Bitcoin's Role in Combatting Inflation

By Jon Matonis
CoinDesk
Saturday, April 26, 2014

http://www.coindesk.com/bitcoins-role-combatting-inflation/

The economies of the developing world will feel the earliest and greatest impact from bitcoin. Not only are bitcoin’s enormous benefits very personal, they are also contextual depending on your political geography.

Individuals residing in high-inflation countries with relatively sufficient Internet access as a percentage of population do seek refuge in bitcoin.

The worst offenders depriving their subjects of monetary stability or a reasonable – albeit ‘coerced’ – store of value are the dictatorial regimes in politically tumultuous countries like Belarus, Sudan, Syria, Iran, Ethiopia, Malawi, Venezuela, Burundi, Yemen, and Tanzania.

Incidentally, those countries also form the top 10 country list for annual inflation rate according to the World Bank and International Monetary Fund data for 2012.

High-inflation promotes bitcoin

Topping the list is Ukraine’s neighbour Belarus, with an annual inflation rate of 59.2%. Ruled by President Alexander Lukashenko since 1994, Belarus is known as Europe’s last dictatorship. While shocking, that inflation rate is actually down from 2011, when a financial crisis triggered a peak rate of 109%.

Venezuela comes in at #7 worldwide, with an annual inflation rate of 21.1%. Price controls, capital flight, food shortages, and electricity blackouts are now pushing Venezuela toward the brink.

The Heritage Foundation’s Index of Economic Freedom highlights the massive potential for bitcoin in a world of abusive monetary authorities.

Not surprisingly, these countries also rank very low for Internet penetration as a percentage of country’s total population when compared to US at 81.0% and UK at 87.0%.

Internet penetration as percentage of total population

Where it becomes interesting is when we look at high-inflation monetary regimes coupled with strong and growing Internet penetration. Notably, the countries with the highest inflation rates that also have reasonable access to Internet connectivity tend to be relatively active on the bitcoin network of active global nodes.

Belarus with 46.9% Internet penetration, Venezuela with 44.0%, India with 12.6%, Vietnam with 39.5%, and Turkey with 45.1% are all disproportionately high outlets for active bitcoin nodes (ranking #51, #50, #54, #48, and #45 respectively). These countries are also in the top rankings for annual inflation with rates exceeding 9% or 10% during 2012.

Argentina demonstrates the prime example of bitcoin solving an issue of monetary justice related to persistent debasement of the national currency (the peso).

The country has merely 55.8% Internet penetration as a percentage of total population and yet ranks #26 in terms of active bitcoin nodes globally. Clearly, Argentinians have a strong desire to protect their long-term purchasing power and regain control over their monetary lives.

High inflation rates coupled with high Internet connectivity tends to lead to bitcoin.

Graphic: World map of 24-hour relative average utilization of IPv4 addresses observed using ICMP ping requests as part of the Internet Census of 2012 (Carna Botnet), June – October 2012.

Key: from red (high), to yellow, green (average), light blue, and dark blue (low).

Increased purchasing power

Certainly, bitcoin exhibits short term volatility as a young medium of exchange attempting to find its footing against the tide of sporadic liquidity, bank account closures, and government-threatened bans.

In the intermediate term, bitcoin’s predictable scarcity makes it a sought-after commodity when compared to fiat currencies. Bitcoin’s price chart is a story of price appreciation, or increased purchasing power, for the decentralized currency and its global community of users.

Time horizon is important and indeed bitcoin can be seen as either currency or commodity, as the IRS has recently affirmed.

Measured over two years in USD, bitcoin exhibits tremendous increases in purchasing power and, in that way, bitcoin is similar to gold. Another way of examining bitcoin purchasing power is to express the gold price in BTC. It is rare that a national, or centralized, fiat currency with predictable depreciation would retain or increase its purchasing power in such a way.

Split appeal

We can kid ourselves that the US or EU won’t see the types of inflation rates that we see from the world’s worst offenders because, for now, the USD and the euro have privileged reserve currency status and this mitigates or absorbs the hidden abuse.

The primary appeal of bitcoin in the developed world is the retention of some remnants of privacy and the occasional opportunity to challenge the monopolistic payment giants like VISA and PayPal. Not so in the the still developing regions where other bitcoin attributes take precedence.

In addition to bitcoin as a digital store of value across all jurisdictions, bitcoin’s resiliency to shutdown and immunity from confiscation lie at the heart of its monetary justice properties.
Moreover, fear not deflation, for deflation is the friend of liberty.

As economist Jörg Guido Hülsmann argues, a much-feared deflationary spiral would not prove fatal to the lives and welfare of the general population. Rather, it would destroy “essentially those companies and industries that live a parasitical existence at the expense of the rest of the economy, and which owe their existence to our present money system.”

Or more bluntly, “deflation is a mortal enemy to the heavily indebted state and its embedded parasites, but it is a friend to the saver and to anyone with a positive net worth.”

The Bitcoin Word Game

By Jon Matonis
CoinDesk
Friday, April 18, 2014

http://www.coindesk.com/bitcoin-word-game/

Words are very important. Even more so with bitcoin, competing constituencies craft specific words and phrases to evoke a predetermined image or outcome.

With a little help from political wordsmith observer Bill Maher, let’s look at some popular examples of this practice in action.

Avoiding the negative

For a long time, assisted suicide as a positive right with legal protections had a difficult time gaining acceptance. Once it was phrased as aid in dying, several US states passed legislation protecting the practice.

Gay marriage is another. Political opponents deployed the phrase when they wanted to convey the idea that the sanctity of marriage was under assault or its meaning was being diluted. Once it became termed marriage equality, it was difficult to be against because it then sounded trendy, inclusive and friendly. Everyone is for equality.

Lastly, when we hear the phrase drilling for oil, we imagine huge nameless corporations raping the wilderness to satiate an out-of-control demand for fossil fuel. However, re-brand it as energy exploration and we visualize a futuristic and responsible effort to transform our planet’s energy needs.

Steering public perception

In the evolving lexicon that is bitcoin, governments and the media consistently deploy phrases to gain an advantage in steering public perception. No secrets there. But, few of us can peer through the facade.

Here are some of the easy ones:

Privacy has become anonymity. Of course, people desire privacy and they rightly should take it for granted, but the word anonymous implies that it is secrecy being used for something nefarious.

Personal purchases have now become untraceable transactions. Remember that first drug store item that you wanted to keep as a personal purchase, so you made sure that no one saw you and that you used cash.

Finality of payment has become irreversibility. In the eyes of regulators, irreversibility has come to be associated with criminal transactions because who else would see the need for a transaction irreversible by a third party. Of course, this is ridiculous because many transaction classes have a proper need for payment finality.

Interestingly, this choice of wording permits opponents to cast bitcoin as anonymous, untraceable, and irreversible – all fitting into the dark persona of the notorious Guy Fawkes mask.

By the way, paper cash in your wallet today already possesses those attributes (analog equivalent rights), which is why we are witnessing a global war on cash or, as its proponents claim, a modern cashless society.

Moving into the regulatory sphere – and no jurisdiction is exempt – the stakes are higher, so predictably the labels have become more elevated.

Financial privacy has become money laundering. More than 30 years ago, money laundering did not exist because it is a made-up crime, as Doug Casey says, and the so-called thoughtcrime of finance.

Unfortunately, individuals seeking financial privacy have been cast as promoters of money laundering ever since.

Financial surveillance has been re-branded as patriotic anti-money laundering and know-your-customer guidelines. Realistically, it is still surveillance on a mass scale whatever you choose to call it.

Financial censorship has been re-positioned as an economic blockade, as in the international cases against WikiLeaks, Iran, and most recently Russia.

A positive spin

Every day, more and more young people embrace bitcoin. This is an encouraging demographic for the future of the cryptocurrency and they get it too.

For them, no government backing really means banks not required. Ignoring capital controls really means truly global with 24/7 availability. No third party for safety really means protection from financial surveillance. And, not centrally controlled really means easy person-to-person payments. Those are the things that matter most to that important demographic.

In economics, deflation is just another way of saying increased purchasing power.

In money, legitimacy is defined by community acceptance not by government decree. Triumphantly, bitcoin is money without government. If we don’t defend ourselves in the word game, all that remains are the sheeple lest we be called domestic terrorists.

Please add your own important bitcoin words in the comments area below.

IRS Bitcoin Ruling May Have a Bright Side

By Jon Matonis
CoinDesk
Monday, March 31, 2014

http://www.coindesk.com/irs-bitcoin-ruling-may-bright-side/

Last week’s guidance from the IRS on tax treatment for bitcoin transactions may have temporarily impeded one avenue in a single jurisdiction, but it has opened up another more significant avenue.

An IRS “property” classification for bitcoin reaffirms it’s status as “digital gold” because it tacitly encourages one type of monetary activity (store of value) over another (medium of exchange).

If bitcoin is digital gold, then gold is analog bitcoin. Both commodities have a significant economic role to play going forward because one is a consensual store of value based on chemical properties and the other is a consensual store of value based on mathematical properties.

This ruling was a lose-lose scenario for the IRS because an alternative tax ruling for treating bitcoin as a currency would have placed it in direct transactional competition with the US dollar. The Department of the Treasury was loath to do that at least from a tax perspective.

The big picture

In the big picture of so-called monetary transactions, economies support three basic types of transactions: person-to-business (P2B), business-to-business (B2B), and person-to-person (P2P). One could also include business-to-person (B2P), but I tend to leave that in the category of P2B.

These classifications hold up whether transactions are physical or digital and also whether transactions are domestic or international.

Regarding tax treatment in various jurisdictions, the only transaction classes affected would be P2B and some B2B in the jurisdictions enforcing merchant compliance for customer identity reporting. Hence, merchant compliance becomes a point of enforcement for authorities.

This is important because any tax rulings that bestow preferential treatment on bitcoin as a commodity will tend to nudge bitcoin (XBT) in the direction of a store of value perhaps backing alternate types of currency issuance or handling predominately large cross-border transactions – exactly the role played by gold (XAU) today.

Since gold and bitcoin are both monetary commodities that don’t represent another party’s liabilities, they become a medium of last resort for transactions without counterparty risk.

The two most prominent monetary metals in the world are gold and silver and while they might have established themselves initially in physical hand-to-hand exchanges, their usage has evolved beyond that. Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.

Dual properties

Bitcoin has the advantage of being both a potential long-term store of value and a useful medium in ordinary day-to-day transaction settings. The fact that bitcoin accommodates both makes its ultimate outcome more a function of jurisdictional treatment than commodity properties.

Remember, two of bitcoin’s medium-of-exchange advantages over gold are its near-infinite sub-divisibility and its near-zero transportation cost over long distances.

Cypherpunk hacker juno moneta tweeted: "IRS ruling likely drives a stake into those looking to transform #bitcoin in a new and better PayPal. I couldn't be more pleased"

What does this statement mean? Who wants to transform bitcoin?

To understand the answer to that, one must understand how PayPal willingly transformed itself in the regulatory sphere to get mainstream adoption. If the bitcoin innovators end up with a PayPal-like system saddled with third-party choke points, what has really changed in the payments world? Our twitter commentator states that the current IRS ruling happily steers bitcoin in the opposite direction.

Whereas PayPal never had the capability to evolve in the opposite direction, the distributed bitcoin network and its corresponding unit of value bitcoin certainly does. This is where the really big boys play.

The IRS ruling is also likely to elevate digital gold bitcoin into some form of reserve currency status and the vehicle of choice for large cross-border transactions. It would not be unusual to see this emergence as different jurisdictions will undoubtedly have varying treatments for “official” bitcoin classification.

Additionally, this outcome would support the thesis that larger international exchanges operate like bitcoin clearing houses while the domestic or regional exchanges satisfy the local markets.

About reserve currency

Reserve currency status refers to the use of a favored monetary instrument or commodity that is commonly held by nation-states and institutions for foreign exchange reserves and large cross-border transactions.
Reserve currencies, like gold, can also be used for the ultimate backing of a government’s own monetary regimes as in the currency substitution cases of Panama, Barbados, Bermuda, and Uruguay.

Bitcoin as a reserve currency asset has appeal because it is non-governmental and global in nature. Its sustainability will not be affected by regional political instability and it has the potential to outlast certain countries and their form of government. Bitcoin is governed by the laws of mathematics.

In the case of large cross-border transactions, bitcoin has appeal because it knows no political boundaries nor is it hampered by capital controls, orchestrated payment blockades, and foreign exchange restrictions. As these transactions are typically performed by sovereigns or large institutions, the jurisdictional tax treatment will probably not be a concern. Possible use cases include closed-loop diamond brokers settling intra-network trades or even partner countries within a trading bloc seeking a pricing and settlement unit other than USD.

Institutional and sovereign transactions fall under the B2B payments category and they also could provide the valuable underpinning for bitcoin price discovery absent sufficient retail price discovery. Just as end-to-end encrypted email messaging, on-network P2P bitcoin transactions exist in a world of their own.

New Binary Options Trading Service Takes Bitcoin-Only Payments

By Jon Matonis
CoinDesk
Wednesday, March 26, 2014

http://www.coindesk.com/new-binary-options-trading-service-takes-bitcoin-payments/

A new service for financial options has launched a beta website for nine different binary options, including gold, silver and crude oil, plus six foreign exchange pairs.

The offered currencies – euros, Australian dollars, New Zealand dollars, British pounds, yen, and Swiss francs – are all paired with the US dollar.

Different than previous binary option offerings, the new service – which is called UpDown – processes payments and payouts in bitcoin only.

With binary options, the trader selects the direction that the price of the underlying asset will move – either up (‘call option’) or down (‘put option’) – and purchases an option contract. This contract gives the buyer the right to exercise the option at the end of the specified time period, at which point the trader makes a return or loses the initial investment.

Binary options are sometimes referred to as ‘all-or-nothing options’, ‘digital options’, or ‘fixed return options’ (FROs), which are traded on the American Stock Exchange.

More popular outside the US, foreign binary options are offered by individual brokers, rather than through an exchange, and they typically have a fixed payout and risk. The brokers earn their revenue from the percentage discrepancy between what they pay out on winning trades and what they collect from losing trades.

Most foreign binary options brokers are not legally allowed to solicit US residents unless that broker is registered with a US regulatory body, such as the Securities and Exchange Commission or the Commodities Futures Trading Commission.

First-generation brokers

First-generation binary options for bitcoin simply offer the BTC/USD currency pair as a trading vehicle, whereas second-generation operators also allow deposits and payouts in bitcoin. Coindesk first covered first-generation bitcoin binary options in June 2013.

Now, binary option brokers that trade bitcoin as an option instrument include anyoption, SetOption, TradeRush, and Bloombex-Options.

Fast and simple, the tradeable asset lists are extensive with durations of 60 seconds to one week. Payouts range between 60% to 85%, depending on the asset and option type. Top brokers will also provide news resources and trading tools.

Second-generation brokers

Second-generation brokers offering both bitcoin funding and bitcoin trading include UpDown, BTCOracle, and BeastOptions.

The first such trading service operating on the bitcoin block chain, Satoshi Option, debuted in March 2013.
Similar to the SatoshiDice betting game, Satoshi Option requires no account registration and no personal details. Payouts are near instantaneous and the service is accessible from anywhere in the world because it relies on the bitcoin block chain as the platform.

Maximum trade size per bitcoin address is currently set at 0.25 BTC. Since the available commodities are traded with publicly available pricing, the binary option outcomes are verifiable.

Unlike the other bitcoin-funded brokers that rely on proprietary platforms, BeastOptions operates on the third-party TRADOLOGIC trading platform, which provides a customizable front end that is a lightweight, high-performance solution for web-based or mobile platform trading.

Several binary option trading platforms exist and SpotOption, TRADOLOGIC’s biggest competitor, has been offering bitcoin binary options since mid-2013. Leverate‘s new platform also includes support for bitcoin binary options and CFDs, which is utilized by Plus500 and TopOption.

Contracts for difference, or CFDs, differ from binary options in that they allow the use of leverage and the contract can be closed at any time, whereas binary options have a fixed expiry. Counterparty risk is a concern for both instruments, which is what the very short-term binary options utilizing the bitcoin block chain seek to alleviate.

UpDown will soon be adding a BTC/USD trading pair to its binary option asset list after it negotiates an exchange partnership. UpDown refers to itself as a community-regulated project and is registered in the British Virgin Islands. As always, please perform your own due diligence on binary option brokers and trade at your own risk.