Myth Of The 20th Century – Episode 20: Bitcoin – The Digitization of Money

Welcome to the Myth of the 20th Century. The podcast airs on Fridays.

— Brought to you by —

Adam Smith, Hank Oslo, Hans Lander, and Alex Nicholson

Notes:

Money and finance has been an integral part of human civilization ever since the advent of trade. Over time, although taking many forms, from salt to gold coins to paper bills, money has almost always had a physical basis. With the advent of fractional reserve banking, however, and the introduction of digital technology and accounting – finance has become much more complex than its roots on ancient trading caravans. The latest major innovation – Bitcoin – has presented an even more complex system – that without even any central banking authority – has been able to connect digital participants through the internet using an entirely new currency and a mechanism for controlling fraud and inflation. Today we explore the advantages – and perils – of utilizing this new technology, as well as how things have evolved to this point with the introduction of computerization in finance.

Timeline:

1950- Diners Club introduces the first charge card in the United States
1950s- IBM mainframes deployed across a variety of back office banking applications
1960- first patent on ATM technology issued
1971- NASDAQ establishes the world’s first electronic stock market
1974- SWIFT system developed for international financial transfers
1980s- personal computing revolution introduces home accounting, spreadsheets, tax software
1989- Fair, Isaac introduces the first national personal credit score (FICO) system in the US
1993- Ed Codd cites OLAP at offering multi-dimensional data cubes as business intelligence technology
1994- K. Aufhauser & Company offers online stock trading
1998- Paypal, WebMoney created as online systems for payment
2009- Bitcoin software first released by Satoshi Nakamoto

References:

– Debt: The First 5000 Years, Graeber (2001)
– SIFIs – https://en.wikipedia.org/wiki/Systemically_important_financial_institution
– Bitcoin Introduction – https://bitcoin.org
– SWIFT banking system – https://en.wikipedia.org/wiki/Society_for_Worldwide_Interbank_Financial_Telecommunication
– Shadow Brokers reveal NSA leaks – https://arstechnica.com/security/2017/04/nsa-leaking-shadow-brokers-just-dumped-its-most-damaging-release-yet/

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6 Comments

    1. We do touch on the analysis of its vulnerability, which he and many other people have written about. Ultimately his analysis is fairly shallow though – of course the government has significant ability to crack down on things like Bitcoin per se, but the impact of the underlying technology is more interesting and difficult to control.

      It’s also worth noting that his specific claim that it will be shut down can by now be considered as empirically wrong.

  1. All the banking systems in your list now handle thousands of transactions per second, except Bitcoin, which has a built-in hard limit of seven per second, with actual performance peaking at 3-4.

    Miners don’t want to raise this limit because it would burden them with more network traffic; they’d rather cherry-pick the transactions offering the highest fees. You can still submit transactions with no fee, but they might take hours or days to clear.

    So the only way Bitcoin could work as a medium of exchange is if people deposit it in banks, and banks hold it in cold wallets that seldom trade. But then you’re back to trusting banks to hold your money.

    1. I basically agree with this; aside from the TPS throughput the best case transaction latency is enough that it’s impossible to buy coffee with it. There’s definitely a role for clearinghouses, similar to the way that banks clear checks in bulk between themselves by the end of the day, but that doesn’t imply you necessarily hold the wallet under their control. Credit cards are essentially this model right now; you pay them off (I hope) in one transaction at the end of the month, and the CC company pays the merchant daily or so. There are also designs that support “stacked” currencies under BTC with different clearing requirements; this also already exists with things like cash management companies.

  2. At one point, credit scores were discussed and one of the people on the podcast said that they are really good because they measure conscientiousness. Broadly, that is true, but there is one problem, I believe.

    People who do not use credit at all can actually have a lower credit rating than those who do (yet pay it off). This obviously makes sense from the point of view of people who would give credit as anyone who does not regularly use credit is an unknown entity.

    However, this does create perverse incentives in that anyone not totally tied into the financial system will be regarded as less conscientious. No, maybe such people consume what they produce, trade for it, or pay cash. Maybe they are quite conscientious. Maybe they understand that being tied into the modern financial ponzi system brings with it all sorts of risks, even for people who think they have everything under control.

    It seems to me that the credit system does not fit that well with a lot of traditionalist thinking and forcing people into it for fear of being regarded as less conscientious certainly does not fit well with traditional thinking.

    1. Agreed. The system is designed for you to participate. If you don’t you’re not trusted. At a certain point, Americans should realize they shouldn’t try to be impressing people who don’t have their interests in mind.

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