Musings Report #10 3-9-14 The Bitcoin Mystery

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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.

The Bitcoin Mystery

Even those of us who are not deeply enmeshed in the world of Bitcoin find the mystery surrounding its founder of human interest. As you probably know, Bitcoin is the original digital crypto-currency that rose from less than $1 at its introduction to over $1,200 in just a few years (it is currently around $620/bitcoin. At a reader's urging, I finally enabled Bitcoin donations to oftwominds.com--a move that probably precipitated its recent decline in value.)

The story is appealing on many levels: a mysterious entity that used the name Satoshi Nakamoto introduced Bitcoin to the world in 2009. (I heard about it in 2010, when it was still under $5, and naturally kick myself for not buying some at that price.) For a variety of reasons, it was soon widely believed that "Satoshi" was not an individual human being but a nom de web of a group of programmers who developed Bitcoin.

Now Newsweek magazine has made a splash by claiming that the founder of Bitcoin is in fact a fellow named Satoshi Nakamoto, a 64-year old engineer who was born in Japan after World War II and who moved to southern California as a young teen. The Face Behind Bitcoin

The Newsweek piece hit the media like a typhoon, and soon Mr. Nakamoto was besieged by reporters. Not unsurprisingly for someone who had kept a decidedly low profile (including a "lost decade" that might have included top-secret work), Nakamoto declared he had nothing to do with Bitcoin in an AP interview.

A number of high-octane pundits and techies have weighed in, picking apart Newsweek's claim, mostly by comparing known examples of Mr. Nakamoto's informal writings in English with the polished, confident academic prose of the paper that laid out the Bitcoin concept.

I recommend the paper as an extraordinary example of creative conceptualization that leads to a practical application. (Ignoring the math won't hurt your grasp of the basic idea.)

These commentators claim there is no way a person writing the imperfect English attributed to Satoshi could have written the masterful paper. On the face of it, that seems like a very reasonable assumption.

However, another explanation seems blazingly obvious to me: Mr. Nakamoto could have conceived the basic structure and programming, and an acolyte could have written the paper and attributed it to Mr. Nakamoto. This would explain the two different "voices" and also the peculiar attribution of the paper to a reclusive person who would never have distributed a paper under his own name.

One of the lead programmers reported that over 70% of the original programming had been reworked or replaced, so clearly the final product was a collaboration. If the programming was collaborative, why not the paper?

Another omission in all the media hysteria is any mention of the blatant violation of Mr. Nakamoto's privacy: did Newsweek really have to distribute a photo of Mr. Nakamoto's home? How did that add to the story, other than to shred this person's privacy? To me, that was completely needless.

The angle that fascinates me has also received little to no coverage: the incredible "American-ness" of this story. Yes, Satoshi is a naturalized citizen, but the whole narrative thread is pure Americana: an eccentric (and not altogether likeable, it seems) semi-genius with a deep working knowledge of model trains, programming and (apparently) cryptography is deeply annoyed by having to pay exorbitant bank fees when he bought model train parts from Britain. This sets him thinking about a peer-to-peer payment system that bypasses the banking system entirely, and he uses his knowledge of CPU cycles and disk storage (back when that mattered) to conceptualize a way of using encrypted strings to establish a trustworthy means of insuring payment and transparency.

(Note that Bitcoins are indeed secure, but since they are digital entities, they can be stolen by any of the usual means of accessing networks and private accounts. A Bitcoin stored on a thumbdrive or hard-drive cannot be stolen remotely.)

Despite his reclusive, semi-paranoid nature, this lone eccentric manages to find collaborators, who then volunteer countless hours perfecting the original concept.

The program is released to little fanfare and ends up changing the world a few years later. How American is that? Very.

Bitcoin has spawned dozens of copycat crypto-currencies, and how the world will use crypto-currencies is far from clear. I have explored the idea of using Bitcoin as a reserve currency because it cannot be duplicated and therefore is immune to inflation:

There are multiple mysteries that have not been resolved and may not be resolved: whomever Satoshi is, individual or group, why are they not cashing in their $400 million trove of Bitcoins?

Family members are quoted as doubting that Satoshi would ever clear up the mystery himself, other than to deny participation in Bitcoin even to his family.

What makes this such an American narrative? Something I have addressed in a previous Musings: the Infrastructure of Opportunity that enabled Satoshi (regardless of his/her actual identity) to not only invent Bitcoin but recruit others to work on it with no formal structure or cash payment, and then unleash it as a revolutionary force that is soon beyond the control of any individual, group, company or nation.

There is also something wonderfully (if perversely) American in someone becoming a media sensation by remaining adamantly in the shadows.

Summary of the Blog This Past Week

What's Cooking at Our House: Quiche 3/8/14

Better Than the Black Card: Introducing the Uranium Card 3/7/14

Why Is Our Government (and Deep State) So Incompetent? 3/6/14

How the Empire Might Strike Back 3/5/14

Ukraine: Follow the Energy 3/4/14

Who Gets Thrown Under the Bus in the Next Financial Crisis? 3/3/14

The essay "Who Gets Thrown Under the Bus next?" opens a major inquiry into competing factions within the Deep State, and introducing my "peak Wall Street" thesis. I had fun with the Uranium Card, and correspondent John D. wrote that distributing depleted uranium in this fashion (i.e. in minuscule portions embedded in a credit card) is a pretty safe way of getting rid of a potentially hazardous material.

Best Thing That Happened To Me This Week

Many good things happened to me this week--a lively musical jam and podcast with Adam Taggart and Chris Martenson, a fun podcast with Jim Kunstler, an enjoyable family get-together--that's it's difficult to pick "the best," but in terms of uniqueness, I have to mention witnessing a blistering solo performance by violinist Julia Fischer following her performance with the San Francisco Symphony of Prokofiev’s 1st Violin Concerto.

Every once in a awhile you experience a musical display that you immediately sense is special and that is burned into your memory: it could be a friend's solo during a jam session, or a unique expression of purity and power in any musical genre--bluegrass, world music, drumming, classical, jazz, rock, you name it.

Regular readers have probably picked up that I enjoy a wide range of music, so hopefully it won't surprise you too much that I am one of those horrible elites with season tickets to the symphony. (And yes, I also eat well at home, more evidence of dreadful elitism.) As a result, I've seen a wide range of performances by famous (within classical circles) musicians.

I'd never seen Julia Fischer before, or heard Prokoviev's 1st violin concerto, so I had no apples-to-apples comparison of Ms. Fischer's ability. After the concerto, the crowd gave her a rousing round of applause and she unexpectedly returned to the stage to unleash one of the most searing solos I’ve ever witnessed: heartfelt, energetic, brilliantly played, fiery and deeply felt. (I missed the name of the piece, the 3rd movement of something unknown to me.)

Encores of any kind are rare in classical performances, and encores after the evening's first piece of music are even rarer--encores come at the end of the evening, not 1/3 of the way through the program. I was puzzled by her unusual encore and did not figure out why she did it until I read the local classical music critic’s review of her performance a few evenings prior to the Saturday program I attended. The critic had slammed her as technically competent but lacking in warmth.

I think Ms. Fischer decided to show the critic exactly what she was made of, which was truly phenomenal: she blew away everyone else I’ve seen live, including many great violinists like Joshua Bell, Midori, etc.

I wonder what all the first violinists were thinking as they watched her, for it was not just super-human technical artistry, it was a display of emotional power and range that is very rare. I feel very fortunate to have been transfixed and transported for those few moments of exhilarating intensity.

Market Musings

One feature of the current global economy that is widely misunderstood is the nature of credit market expansion, which as you know has been quite robust for the past 5 years since the global financial meltdown.

Credit expansion does not have to reverse into contraction to trigger the collapse of bubbles and an ensuing recession--it only has to stop expanding at an accelerating rate. Asset bubbles and the credit expansion that inflate them are not steady-state systems--once they stop expanding, they collapse, much like a supernova star (a model I have referred to many times in the blog).

What does this mean? Simply this: China does not need to rein in its spectacular expansion of credit to pop its multiple bubbles (in real estate, shadow banking, copper, etc.)--it simply has to limit credit expansion to its current rate.

Once credit isn't expanding at an ever-faster rate, the system quickly runs out of oxygen and implodes. Since there is no way that China can do both of these-- 1) rein in credit growth and 2) keep inflating bubbles in real estate, commodities, etc.--then it is inevitable that the asset bubbles in China will burst, "surprising" everyone who doesn't understand that bubbles require an ever-accelerating expansion of credit to keep from imploding. There is no equilibrium in bubbles, and no steady-state. It's either expand or implode, and those with unlimited faith in the central government's ability to "manage" the Chinese economy will be surprised when it turns out the central state in China is not god-like in its powers or prescience.

From Left Field

Help! An elephant ate my iphone (1:48 minutes) (via Cindy F.) -- proof of the iPhone's durability, as it was recovered intact--though not from the Elephant's mouth....

Amazing Billiard Trick Shots By Florian Kohler - video - (via Wayne A.) -- check out this fellow's mastery of spin....

Tampa family sickened by LSD-tainted beef (via Steve K.) -- purchased at the local Walmart, no less....

History in 9 minutes- Europe Middle East from 1000 AD to the present-- video - ever-changing borders (via Mark G.)

European Border Changes Over Last 1000 Years (via Ron R.) (3:24 minutes) -- another take on the same history.

Ravel's La Valse, Martha Argerich & Freire (via Kathy K.)(11:29) -- two pianos, "....the most unexpected of the compositions of Ravel, revealing to us heretofore unexpected depths of Romanticism, power, vigor, and rapture in this musician whose expression is usually limited to the manifestations of an essentially classical genius."

Why Germany really lost World War II (via Lew G.) -- energy and transportation eventually trump everything else...

Don’t drink the water: Translated travel tips for coming to America

We Aren’t the World Joe Henrich and his colleagues are shaking the foundations of psychology and economics--and hoping to change the way social scientists think about human behavior and culture.

Americans are weird: we're at one end of the cultural spectrum, so studies based on Americans cannot be extrapolated to represent the "average" human response or worldview.

Christopher Lasch and the Role of the Social Critic "Bourgeois society seems everywhere to have used up its store of constructive ideas. It has lost both the capacity and the will to confront the difficulties that threaten to overwhelm it."

The American cloud (via Yoni F.) The cozy coastal world of pretend farmers’ markets bears no resemblance to the actual back end of America

"All human beings have three lives: public, private and secret." Gabriel García Márquez

Thanks for reading--

charles