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BBC Newsnight Bitcoin Segment – Daniel Knowles Versus Trace Mayer

On 26 March 2013 the renowned BBC Newsnight produced a 9:20 segment for about 700,000 viewers on the new decentralized virtual currency Bitcoin. Veteran journalist Jeremy Paxman hosted Daniel Knowles, a writer for The Economist, and Trace Mayer of Run To Gold and How To Vanish.

Being a professional journalist myself, although mostly contained to the written word, I know how difficult it is to research a story, craft an engaging script and then produce a segment all under the extremely tight deadlines imposed by current events. Being a long-time fan of the BBC, it must be the accents!, I jumped at the opportunity to provide the counterweight in the Bitcoin segment and am grateful to the very professional team at the BBC that made this segment a well produced piece of content. And having it follow the hair raising piece on the Cyprus debacle shows they have an open mind towards a potential solution for their viewers.

[youtuber youtube='UA5_paH__q0']

BACKGROUND

In this case and under the circumstances, I think the BBC produced a fine piece on Bitcoin. There are some within the Bitcoin community who are constantly impugning the motives of the professional media outfits. But with regards to this piece I hope some background information may be found useful.

With the bank seizures in Cyprus coupled with recent FinCEN guidelines being issued for decentralized virtual currencies there has been a flurry of activity in the Bitcoin price which makes for a very compelling story. But Bitcoin is extremely complicated. And to make matters worse, it seems that many of the knowledgeable voices on the subject have spent too many of their bitcoins on Silk Road instead of saving them.

On 25 March I was freezing in London and headed to Heathrow so I could join some people for an event in the Southwest United States and since I had a few days free in the schedule preferred to spend it in the sun instead of the frigid drizzle. Around 10:30am I received a call from a blocked number, which I normally do not take, but because I had been tipped off that the BBC may call therefore I answered. They were crafting a Bitcoin story, looking for a proponent and after some conversation I was battlefield promoted to backup.

You see they wanted someone in London, where ironically I had just been, to be live in studio. Plus, it would have been a higher quality piece of content, technically more controlled and were working under an extremely tight deadline with this very complicated subject matter. Had I known I would have extended my stay in London a couple days to accomodate them since I am such a fan of the BBC and this would be my first appearance. But we are all played the cards we are dealt and while they searched for someone local I told them I would be as flexible as possible as a backup.

But finding high quality and reliable guests is difficult! So a few hours before airtime I got the call and began making the 45 minute drive to the remote studio. Once there the studio had some technical difficulties so the poor BBC staff had to make several contingency plans and modifications. I am sure the uncertainty was problematic for scheduling. But about three minutes before airtime the technical difficulties got resolved and it was go time. The show must go on.

And it did go on and I think turned out pretty well all things considered.

REBUTTALS TO MR. KNOWLES

It is evident that Mr. Knowles has done significant research on Bitcoin. He raised a few issues that it would have been nice to respond to. However, given the remote studio nature of the appearance and time constraints that made it impossible to do on air without potentially disrupting the show in an unprofessional manner. So, I suppose this will have to do.

First, For money laundering Bitcoin is not a very useful tool, compared to others available, and that activity is largely kept within the fiat currencies like USD and EUR anyway. Even the European Central Bank’s Bitcoin report concluded on page 25, ‘Therefore, the real dimension of all these controversies [money laundering] still needs to be further analyzed.’

Users should keep in mind that Bitcoin is not anonymous by pseudo-anonymous. Additionally, all transactions are permanently stored in the blockchain which anyone can review. This leaves a tremendous amount of digital footprints that a competent forensic accountant can follow.

Consequently, I think Mr. Knowles is attributing to Bitcoin’s censorship-resistant nature a property which it does not have. Just because a payment cannot be stopped does not mean it cannot be traced.

Second, Bitcoin is not deflationary because inflation is an increase in the money supply and deflation is a decrease in the money supply. With Bitcoin there is a predictable amount of new bitcoins issued on a regular basis, currently 25 bitcoins about every six minutes. Therefore, Bitcoin is inflationary.

So, I am not sure what Mr. Knowles criticism is since it is premised on a substantively incorrect premise and misstatement of fact. Perhaps he can rephrase it?

Third, I am not sure I understand his criticism about why it is bad for one’s savings to increase in value. As illustrated in an infographic I put together on potential Bitcoin prices the saving of bitcoins is the starting point of a virtuous cycle for the Bitcoin economy.

potential bitcoin prices

Plus, for those of us who have been saving bitcoins, unlike Mr. Knowles who if he is saving at all is doing so in a fiat currency that is constantly losing purchasing power, those in Bitcoinland have a lot more wealth to spend on consumer products and as Bitpay’s recent records show, with $2m of transactions processed in March, those bitcoins are being spent. And that increased wealth is the result of a massive wealth transfer that is benefitting holders of bitcoins.

Fourth, the size of the Bitcoin money supply is starting to get pretty substantive in size and larger than about 40 nation states. It seems Bitcoin nation is growing. For example, the Central Intelligence Agency’s World Factbook would place the Bitcoin money supply around the 150th largest nation.

COUNTRY M1 BITCOIN PRICE
Rwanda $673,200,000.00 $61.65
Montenegro $749,000,000.00 $68.59
Fiji $794,600,000.00 $72.77
Djibouti $798,100,000.00 $73.09
Turkmenistan $828,800,000.00 $75.90
Aruba $868,500,000.00 $79.54
Togo $954,500,000.00 $87.41
Bitcoin $955,000,000.00 $87.50
Maldives $974,900,000.00 $89.28
Congo, Dem. Rep. $1,016,000,000.00 $93.05
Niger $1,064,000,000.00 $97.44
Cambodia $1,094,000,000.00 $100.19
Spain $775,200,000,000.00 $70,993.24
United States $2,318,000,000,000.00 $212,283.70
European Union $6,205,000,000,000.00 $568,257.27
Japan $6,735,000,000,000.00 $616,794.96

By

Trace Mayer is an entrepreneur, investor, journalist, monetary scientist and ardent defender of the freedom of speech. He holds a degree in Accounting and a law degree. He has studied Austrian economics focusing on the work of Murray Rothbard and Ludwig von Mises. He is a strong advocate of the freedom of speech, operates RunToGold.com and HowToVanish.com, has authored The Great Credit Contraction and co-authored How To Vanish The Book, Bitcoin Beginner’s Guide and A Lawyer’s Take On Bitcoin And Taxes, is a member of the Society of Professional Journalists and the San Diego County Bar Association. Trace Mayer has appeared on Canada’s national financial network BNN, BBC, ABC, NBC, many radio shows, conferences, to many private groups and is syndicated through Seeking Alpha, Yahoo! Finance and MarketWatch. He was among the first popular bloggers to publicly recommend Bitcoin in its infancy with a market cap under $2m and well before its massive rise to about $900m in March 2013. He has presented on Bitcoin, both objectively and persuasively, to a wide variety of audiences including members of the Federal Reserve, Bundesbank, major financial institutions, HNWIs, conferences and many others. So if you like, use or have profited from Bitcoin then there is a chance you were directly or indirectly influenced by Trace.

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  • Dane

    Hi Trace,

    You sure came across way better than the guy from the Economist!

    I know you’re pushing the bitcoin idea and I should have bought in last year when I first discovered your site – days after Barclays UK stopped accepting UK £ deposits through MtGox.

    Anyway, your site is runtogold so do you think without the central banks influencing the price of gold, gold would be experiencing the same gains as an unregulated bitcoin is now? I really can’t see the difference between gold and bitcoin other than ease of use over distance/online. Surely a digital gold would be the same as bitcoin?

    Dane

  • http://twitter.com/dlknowles Daniel Knowles

    Hi Trace. Daniel here. Good to debate with you. Just to explain my points:

    1) I’ll take your word for it on money laundering. Its extensive use to get around restrictions on gambling and buying drugs online struck me as evidence that it is a fairly useful tool for moving money around anonymously. But for actual money laundering, as you say, it may be less useful.

    2) A currency can be deflationary even if the total amount in circulation increases, because the volume of transactions increases. As the economy grows and as more people use bitcoin, the demand for bitcoins goes up. A central bank would create more money at that point, but the supply of bitcoin is designed to slow and eventually stop: and so its price relative to goods has to go up: ie, it deflates in value.

    3) Savings going up in value is great if it reflects an economic return on investment. Bitcoin isn’t an investment though – it doesn’t generate profits in itself. And if the price is shooting up, nobody has an incentive to spend their bitcoins, so it sucks liquidity out of the market, and makes it less useful as a means of exchange. There’s a contradiction between the two uses of money: is it for saving, or is it for buying and selling? There are good reasons why most central banks want to maintain price stability.

    Anyway, for what it’s worth, I think bitcoin is a fantastically clever and potentially trans-formative technology, and I would have liked to have got that across better. However, I think that the way it is shooting up in price at the moment actually undermines it somewhat.

    • Trace Mayer, J.D.

      @Dane, well, I am assuming the ideas. I am sure it was a lot more nerve wracking for Mr. Knowles since he was in studio while I was only in front of a camera without a screen.

      @Daniel, from an economic perspective Bitcoin is fine for users who want to buy things on Silk Road and preserve privacy mainly because the cost of discovering them is so high relative to other methods like credit cards or Paypal which are linked to identity. For dealers selling on Silk Road the laundering costs are most likely priced into the products. The costs really rise for those who do not have a Bitcoin position to launder.

      For example, most cash into Bitcoin services cost upwards of 8-10%, about 45 minutes and have limits around $1,000 per day per person. I read a report by the IMF that placed the upper bound on money laundering costs that the market would bear to be around 20%. So, that is why I have drawn the conclusion that using Bitcoin to launder, particularly with the permanent record in the blockchain which leaves a contingent liability of discoverability, is not a very good economic proposition.

      For the deflation issue I think our disagreement is semantic. I agree with the substantive points you make about bitcoins increasing in price as transactional demand increases.

      You are correct that the increase in bitcoin’s price is not the result of earnings but instead a wealth transfer. Whether one ‘likes’ that or not is probably a result of how many bitcoins they have. But, nonetheless, the wealth transfer is based on individual human action from market participants so it is what it is. Good luck trying to stop the market.

      I think your argument about sucking liquidity out of the market has largely been disproved by both theory and actual market behavior. Theoretically there is always enough liquidity but it is just a function of price so if there is not enough liquidity then the price will rise until there is. And market behavior is showing that as the bitcoin price rises it is increasingly being used for transactions. Personally, I like the 200 day moving average for a time period with charts because it filters out the short term noise and emotion and reveals the long-term trend.

      Chart of the 200 day moving average of the number of transactions minus the 100 most popular addresses.

      Chart of the 200 day moving average of the USD market cap.

      As the inforgraphic shows in the virtuous adoption cycle a rising price is extremely beneficial and self-reinforcing for Bitcoin’s growth and adoption. The uses of money are really to be determined by each individual market participant based on their own subjective valuation of the good and central banks are only one market participant. And as the price rises it surpasses some other good in the value judgment scale and is reflected in as the individual engages in voluntary trade.

      As far as the reasons being ‘good’ for why central banks want to price fix both the supply and cost of currency, well, I think that is a value judgment best left to politicians and political dogmatists and not monetary scientists or economists. And because they lack knowledge it will result in economic loss because of their inability to perform economic calculation hence the rise in Bitcoin’s price and accompanying wealth transfer. With both the Bank of Canada and Bank of England publishing proposals for ‘bail-in’ schemes like Cyprus it will be interesting to see how fast other market participants lose confidence and move towards something like Bitcoin.

      And if it happens in a large enough scale, as you alluded to, and becomes a truly transformative technology then a significant portion of the wealth will be transferred away from holders of assets backed by central banks and to holders of Bitcoins; hence potential prices of US$1,000,000+ depending on just how fast the central banks and governments continue the wealth destruction driving holders of capital into Bitcoin resulting in an even faster wealth transfer.

      Keep up the good work and enjoy the fun times!

  • Trace Mayer, J.D.

    @Dane, well, I am assuming the ideas. I am sure it was a lot more nerve wracking for Mr. Knowles since he was in studio while I was only in front of a camera without a screen.

    @Daniel, from an economic perspective Bitcoin is fine for users who want to buy things on Silk Road and preserve privacy mainly because the cost of discovering them is so high relative to other methods like credit cards or Paypal which are linked to identity. For dealers selling on Silk Road the laundering costs are most likely priced into the products. The costs really rise for those who do not have a Bitcoin position to launder.

    For example, most cash into Bitcoin services cost upwards of 8-10%, about 45 minutes and have limits around $1,000 per day per person. I read a report by the IMF that placed the upper bound on money laundering costs that the market would bear to be around 20%. So, that is why I have drawn the conclusion that using Bitcoin to launder, particularly with the permanent record in the blockchain which leaves a contingent liability of discoverability, is not a very good economic proposition.

    For the deflation issue I think our disagreement is semantic. I agree with the substantive points you make about bitcoins increasing in price as transactional demand increases.

    You are correct that the increase in bitcoin’s price is not the result of earnings but instead a wealth transfer. Whether one ‘likes’ that or not is probably a result of how many bitcoins they have. But, nonetheless, the wealth transfer is based on individual human action from market participants so it is what it is. Good luck trying to stop the market.

    I think your argument about sucking liquidity out of the market has largely been disproved by both theory and actual market behavior. Theoretically there is always enough liquidity but it is just a function of price so if there is not enough liquidity then the price will rise until there is. And market behavior is showing that as the bitcoin price rises it is increasingly being used for transactions. Personally, I like the 200 day moving average for a time period with charts because it filters out the short term noise and emotion and reveals the long-term trend.

    Chart of the 200 day moving average of the number of transactions minus the 100 most popular addresses:

    http://tinyurl.com/ctgtaqt

    Chart of the 200 day moving average of the USD market cap:

    http://tinyurl.com/cqtoy8v

    As the inforgraphic shows in the virtuous adoption cycle a rising price is extremely beneficial and self-reinforcing for Bitcoin’s growth and adoption. The uses of money are really to be determined by each individual market participant based on their own subjective valuation of the good and central banks are only one market participant. And as the price rises it surpasses some other good in the value judgment scale and is reflected in as the individual engages in voluntary trade.

    As far as the reasons being ‘good’ for why central banks want to price fix both the supply and cost of currency, well, I think that is a value judgment best left to politicians and political dogmatists and not monetary scientists or economists. And because they lack knowledge it will result in economic loss because of their inability to perform economic calculation hence the rise in Bitcoin’s price and accompanying wealth transfer. With both the Bank of Canada and Bank of England publishing proposals for ‘bail-in’ schemes like Cyprus it will be interesting to see how fast other market participants lose confidence and move towards something like Bitcoin.

    And if it happens in a large enough scale, as you alluded to, and becomes a truly transformative technology then a significant portion of the wealth will be transferred away from holders of assets backed by central banks and to holders of Bitcoins; hence potential prices of US$1,000,000+ depending on just how fast the central banks and governments continue the wealth destruction driving holders of capital into Bitcoin resulting in an even faster wealth transfer.

    Keep up the good work and enjoy the fun times!