have listened to the Wright Brothers either, so some lessons simply have to be learned the hard way.
For merchants to accept and consumers to hold a virtual currency the problem of "shrinkage anxiety," must be solved. Right now merchants that accept the Bitcoin immediately convert it to US Dollars. They convert it to US Dollars because of "shrinkage anxiety." Like the fear of skinny dipping in a cold pond, the merchants fear that their bank account holding Bitcoins will suddenly shrink. Consumers that hold Bitcoins in their wallets don't fear inflation robbing them of 5% each year, they spend sleepless nights fearing a Bitcoin crash that can and has robbed them of 50% overnight. Most people and merchants have no use for a currency that can and does swing in 50% or more moves. A virtual currency that maintains a stable conversion rate to the US Dollar or other local currency is infinitely more preferable to most potential users of a virtual currency than the volatile and unpredictable Bitcoin.
Anonymity and security are also important. The open code nature of the Bitcoin will likely provide much of the code of a successful virtual currency. The ultimate goal is to make the virtual currency act much like cash. When I use cash at a garage sale, the person doesn't have any way of knowing who I am when I enter into the transaction. Once again, I never even considered anonymity as a benefit, but the Bitcoin has made me realize that benefit should not be ignored. Anonymous Swiss Bank accounts and safe deposit boxes prove a need for anonymity exists, at least to some people.
Low or no fee for transactions and money transfer. The Bitcoin has made great strides in this area, problem is the "shrinkage anxiety" and volatility cost far outweighs the benefits of saving a percent or two on transaction fees. What good does it do a merchant to save 5% on transaction costs when the Bitcoin can drop 50% in a day? A stable, secure, anonymous transaction free virtual currency would be ideal for merchants and consumers.
No central authority is a myth, and of no real benefit. Someone will ultimately have to write the code and design the system. Those with the gold/code will always make the rules. Few consumers and merchants would rather trust an anonymous network over a well established bank staffed by real people that can address any problems with your account. Banks and corporations have reputations to maintain, anonymous Libertarian computer scientists don't, they may not even exist. This Bitcoin could simply be an elaborate tool designed by the NSA to identify and track criminal activity. How better to discover a drug dealer than to create the currency used by drug dealers? Marking money has been a tactic used by law enforcement for years.
Building a better Bitcoin; The BitChip:
A successful virtual currency will build upon the success of the Bitcoin and address its weaknesses. The main Bitcoin weakness is that it is designed to solve an imaginary political problem, it isn't designed to function as a currency that would facilitate commerce. To do that a successful virtual currency must be elastic. Its supply must expand and contract with demand, and it must maintain a fixed exchange rate with the local currency.
The model for a successful virtual currency and Bitcoin killer already exists in non-virtual form. There already is an anonymous, stable, convertible, relatively widely-accepted, secure, cash-like alternative currency already, the casino chip. A virtual casino chip is the Bitcoin killer. Best yet, it would use the existing Bitcoin code as its backbone.
How would it work?
Simple, a casino would replace the network of "miners" and the code would be altered to allow the casino to "mine" as many BitChips as demanded, i.e. make the Bitcoin elastic. No longer would the Bitcoin have a 21 million Bitcoin maximum. Almost everything else would be the same. This essentially creates a stable Bitcoin, a $1 casino chip is worth $1, and that value never changes. Just like a $25 gold coin minted in 1800 still buys $25 worth of good today (unless you melt it down, but then it won't be a $25 coin anymore).
With the current non-virtual casino chip system people walk into a casino and convert their dollars into chips. The guest takes $10 and hands it to the teller, who in turns hands the guest $10 in casino chips. At the end of the night the transaction is reversed. It is completely anonymous. The casino doesn't pay tax on that transaction, the transaction had a zero fee, the casino and guest don't suffer "shrinkage anxiety," and the casino chip is convertible.
Under the virtual BitChip system, the casino replaces the "miners." People would go on-line and visit for example Caesar's Castle Casino. They would buy virtual Caesar's Castle Casino Virtual Chips or CCC BitChips. The transaction is as if they pre-purchased casino chips in advance of a trip to Vegas, and would work within the casino's existing accounting system. Caesar's Castle Casino would issue the buyer new virtual chips all convertible for a fixed dollar value of chips when they arrive at the casino and visit the teller. The CCC BitChips are deposited in the guest's virtual wallet that used to hold the now obsolete Bitcoins.
Once the CCC BitChip is deposited into the guest's virtual wallet, everything is the same with the old Bitcoin system. The BitChip would simply work within the existing Bitcoin infrastructure, ledger system and ecosystem. The BitChip would simply compete with the Bitcoin in the virtual world using the Bitcoin code as its backbone.
The big difference however is that people and merchants would not suffer "shrinkage anxiety" if they accept for a BitChip, people wouldn't have to treat a BitChip like a hot potato or feel like they are perpetually stuck in a game of high stakes musical chairs. If I want to transfer $100 to a friend in Japan, there is no need to check the most recent quote for a BitChip, I simply transfer 100 BitChips from my wallet to my friends. No charge. If I buy something for $1 from a struggling internet retailer, I simply transfer 1 BitChip from my account to theirs and there is no transaction fee, no exchange rate and the merchant doesn't have to rush to convert it to local currency. Unlike the volatile Bitcoin, the BitChip literally functions as "shrinkage anxiety free," anonymous, secure, no transaction free virtual cash that would work with most accounting systems. BitChip is the Bitcoin killer.
But wait, it gets better. There is a huge advantage for Caesar's Castle Casino to issue CCC BitChips. Caesar's Casino would be making all the money the "miners" are now. Caesar's Casino would make money by selling the CCC BitChips, they are essentially pre-purchased casino chips. The CCC BitChip has the added benefit of being convertible. Owners of the CCC BitChip can use it to gamble at the Caesar's Castle Internet Casino, or convert it to real Caesar's Castle Casino Chips when they visit the casino in person. It is a great way for casinos to bring people to their casinos. The BitChip has all the benefits and fixes the main problem of the existing Bitcoin, and it has added benefits that would make merchants want to use, accept and even "mine" them themselves.
Best of all, because the BitChip is convertible and will always hold its value, there is no problem with long-term planning, budgeting and most importantly, paying taxes. Merchants don't have to worry about their BitChip losing value so when it gets converted to dollars there isn't enough to pay the IRS. A worst case scenario would be having to fly to Las Vegas to convert the chips in person. As long as the casino still exists, the person would be able to get their dollars back.
In conclusion: The virtual currency that is designed to address the needs of the merchants and consumers that will use it will be the virtual currency that eventually succeeds. The Bitcoin isn't that virtual currency. The Bitcoin wasn't designed to solve the problems that exist in the free market where it is used, it was designed to implement a misguided and destructive political agenda. Currently the free market is rushing to accommodate the Bitcoin, starting from scratch to invent a whole new system. To me, that is the tail wagging the dog. What should happen is that merchants and consumers develop a virtual currency focused on addressing their transactional needs that works within their existing accounting and tax system. The BitChip is basically that solution. The BitChip allows the dog to wag the tail and offers real hope for a successful virtual currency. Every system has its flaws, and BitChip will to, but the BitChip has fewer flaws than the Bitcoin, and that is what is needed to succeed in the world of competing currencies. You simply have to build a better mousetrap.
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Full Disclaimer and Disclosure Click Here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.