Bitcoin Market Oracle Challenge

So Nadeem Walayat of The Market Oracle set out his stall regarding bitcoin. I have been a follower of Mr Walayat’s site for some years now and would say that some of his insights have been incredibly reliable. For example, his take on the financial crisis of 2008, as it happened, was spot on!

However, I believe he’s got it hugely wrong with his analysis on bitcoin. Firstly, it is not a Ponzi scheme (notwithstanding the distinct possibility that Satoshi Nakamoto is probably sitting on a few hundred thousand bitcoins), as there is no dividend payout structure to existing investors from new money coming in. Further, Ponzi schemes need a certain amount of smoke and mirrors in order to sustain the magic over a period of time which could last decades. Bitcoin, on the other hand, is precisely the opposite – everything is exposed. I mean, like, everything. Every single transaction is visible and sites such as Blockchain make this an easy task to interrogate. Only under severe conditions can bitcoin be manipulated, requiring someone or some agent to dominate the network thereby gaining control of the network. This has never happened and at the time of writing there is a healthy distribution of miners out there.

The real irony here is that, if we are talking about Ponzi schemes, there is none grander than our very own money supply! The incumbent fractional reserve banking system IS the grandest of all Ponzi schemes and is manipulated freely and frequently viz-a-viz quantitative easing or in plain english MONEY PRINTING. Ponzi schemes need constant growth in order to survive, with new investors coming in at the bottom in order to payout investors higher up the chain. As soon as these new investors dry up or existing investors want to withdraw en masse, this triangular scheme collapses. Now think about our current money supply and our macro economic structure. Why is economic growth ALWAYS talked up in the media and in politics? Why does the thought of deflation fill governments with dread? Because deflation is the Ponzi equivalent to a lack of new investors. Fractional reserve banking REQUIRES the constant expansion of the money supply which, unlike bitcoin, is magicked from thin air. Expansion of the money supply needs to be coupled with an expanding population. But where to find new investors in our fractional reserve world? Simple. A fractional reserve nation needs to bring in migrant workers to buy-in at the bottom of the economic ladder. Those higher up the ladder are seemingly better off as long as they can afford to unhook themselves from the inflationary spiral and ‘index-link’ themselves to assets such as houses. With asset values rising as the money supply expands, this group of people will also live under the illusion of increased wealth that sounds remarkably like a Ponzi scheme, don’t it? BTW, failing to index-link yourself is a fatal flaw in a fractional reserve society.

Mr Walayat then suggestion that a handful of mining pools manipulate bitcoins without any explanation as to what manipulation is taking place suggesting a miscomprehension of what and how bitcoin works. Mining pools ARE by their very definition made up of many many ordinary people, much like a lottery syndicate. Granted some of them will be mining a disproportionate number of bitcoins by way of ASIC computers, but bear in mind that long gone are the days when an individual can mine bitcoins solo, much in the way that current day gold prospecting is a heavy industry business.

Likewise his comments on the lack of anonymity. I don’t get that.

So could bitcoin return to the realms of $15 as he suggests? Maybe, but I think it’s unlikely. I believe that bitcoin survival relies upon the incumbent financial system not entirely breathing the life out the numerous exchanges out there that allow for easy distribution to non-miners and merchants. Given the somewhat surprising hug coming out of the US together with Bank of America suggesting that bitcoin could account for 10 percent of all online transactions, the most likely scenario is that the US will take a lead now that China is beating a retreat.

Regarding China, after initially embracing bitcoin by way of its CCTV state television and state sponsored newspapers, the People’s Bank Of China has effectively ceased all bitcoin related activity. I suspect this is because the people of China were using it as an incredibly simple and efficient method to anonymously get money out of the country. However, it is still not illegal to own bitcoin in China and state media has now put it on the radar from which it can no longer be removed. As noted on China’s largest bitcoin exchange: In terms of regulation, Bitcoin exchanges are allowed in China. On December 5th, the People’s Bank of China and Five Associated Ministries issued a notice, which clearly stated, “Bitcoin trading constitutes a method of buying and selling commodities online, and people are free to participate, so long as they are willing to assume the risk.”

So Nadeem Walayat, here is my challange: I believe bitcoin will reach $2000 before it reaches the predicted car crash of $15. At the time of writing the price of bitcoin is pretty evenly split, though slightly in your favour, sitting around the $800-$900 range. Care to take a $100 wager on it, payable in bitcoin or dollar, when either $15 or $2000 is realised? 

Wednesday, 8 Jan 2014 : By serendipity, recent events in British politics bear out my assertion regarding fractional reserve economics as reported in the International Business Times http://www.ibtimes.co.uk/nigel-farage-would-rather-uk-was-poorer-fewer-migrants-1431315 . Hopfully you’ll see the connection!

Tuesday, 21 Jan 2014 : More garbled ponzi scheme claims on Gary North’s site http://www.garynorth.com/public/11828.cfm , this fellow really needs to discombobulate himself!

Here are the comments related to this from the Market Oracle website, just in case they ever get lost!

paulmathers
27 Dec 13, 13:25bitcoin challange

Dear Nadeem

A rare occasion where I think you’ve got it wrong. Care to take my $100 challenge? https://paulmathersblog.wordpress.com/2013/12/12/bitcoin-ftw/

Happy Christmas!

Paul Mathers

 

Nadeem_Walayat
27 Dec 13, 13:54Bitcoin gamble

Hi

I don’t gamble I take calculated risks, I said what i would do which is to buy bitcoins at 15. That is the risk reward that would get me a positiona and that is what Market Oracle is all about, not gambling.

If bitcoin never gets anywhere near 15 then I have no position, no loss, but if I take your bet then I could lose $100. The risk vs reward is bad. It’s a gamble!

To trade the price collapse I would have shorted it from above 1100 and then moved the stop to break-even and then locked in a small profit, and then cashed in on the plunge- that’s how I would trade bitcoins IF it had a tradeble tight spread market, that’s how I traded past crashes such as stocks in 1987 – not take a 50/50 MASSIVE SPREAD bet of $2000 or $15 for $100 that is a bad behaviour pattern to imprint.

Ofcourse bitcoins is a ponzi scheme, I could create my own ! and make it even more enticing to investors as it would be backed by the MO site ! But I won’t for obvious reasons.

And ofcourse the bitcoin market is manipuated by a few small pools THAT IS WHAT HAPPENS TO ALL MARKETS!!!! ALL MARKETS ARE MANIPULATED! Teh first step to understanding where markets are going to go is to understand this fundemental fact that all markets are manipulated!

I understand it is very easy to get sucked into bubbles afterall that is what happened during the dot com bubble, but people buying at $900 are going to regret buying big time.

All the Best

NW

 

paulmathers
08 Jan 14, 17:37bitcoin challange

It was more a friendly wager Nadeem.

The fact that you can create a crypto currency yourself does not make it a Ponzi scheme. Confidence in your coins only comes by them being operated by a democratic network viz-a-viz bitcoin.

I still maintain that the greatest ponzi scheme of all is fiat currency as explained on my blog. This has recently been supported by reports in the newspapers such as http://www.ibtimes.co.uk/nigel-farage-would-rather-uk-was-poorer-fewer-migrants-1431315

Best

Paul M

 

Nadeem_Walayat
08 Jan 14, 21:14Fiat Currency

Yes, fiat currency is a ponzi scheme the cost of which manifests itself in inflation and ultimately hyperinflationary collapse that ALL currencies are trending towards.

To imagine bitcoin is any different is a huge mistake. It IS a PONZI just as are all fiat currencies.

For something to be none ponzi it needs to be backed by something physical that cannot be easily printed such as gold or housing stock.

Best

NW