If we build it and mythologise it, they will come

If we build it and mythologise it, they will come

The power of cult beliefs in value systems

Izabella Kaminska

03/06/2014

2FT Alphaville presentation on Bitcoin

Izabella Kaminska June 2, 2014

Who am I?

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1 Izabella Kaminska, FT Alphaville reporter

2 “Lateral thinker” (apparently)

3 Really BIG cycles – Anacyclosis

4 Lover of civilisation and ancient monetary systems



Here’s me loving ancient systems….



Studying Ancient Economies…



What is money?

• A store of value

• A means of exchange

• A unit of account



But money is also economically neutral!

(Unless, you’re a Keynesian economist who believes that in the short run monetary-disequilibrium theory applies.)



Money also represents Darwinian evolution

“It is even possible that man’s swollen brain, and his predisposition to reason mathematically, evolved as a mechanism of ever more devious cheating, and ever more penetrating detection of cheating in others. Money is a formal token of delayed reciprocal altruism.”

Richard Dawkins, Selfish Gene

And a primitive version of “memory”



“ Money is a store of value, money is a medium of exchange and/or money is a unit of account. These phrases are certainly useful descriptions of money’s role in equilibrium. However, they are misleading when taken as descriptions of the technological function of money. After all, money does not allow society to transfer resources over time. Money does not reduce the cost of transferring resources from one person to another.

“There its no immediate technological reason why money should be a better numeraire than other goods. An important conclusion of this paper is that “Money is memory” is a much more revealing and accurate description of money’s effect on economic primitives (preferences, information, and technology) than these other, more common, descriptions.”

Narayana Kocherlakota, 1997

The Yap Stones of Micronesia When Money is an Open Ledger – We’ve been here before!



The origins of the trusted intermediary



• The temple as a clearing agent• These temples were creditors NOT debtors• Many credits were for the advance of protected land, boats, workshops, and

taxes accruing on subject populations.• The first written documents record who owed who what.

• The prime motivation was of an economic nature: the desire to administer economical and trade transactions.

• Almost all of the early cuneiform texts and a very large fraction of the 2nd millennium texts concern economy and administration.

Money as a trust arrangementGive unto Caesar that which is his

Turning the Republic into an Empire was only possible with propaganda and the illusion that power hadn’t really been transferred – hence Augustus’ focus on austerity and humility.



So this is how liberty dies, with thunderous CPUs?

Providing everyone agrees to believe…Then money has value in and of itself, irrespective of what economic value it represents.



Money is a protocol system



Etymology:

“late Middle English (denoting the original minute of an agreement, forming the legal authority for future dealings relating to it): from Old French prothocole, via medieval Latin from Greek prōtokollon ‘first page, flyleaf’, from prōtos ‘first’ + kolla ‘glue’. Sense 1 derives from French protocole, the collection of set forms of etiquette to be observed by the French head of state, and the name of the government department responsible for this (in the 19th century)”

Money can also be seen as sovereign equity



So how innovative is Bitcoin really?

(Hint: Not much. There’s nothing new under the sun.)

What is the value of Bitcoin? If any?

Two aspects to Bitcoin’s value:

•The crypto tech: impossible to value (Stiglitz efficiency paradox eventually?)

•The store of value: The Satoshi foundation myth, pump and dump, break-even rates, artificial scarcity (21m cap)



If the value represents anything it’s this…$1bn invested so far. Yay!



The Flaws



So many!

•Recreates the old system but in a less fair way•Represents pure rent extraction•Inflexible supply•Break-even costs like any miner•Dependent on constant inflows like a ponzi•The equivalent of a highly speculative equity with no proven cash-flow potential of its own•Tendency for monopolisation and cartelisation•NOT anonymous•Major energy expenditure•Favoured by the black economy •Supported by system of opaque miners or cartels•Cryptographically vulnerable to double-spending•Quantum risk•Unconditional issuance•Bitcoin Assassination Markets

The Flaws (Part 2)



• Fees will inevitably get higher• The block-chain is not 100% secure• The block-chain has(can take hours to settle a high value transaction)• The bigger the chain, the more costly to host the chain and the more exposed to

cryptographic hacking, attack or revisionism• Terrible market asymmetry which rewards those who give up private information in

favour of those who don’t• Plays into the hands of central banks anyway • No track record• Illiquid and volatile (a feature not a bug if you’re Goldman Sachs?)• Governed by an anonymous foundation, which you buy your way into.• Exposed to Gresham’s law• Creates a new unequal society which replaces bankers with crypto geeks• Susceptible to replication and substitution• Incorrectly presumes there is no private money in the system

The Flaws (Part 3)



• No double-spending means no rehypothecation, which is a problem in a fixed supply system that plans to create debt and yield from lending.

• Processing bottleneck down the line

• Easily displaced by official e-money

• Easily substituted and replicated

• Opens the door to Weimar style over issuance of private money

The Benefits



• Encourages young people to learn to code?• Allocates capital to efficient hashing infrastructure which could be useful if it is

opened up for registration of real assets.• A form of private QE.• Represents the equitisation of all value, opens door to equity being used as currency.• The decentralised network structure (actually a CERN LHC innovation not a Satoshi

innovation) could be used to create a better market clearing framework, which exposes the risk in the system without giving up on the privacy. (Risk = anonymity and uncertainty over whether something is value or not)

• Capital control efficient• Self-policing and prone to vigilantism (its own fraud squad)• Redirects hot money from socially useful (consumption) markets to 100% synthetic

markets, and in so doing stops bubbles distorting the prices of essential goods.



Quantum value a.k.a Alchemy

A gold bar dug up from the ground is an asset, until it turns out it’s not a gold bar at all.

It can be valuable and not valuable at the same time, until it’s observed.

• The Power of Seigniorage = The power to delay realisation of value.

• Allows you to create units which may or may not have value

• Uncollateralised = unfunded

• Do not confuse value with artificial scarcity

• Things that are pretty rubbish can have value if artificial scarcity tactics and persuasion are applied.

• Is it a ponzi if you warn people it’s a ponzi?

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Medici coin – We’ve been here before



The Medici created a money transfer system which not only allowed merchants to transfer money easily and safely, but allowed them to dodge national currency controls.

How it worked was that you deposited your local currency/collateral in location A, were you were issued with a Medici note. Upon arrival in location B, you could redeem your note for local currency from a Medici subsidiary/partnership, which held local currency in reserve.

The genius of the whole thing, from the perspective of the Medici, was that the note didn’t guarantee you a rate. So if by the time you came to redeem it the exchange rate had moved against you, you would bear the risk. This was often the case due to seasonal factors and settlement times.



If it’s too good to be true, it usually is

Who benefits from Bitcoin really? (HINT: early adopters, and those seeking volatility)

Who benefits from Bitcoin’s volatility and under regulated status? (HINT: those who are suffering from the opposite in their markets.)

A free market always rewards the most ruthless

If scarcity alone determines value why aren’t my toenails worth anything? (HINT: There isn’t a foundation myth about my toenails )

Money helps us form an abstracted reality



A simulation in which evolutionary game theory can be played out – providing

everyone plays by the rules

Maybe forgetting is good?



Life, the universe and everything



Thank you!

Any questions?

If we build it and mythologise it, they will come

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