Bitcoin

The history of money is fascinating. I’ve quoted Philip Coggan’s definition before:

Money is the belief that someone will pay you back.

The concept of value is intrinsically linked to scarcity, and we express it every day in phrases such as a great holiday, a diamond ring, or a beautiful woman. In every case, it’s the adjective that provides the value—there’s sex and then there’s great sex, and we all know the difference.

Through the ages, what made gold special was scarcity, allied to purity. Aurum, as the Romans called it, the chemical element with symbol Au, sits at number 79 in the periodic table. That table is in itself a tribute to human brilliance, the brainchild of one Dmitri Mendeleev.

Mendeleev wrote his Ph.D. thesis on ‘the combinations of water with alcohol’, which seems appropriately Siberian, and went on to devise a framework for organizing all the chemical elements known to man—as more were discovered, they neatly filled the slots.

Atoms are like a miniature planetary system, a core mass surrounded by satellites called electrons. These electrons are organized in shells, two in the first, eight in the second, and so on. Gold has seventy-nine electrons, and it is one of only three metals (the others are sliver and copper) that’s mined as an element.

If you ask Wikianswers How abundant is gold? it says.

gold is very abundant seeing as to how we have alot of jewlry and money and other things.

The problem with that answer is not just illiteracy. What drives people who are clearly clueless to contribute this kind of vacuous comment? Maybe the fact that they’re clueless.

Gold is anything but abundant. It’s so scarce that you’d need over three hundred (twenty ton) truckloads of earth to obtain an ounce, and it’s so dense that a cube fourteen inches long weighs a metric ton. Oh, and it doesn’t tarnish.

Mercury sits next to gold in Mendeleev’s table, and it’s twenty times more abundant on earth than it’s auric brother—perhaps that’s why the alchemists believed quicksilver could be turned into gold, through some chemical magic.

Plastic religion: a Swedish pastor takes the collection basket into the digital era.

Plastic religion: a Swedish pastor takes the collection basket into the digital era.

With all the major powers printing paper money like there’s no tomorrow, scarcity dived out the window. Of course the nuance here is that it’s not really paper money, given current estimates suggest only seven percent of the U.S. economy relies on banknotes—in Europe that number is nine percent, only marginally higher.

So it’s unsurprising that the Bitcoin phenomenon has arrived in our midst. One thing Satoshi Nakamoto understood was the concept of scarcity. The Bitcoin ‘Federal Reserve’ is in the cloud, as you’d expect. Coin of the realm is minted by a network of ‘miner’ computers (nice to see that gold touch), that create the coins and deal with transactions.

The ‘printing’ of bitcoins is exclusively digital, and depends on the resolution of complex mathematical problems. Here’s an example:

Some of the earliest work with mathematics — we’re talking ancient Greek number-crunching here — was with prime numbers, especially the relationships and frequency between them.

The abc conjecture — a younger problem in the field, originally proposed in 1985 — is as follows.

Take three positive integers that have no common factor and where a + b = c. For instance, 5, 8, and 13.

Now take the distinct prime factors of these integers—in this case 2, 5, and 13—and multiply them to get a new number, d.

In most cases, like this one, d is larger than c. The conjecture states that in rare instances where d is smaller than c, it is usually very close to c. Most importantly, the conjecture also shows that there are a finite number of instances of a, b, and c where d is smaller than c.

Not for the faint-hearted, right? So if you’re a miner for a heart of bitcoin, you solve problems and earn bitcoins, which you can then trade. The mint is apparently designed so the number of bitcoins will not exceed twenty-one million. Only a few people can generate currency, because the generation is knowledge-based.

And there’s no scarcity like knowledge scarcity.

Bitcoins circulate outside the conventional banking circuits, and aren’t subject to the usual array of transaction fees, rules and regulations. This triggered a major FBI investigation, resulting in the shutdown two months ago of an online drug market called the Silk Road.

The site, allegedly run by a guy who used the handle ‘Dread Pirate Roberts’ (the Roberts seems a little out of place here, kind of like Macho Man Hello Kitty), was investigated for two and a half years. Since Bitcoin was created in 2009, it only took one or two years before it started being abused—how reassuring to see digital metal corrupts as quickly as the other stuff.

Apparently another silk road is already up, much as the India Road replaced the caravanserai.

Rocket in your pocket? Bitcoin fever hits the markets.

Rocket in your pocket? Bitcoin fever hits the markets.

But the U.S. Government Accountability Office has been giving Bitcoin it’s full attention—among other things, it declared that income earnt through virtual currencies is taxable.

The value of Bitcoin against convential currencies has fluctuated wildly, reflecting the speculative stage of this new financial instrument. This week, a bitcoin was worth over a thousand dollars, which would cap the maximum value of bitcoins at twenty-one billion bucks—just enough to pay off Detroit’s debt.

Don’t write Bitcoin off as a fad, there are several firms setting up investment trusts, exchange-traded funds, and the like. Names such as Winkelvoss and Silbert pop up—to me it sounds like Jewish thinking heads are getting involved.

This morning, the India Road blog passed thirty thousand views. I am in your debt. Mayhap ye shall be paid in bitcoin.

Atmos Fear and The India Road. Quick links for smartphones.

Atmos Fear and The India Road. Quick links for smartphones.

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