Tag Archives: money

Bitcoin risks, uses, and bubble

Bitcoin prices over the last 3 years

Bitcoin prices over the last 3 years

As I write this, the price of a single bitcoin stands are approximately $11,100 yesterday, up some 2000% in the last 6 months suggesting it is a financial bubble. Or maybe it’s not: just a very risky investment suited for inclusion in a regularly balanced portfolio. These are two competing views of bitcoin, and there are two ways to distinguish between them. One is on the basis of technical analysis — does this fast rise look like a bubble (Yes!), and the other is to accept that bitcoin has a fundamental value, one I’ll calculate that below. In either case, the price rise is so fast that it is very difficult to conclude that the rise is not majorly driven by speculation: the belief that someone else will pay more later. The history of many bubbles suggests that all bubbles burst sooner or later, and that everyone holding the item loses when it does. The only winners are the last few who get out just before the burst. The speculator thinks that’s going to be him, while the investor uses rebalancing to get some of benefit and fun, without having to know exactly when to get out.

That bitcoin is a bubble may be seen by comparing the price three years ago. At that point it was $380 and dropping. A year later, it was $360 and rising. One can compare the price rise of the past 2-3 years with that for some famous bubbles and see that bitcoin has risen 30 times approximately, an increase that is on a path to beat them all except, perhaps, the tulip bubble of 1622.

A comparison between Bitcoin prices, and those of tulips, 1929 stocks, and other speculative bubbles; multiple of original price vs year from peak.

A comparison between Bitcoin prices, and those of tulips, 1929 stocks, and other speculative bubbles; multiple of original price vs year from peak.

That its price looks like a bubble is not to deny that bitcoin has a fundamental value. Bitcoin is nearly un-counterfeit-able, and its ownership is nearly untraceable. These are interesting properties that make bitcoin valuable mostly for illegal activity. To calculate the fundamental value of a bitcoin, it is only necessary to know the total value of bitcoin business transactions and the “speed of money.” As a first guess, lets say that all the transactions are illegal and add up to the equivalent of the GDP of Michigan, $400 billion/year. The value of a single bitcoin would be this number divided by the number of bitcoin in circulation, 12,000,000, and by the “speed of money,” the number of business transactions per year per coin. I’ll take this to be 3 per year. It turns out there are 5 bitcoin transactions total per year per coin, but 2/5 of that, I’ll assume, are investment transactions. Based on this, a single bitcoin should be worth about $11,100, exactly its current valuation. The speed number, 3, includes those bitcoins that are held as investments and never traded, and those actively being used in smuggling, drug-deals, etc.

If you assume that the bitcoin trade will grow to $600 billion year in a year or so, the price rise of a single coin will surpass that of Dutch tulip bulbs on fundamentals alone. If you assume it will reach $1,600 billion/year, the GDP of Texas in the semi-near future, before the Feds jump in, the value of a coin could grow to $44,000 or more. There are several problems for bitcoin owners who are betting on this. One is that the Feds are unlikely to tolerate so large an unregulated, illegal economy. Another is that bitcoin are not likely to go legal. It is very hard (near impossible) to connect a bitcoin to its owner. This is great for someone trying to deal in drugs or trying hide profits from the IRS (or his spouse), but a legal merchant will want the protection of courts of law. For this, he or she needs to demonstrate ownership of the item being traded, and that is not available with bitcoin. The lack of good legitimate business suggests to me that the FBI will likely sweep in sooner or later.

Yet another problem is the existence of other cryptocurrencies: Litecoin (LTC), Ethereum (ETH), and Zcash (ZEC) as examples. The existence of these coins increase the divisor I used when calculating bitcoin value above. And even with bitcoins, the total number is not capped at 12,000,000. There are another 12,000,000 coins to be found — or mined, as it were, and these are likely to move faster (assume an average velocity of 4). By my calculations, with 24,000,000 bitcoin and a total use of $1,600 billion/year, the fundamental value of each coin is only $16,000. This is not much higher than its current price. Let the buyer beware.

For an amusing, though not helpful read into the price: here are Bill Gates, Warren Buffet, Charlie Munger, and Noam Chomsky discussing Bitcoin.

Robert Buxbaum, December 3, 2017.

Solving the savings dilemma (how to have savings)

A few days ago, I wrote a post about the lack of savings in America, the social causes for it, and the damage it causes. I had some governmental suggestions, but suspect I didn’t emphasize that the main responsibility is personal: if you want savings, you’ve got to save.

Every rich person spends less than he earns. If you aspire to be rich, spend less on clothes than you can afford.

Every rich person spends less than he earns. If you aspire to be rich, spend less on clothes than you can afford.

If you want to have savings, it is up to you to spend less than you earn. If you don’t, you’ll never be rich, you’ll never have savings or net-economic worth, and you’ll always be strung-out over emergencies. Income and gifts won’t help if spending rises to match. At all incomes, the people who get richer are those who tailor spending to be less than earnings.

There is another personal honesty issue here, and a marriage issue too. If you spend more than you earn, someone will be cheated, and that person (your wife, husband, neighbor, friend) is likely to get mad. Earn $100 and spend $99.99, you can be honest and well liked. if you earn $1000 and spend $1000.01 and you will cheat someone you love sooner or later. Be an honest fellow and spend less. Clothes is a good place to start: say no to the fancy dress and the fancy wedding, and to fancy clothes in general. If you smoke, vaping can be a life and money saver. And try to avoid pot-smoking, at $400/oz that’s got to be a killer. And here are some water savers.

A good way to know if you are doing things right :Start a bank account, and check the balance and resolve to see it $10 higher at the end of the week than before. And that’s my two cents.

Robert Buxbaum, April 26, 2017.

Stories of Jewish charity

Before Passover this year, an individual went to the rabbi of our town for a private meeting to tell him about the problems facing various people. He said, there was one particularly pathetic case where a family could lose their house. They had borrowed $5000 from a particularly nasty lender who would throw them out in the cold if they didn’t pay up soon.

Our rabbi was touched, and said he would do what he could to raise the sum. He would even contribute $100 of his own. As the fellow left, he had just one question, ‘How do you come to know this is going on? Are you a relative, or particularly close friend?” “No,” said the guest, “I’m the lender.”

 

Another story of Jewish charity: a neighbor of ours takes incredible care of her husband, She spends quite a lot, regularly to get his nails done professionally. She says it’s worth it to know that his coffin is secure.

Finally, I must admit that I’d wanted to marry my ex-wife, who I had divorced previously — sort of an act of kindness. But she would have none of it. My ex said I was only marrying her for my money.

Robert E. Buxbaum. October 23, 2015

Cross of gold democrats

While it is dangerous to paint a large organization like the Democratic party with a single, broad brush, there are always patterns that appear, in this case in every presidential platform for a century. Beginning in the late 1800s when the Democratic party gave up on slavery, a stated goal of every Democratic platform has been to help the poor and downtrodden. Republicans claim to help too, but claim to target the worthy. For Democrats, by contrast, the common aim is to provide help without reference to individual worth or work — to help just because the individual needs it. All versions of this classic Democratic goal are achieved through forms of wealth redistribution: taking from the rich to give to the poor, Robin Hood style, at least temporarily. There is some inherent tension here: if the recipient can get free money without working, why would he work — a tension that some find insulting, but others accept as part of the comic nature of society. Many Americans accept that helping poor people is such a worthy goal that they knowingly accept the tension and cheating.

Mayor Quimba of Springfield (from the Simpsons). A classical Democrat, his motto: Corrupts in Extremus

Mayor Quimby of Springfield (from the Simpsons) is a classical Democrat, he has no morals beyond, ‘whatever the public wants’. Quimby is corrupt and an awful manager, but quite likable.

Extracting money from the rich always proves difficult: the rich generally object. The most direct way to extract money is taxation, but Democratic politicians, like Mayor Quimby, right try to shy from this to avoid being branded “tax and spend Democrats.” This year, Bernie Sanders has taken this line, proposing to raise the tax rate on the wealthy to 90% of income so he can do good for the poor and curb the power of rich Republicans. He has no problem with rich Democrats like Ms. Clinton, or perhaps he does, but doesn’t say so. In Britain, under Attlee, the tax rate was raised to 95%, a rate memorialized in The Beatles song “Taxman” (there one for you nineteen for me; 19/20 = 95%). Americans oscillate between accepting high tax rates and acknowledging that the worker and creative must be able to keep most of his/her earnings or he/she will stop working.

Every few years recipient Americans revolt against the way redistribution makes rich Democrats richer, and how high taxes seem to go with crony corruption. The motto of The Simpson’s Mayor Quimby is “corruptus in extremus”, a nod to the observation of how corruption in redistribution favors friends and family of those redistributing the wealth. Redistribution also tends to create poverty. This happened in England, for example. As Quimby says: “I propose that I use what’s left of the town treasury to move to a more prosperous town and run for mayor. And, er, once elected I’ll send for you.”

An alternative many Democrats favor is to print money or borrow it. This appears to be Ms Clinton’s approach, and was proposed famously in the “cross of gold” speech of William Jennings Brian in 1896.  In this speech, one of the finest in American history, Bryan (an unknown until then) proposed to monetize silver and other assets, allowing him to print money. He would spend the money on the poor by debasing the currency, that is by inflation. Bryan claimed that the rich were anyway sitting on unused money: a useless, dangerous pile that he’d inflate away. He also claimed that the poor are the ones who owe money, a burden that he would wipe out with inflation. Bryan’s final line is immortal: “you shall not press down on the people this crown of thorns, you shall not crucify the nation on a cross of gold.” The speech managed to combine God and greed and was an enormous success. Following the speech there was stunned silence, and then whoops and hollers. Bryan was carried around the convention for an hour before being chosen the Democratic candidate for president in 1896, 1900, and 1908. His speech has appeared, to a greater or lesser extent, in the platform of every Democratic candidate since with a greater or lesser reference to God depending on the conservatism of the speaker.

Donald Trump currently the front runner for GOP president reads to his grand-daughter Chloe from that Christmas classic, 'winners aren't lots.' photo by Donald Trump, jr (Chloe's Dad) aboard their car (?) plane (?).

Donald Trump currently the front-runner for GOP president reads to his grand-daughter, Chloe from ‘winners aren’t losers.’ photo by Donald Trump, jr., Chloe’s Dad. Trump seems to revel in the lovable, rich jerk persona as no Liberal or Democrat could.

Republicans have traditionally supported property rights and harder money: gold in the old days, a balanced budget today. They claim that low inflation is good for the rich and poor alike, and especially for the small businessman. Entrepreneurs are pictured as more virtuous than the idle, wastrel Democrats. Free money, the Republicans note, discourages work. Of course, distinguishing worthy from wastrel is easier said than done. Republicans are accused of being uncharitable, and of helping the idle rich once they get into office. Presidential candidate, Donald Trump claimed that until now he’d give big donations to candidates of the left and right so they would repay the favor with interest at a later date. No one knows if it will change when he gets in office, but so far he’s avoided the major rich donors. He’s doing well running as a lovable, rich, jerk who’d do things different.

Inflation is a dangerous mistress, the middle class generally doesn’t like the way it wipes out debts and savings, while supporting a class of rich wastrels, drunks and the chronically unemployed. Many of the poor and middle class save, while the rich tend to build up debts. The rich have better credit ratings than the poor, and thus borrow more. They are also better positioned to increase their borrowing if they think inflation is coming. The money they borrow is invested in hard assets: land, homes, and businesses. When inflation slows, they can sell these assets. And if they pick wrong, the government bails them out!. William Jennings Bryan lost all three of his runs at the presidency, twice to McKinley and once to William H. Taft, who stood for doing nothing.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

I think the American people want a balance in all things. They want a balance between helping everyone, and helping only the deserving; between high taxes to help folks, and allowing folks to keep their wealth. They don’t quite know where to draw the line, and will even help the wastrels, even those who refuse to work, because they don’t want them starving in the street. They also seem to accept rich folks getting richer, especially when a big project is needed — a ship or a bridge, for example. We elect an alternating mix of Democrats and Republicans; conservatives, and liberals to avoid false paradoxes, achieve some liberty, and establish one of the richest states known.

As for me, you might as well know, I’m a liberal Republican. I favor low income taxes, but some welfare; taxing imports (tariffs), and low inflation –“bread currency,” I like Peter Cooper, and the Greenback Party, 1876. Cooper claimed that the dollar should always have the same value “for the same reason that the foot should always have 12 inches and the pound 16 ounces.” I also think enforcing morality is a job for preachers, not politicians. For 160 years students of Peter Cooper’s union were getting a free college education and I’m one of those engineering students, see my biography of Peter Cooper.

Robert E. Buxbaum, December 30, 2015. See my view of Scrooge’s economic education in the Christmas Carol.

Republicans vs conservatives

Most of the great divides of the 1800s pitted conservatives against Republicans. This was the Divide in the Mexican civil wars of the 1800s, and there were several; it is the divide in the South American wars of Independence, and in much of the US and European political debate of the 1800s as well.

Ned Flanders, cartoon conservative from "The Simpsons" He's generally well meaning and helpful, but also a bit creepy.

Ned Flanders, cartoon conservative from “The Simpsons” He’s generally well-meaning and helpful, but also a bit creepy.

In general, the difference between conservatives and republicans is that conservative governments favor religion, and religion-based leadership, while republicans favor individual liberty. In 1800s Mexico, conservatives backed two emperors (Maximilian I and Agustin I) and Santa Anna, the ruler who suspended all personal rights an ignited the war of Texan independence. Conservatives generally favor the religion of the majority: Protestantism in England, Catholicism in Central and South America, Judaism in Israel, and Islam in most of the Muslim world. This tends to annoy the irreligious and minority religious populations, who tend to become republicans. Cinco de Mayo celebrates the 1862 victory of Mexican republicans over the French-backed, conservative Maximilian I, at the battle of Puebla. The US Civil War, in essence, pitted the irreligious, industrial, republican north against the conservative, evangelical South; slavery is in the Bible so it must be good.

Conservatives usually favor government actions against sin in all it’s forms: miserliness, drunkenness, drugs, pornography, wild music, money-making, and freedom as such. Conservative-ruled countries have generally had anti-blasphemy laws and enforced “blue laws”, restrictions on business on holidays. Republican governments have few, or none of these. In pre-revolution France, the penalty for blasphemy was death, just as the Bible mandates. This changed when the republicans came into power. In England, private blasphemy was prosecuted as late as 1977. Similar penalties are still in force in Iran and other conservative Islāmic countries. Many US states still restrict the sale of alcohol on Sunday, for similar, conservative reasons. Conservatives usually favor sexual morality laws, putting strong restrictions on homosexuality, abortion, and divorce. In England, amicable divorce wasn’t legalized until 1930, and homosexuality was illegal until 1970. In the US, sexual laws are a fairly bizarre mix, in my humble opinion, the result of republicans, liberals, and conservatives making inelegant compromises.

In republican democracies like modern-day France, Holland, and Germany, sexual immorality laws are more lax than in the US. Republican governments strive to protect the rights of the individual; among these their right to property and to a fairly unbridled pursuit of pleasure. Republican countries tend to suffer from (or benefit from) significant income inequality. People can become rich due to hard work, talent, luck, or birth. And they very often become arrogant and obnoxious after they become rich — and sometimes before — to an extent that bothers conservatives and liberals alike. People can also become very poor: from laziness or bad choices, or just from bad luck or having been born to the wrong parents. Conservative and liberal elements then strive to help the very poorest, providing them with food, money and basic housing — generally achieved by taxing the rich. This is good in moderation, but taken to excess, this can lead to dependency of the poor, and redirection of the rich into less-productive fields like politics and the church. Conservatives very rarely leave a good pathway for the poor out of dependency, nor have they found a way to keep scoundrels out of the government and the church.

Scrooge McDuck. he'd likely be a Republican, if only to protect his wealth.

Scrooge McDuck, banker, railroad tycoon, steel magnate; he’d likely be republican, though not likely conservative. Motivated by money and power, he may do good, but not in any direct way, usually.

At present, the US Republican Party, the GOP, consists of approximately equal halves conservatives and republicans. That is, GOP leadership is currently an approximate balance between kindly folks like Ned Flanders who would rule by the Bible, and an equal number of rougher individuals, more like Scrooge McDuck who would rule by money.  in a sense, this is a wonderful compromise as the excesses of each group reins in the excesses of the other. In another sense though, the balance between conservatives and republicans is an ungovernable mess that leads to regular de Condorcet failures. I’m not sure how this will play out in the 2016 elections.

Fortunately, not all irreconcilable differences are as irreconcilable as one might think. Many de Condorcet problems are solvable by compromise, or by the effects of time. Compromise between charity and commerce can produce the best of all worlds, a major theme point, as I understand it, of Dickens’s Christmas Carol.

Robert E. Buxbaum, October 20, 2015. I use these essays to refine my thinking — here, more than usual. Any help you can provide will be welcome, feedback, corrections, comments. I’m trying to figure out what I, myself think. The divide between Conservatives and Liberals produces some of the most wonderful quote – exchanges, e.g. between Churchill and Attlee in 1950s England. Liberals, and I have not quite made up my understanding here, seem like a sort of like conservatives in that they believe in wealth redistribution, but without the guidance of a church, or church-based morality. At some point in the future, I’ll hope to arrange my thoughts about them, and about the difference between liberals and democrats.

von NotHaus, the terrorist who uttered money.

Bernard von NotHaus was sentenced two days ago, December 3, 2014 in Federal court, North Carolina on charges of terrorism for the crime of making token coinage. This crime is called uttering money in English common law, but it is not generally considered terrorism, or generally prosecuted at all in modern times. The sentencing was covered by only one newspaper, The New York Sun. The New York Times and others, I guess, found it wasn’t news fit to print. But I find it newsworthy enough to blog about.

The current price of silver (as I write) is $16.60 per ounce. Had Bernard von NotHaus limited himself to selling ordinary, one ounce, silver medallions for $20 each, he could have made money on each, and perhaps been awarded a medal for his artistry. Instead, von NotHaus stands convicted as a terrorist against the US economy. The problem: his $20 medallions include the symbol “$20″ and the word “dollar” on the coins. The government’s claim is that people might come to use his silver medallions to buy $20 worth of products, and this, it was argued, could bring down the government. Also incendiary was the phrase “Trust in God.” The federal prosecutor argued this was too close to our government’s, “In God we Trust.”

A liberty dollar. The crime is terrorism by uttering money -- saying that this coin should be used as $20 currency.

A liberty $20 piece The crime is terrorism, undermining the US by suggesting people use this coin as currency.

Von NotHaus was arrested on June 6, 2009, and had his coins and metal confiscated. He was convicted of terrorism March, 2011. Among the evidence are gold coins with the image of Ron Paul and certificates with von NotHaus’s image marked as 1 Dollar negotiable currency. Making these items isn’t quite counterfeiting, as the coins and certificates don’t look like US currency, but the US government decided it’s worse: economic terrorism. Anne Tompkins, the federal prosecutor successfully argued that von NotHaus is suggesting that the currency of the US is somehow deficient, and perhaps that the president and his crowd are doing something wrong in their efforts to drive inflation by printing excess currency. Ms. Tompkins successfully argued that such “attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism” and that they “represent a clear and present danger to the economic stability of this country.” I’d say that’s over-reacting.

The Liberty Dollar. It's not counterfeiting, but the crime of terrorism by uttering money. Printing certificates with the intent of having them used as currency.

The Liberty Dollar. It’s not counterfeiting, but terrorism. 20 of these can be exchanged for a silver coin. US currency is non-negotiable; you have no right to change

The mechanism whereby these items are supposed to undermine the economic stability is the reverse of Gresham’s law. Gresham’s law is that the worse currency will stay in circulation and the better will be driven out. Applied here, Gresham would predict that people will hoard these liberty dollars and will spend only the paper. That’s what happens with ordinary art, or gold bars. But our government’s terrorism argument assumes Gresham’s theories are wrong, and that people will hoard Obama’s paper while spending von NotHaus’s coins. On that chance, Mr. von NotHaus stands convicted of terrorism. Mr. von NotHaus’s defense is that he never claimed his medallions should be used as currency. The judge rejected this defense. For all I know, Ms Tompkins could now pursue Von NotHaus for sedition: suggesting there is something wrong with the way we pursue minters.

The Ron Paul $1000, weapon of mass destruction.

The Ron Paul, $1000 weapon of national destruction.

At sentencing yesterday, Judge Voorhees ignored rules that should have condemned von NotHause to life in prison. Instead, he ruled for 6 month’s house arrest and 3 years probation saying he didn’t believe von NotHaus was motivated by evil intent, but rather by philosophical speech (something partially protected by the first amendment). I’m always glad for lenient sentencing, especially when the argument involves freedom of speech. I’m also glad for philosophy, but that does not mean I’m happy about the outcome. To me, von NotHaus deserves a medal; he is the Rosa Parks of hard currency. And I think that’s fit to print.

Part of the reason this conviction bugs me is that I got a free education courtesy of Peter Cooper, the citizen industrialist of the 19th century who founded the greenback party. He published (uttered) $3 bread notes to advertise his cause. Robert Buxbaum is a good US citizen, who uses only non-negotiable, fiat currency; none of this negotiable stuff for me. December 5, 2014.