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Calling creative people, productive people, thinking people, considerate people, Londoners, Welsh people, developing nation entrepreneurs and good people everywhere

Please consider putting a little of your money into Bitcoin – and sooner rather than later.

That’s it! Making this request is the sole purpose of this blog post.

I will explain why I’d like to see this but first a disclosure I would like anyone considering risking any money to think about:  I am personally heavily invested in bitcoin and I am also selling physical bitcoin ‘Casascius’ coins. So not only do I indirectly benefit every time someone buys bitcoin from anyone anywhere but interest arising out of this piece could result in physical bitcoin sales for me and direct profit.  So feel free to question my motives for writing this in the first place.

Given the amount of negative Bitcoin press coverage since the price crashed about a month ago* people could be forgiven for believing Bitcoin was a fad that is on its terminal decline. And while considering whether or not or how much money to put into bitcoin please keep in mind the naysayers may be right. Not only could the technology theoretically totally fail wiping out all value but also a probable consequence of one or more major world governments attacking bitcoin is that its value could fall through the floor as the door to mainstream use is closed for the foreseeable future.

I’m not going to try to persuade you these disaster scenarios are unlikely although needless to say I would not be anywhere near as heavily invested if I thought them very likely. What I’d like to see is those people I listed above each spending say £20 (or some sum that would most likely to have been spent on something frivolous and unnecessary) on bitcoin. And whilst I would always like to see people researching, learning about and understanding the ins and outs of Bitcoin I would in this instance recommend your looking at your bitcoin purchase as a ‘punt’ as if on an outsider at the dogs. I’m saying I wouldn’t want your lack of understanding of the intricate mechanisms and underlying economic principles of bitcoin to hold you back from spending a little money just as not knowing the trainer, training regime, in depth understanding of form and probability theories wouldn’t hold you back from backing the dog whose name you fancied on a night at the dogs.

So why am I asking you to do this?  If Bitcoin did take off even to a tiny proportion of its potential one consequence would be a one-off significant worldwide redistribution of wealth and I’d like to see a higher proportion of the beneficiaries, and the consequent economic power, in the hands of good people in general and my kind of people in particular.

There will never be more than 21 million bitcions in existence. And a consequence of this finite number having been built into the protocol the only way Bitcoin could ever become widespread is if its value was orders of magnitude above what it is today. In practice, assuming bitcoin does not fizzle away, this means people who have bitcoins early on will see the value of their bitcoin holding increase in value by the same orders of magnitude. This aspect of Bitcoin makes for a characteristic that many find undesirable because it would appear to reward early adopters by an immensely disproportionate amount relative to the risk they took. Others take it further calling Bitcoin a Ponzi or pyramid scheme, likening it to Tulip Mania or laughing at it as a bunch of mugs searching for the ‘greater fool’. Invariably those who are most dismissive simply don’t understand enough about it but I will accept there is something unfair about the extent of the disproportion of early-adopter rewards. However I also tend to think without this attractive aspect Bitcoin wouldn’t have got to where it is today let alone where it might go in the next few years.

So given that it is what it is if someone is going to be making disproportionate gains relative to risk and as a consequence increasing the buying power of a bunch of people I have my preference as to the kinds of people I’d like to see wield that power.

Relative to population size whilst Russia, Finland and the US are big Bitcoin users in China last week nearly 40,000 copies of the main Bitcoin wallet was downloaded in merely three days after a state-controlled TV programme featuring Bitcoin. Because of its ‘pseudonymous’ nature we don’t really know who is using or what for it so my assessment is likely to more reflect my prejudices than fact! However I’ll have a go anyway: In the former eastern block I’m afraid my suspicions are it is not mainly those of highest integrity using it for constructive purposes. In the US it appears to be largely techies and anarcho-capitalists whilst in Finland it appears more to be a cross-societal mix.

I would like to see London continue as a world financial centre and I believe Bitcoin has the potential to give a bigger kick in the behind to banks’ damaging practices than regulation ever could. But this does mean unless there’s enough bitcoin in London when this all happens we could lose out to countries and cities who got in earlier. Having said this, my ideal would be that it be adopted by creatives, productives and traders of real goods and services worldwide before the private and central banks catch on to what’s going on.  It would mean their having to come to us for for their bitcoin rather than vice versa 🙂

So how’s about it? Can you put your hand on a few fivers floating around that you wouldn’t miss? Do you fancy having a little stake in this game?

* If you’re not familiar with the prices relative to the pound, from the first few days in April it shot up to more than double and has since the last few weeks overall gone back down to where it was.

An healthy uncertainty in the bitcoin marketplace

I like what’s going on with the bitcoin price lately.  Unless this is the first time you’ve heard of Bitcoin* you will no doubt know the price per bitcoin in relation to ‘normal’ currency recently plummeted to about a quarter of its all time high over a couple of days.  It is since then I’m talking about, when it has gone both up and down to the extent that nobody anymore can convince themselves ‘bitcoin only goes up’.  As a consequence the silliest of speculative money (belonging to those like the ones who panicked and sold when they saw the price go down for the first time) is staying away.  I am reading comments whenever it dips (as it did yesterday and today) like “we’re not out of the woods yet” and I think: long may we not be ‘out of the woods’ if it means people will refrain from throwing their whimsical money into bitcoin again only to pull it out as soon as their overnight get-rich-quick scheme isn’t working out for them.

One of the reasons I like the way the exchange rates are right now is because it reduces the chances of a repeat of such an immense drop where many innocently going about their bitcoin business got caught in the crossfire.  I also like it because it means we are no longer on such a rapid upward trajectory which gives people coming across Bitcoin for the first time more time to have a think about it without feeling the pressure of the runaway price whispering ‘buy today or miss the boat’!

Chart

The thing is in order for people to use Bitcoin as a means of sending or spending money it doesn’t really matter what the price of it is as long as it is not zero.  

For illustration purposes I’m going to pretend sending or spending are the only things people do with bitcoins (no saving or speculating) and people only exchange their local currency for bitcoins in order to carry out the transaction with the recipients immediately exchanging back to local currency.

In this hypothetical scenario if all the bitcoins currently in existence (let’s round it down to 10 million) were immediately available the total value of all the bitcoins (in local currency) need be no more than the total value of the transactions being processed at any one time.  So let’s say 100 people wanted to send or spend at the same time an average of £200.  The total value of bitcoin would need in that moment to be £20,000 meaning one bitcoin would need to be valued at 0.2 pence.

This is of course an impossible situation apart from anything else because it would require synchronised buying from the last folks to use it and selling to the next and would require a perfect and predictive price-discovering marketplace.  For something like this to have any hope of working you need a liquid marketplace .  We need people always prepared to buy and sell.  Enter stage right the speculators who, despite sometimes giving the rest of us a headache when their antics get out of hand, provide this service thus enabling those who want to use it to send and spend always to be able to buy when they need to. This of course means not all bitcoins can be used for sending and spending anymore because the speculators need theirs too.

We know there will never be more than 21 million bitcoins and we know it is better than anything that has been before in terms of low-friction, speedy, secure transactions so we can be pretty sure unless and until something better comes along there will always be a market for bitcoins.  We can also therefore be very confident we will always be able to get something for our bitcoins – meaning they can be used as a store of value.  But when someone decides to keep some bitcoin as a store of value this further reduces the amount remaining on the marketplace available for transactions.  So going back to our hypothetical situation above if half of the bitcoin in existence was in use by speculators and by savers and therefore unavailable for spending and sending we’d only have 5m remaining bitcoins on the marketplace available for the same total value of transactions therefore the price per bitcoin would need to be 0.04p**

All good so far:  Small economy, reasonable levels of savings, liquid market. Enter stage left a growing economy (more concurrent demand for sending and spending).  Also, the barman accepting bitcoins from his customer now instead of exchanging them immediately back is using them to pay his brewery thereby turning temporarily into a ‘saver’ and keeping more off the market for longer.  As a consequence the value needs to go up to enable the volume of transactions.  And as the value rises and looks to continue to rise it becomes more attractive to savers.   Also people can see although they might not now be able to use bitcoin to the extent they would like to, it makes sense to buy some now because of the reasonable chance of being able to buy more with it in future.  So even as the growth of the bitcoin economy accelerates so does its attractiveness as a store of value.  I won’t start throwing figures as to what I think the price of bitcoin will be but have a look at the logarithmic scale on the x axis of that chart above and extend both x and y axes to get an idea of where it is likely to be heading.***

Yes, this means even without adding into the mix the activities of those who care nothing about bitcoin’s usefulness as a means:

  • of being independent of central banks and their political masters;
  • of being independent of high street and city banks;
  • of avoiding credit card charges and fraud;
  • of sending money ‘home’ irrespective of a country’s political status and without the high costs of money transfer services;
  • and not least with its potential to protect those living under tyrannical regimes from hyperinflating their savings out of existence (such as happened in Zimbabwe and is close to happening again in Argentina)…

… the growth of the value of bitcoin looks to be exponential.

It doesn’t look to me like there’s a serious competitor to Bitcoin coming along anytime soon (and if it does it would need to be so much better so I would welcome it and ‘jump ship’) and reading between the lines on the legislation front it doesn’t look like the authorities are about to take any drastic measures so I see nothing of substance ahead to slow Bitcoin’s growth down.  Nor do I see anything of substance holding back the consequent increase in evaluation and price.

What is slowing the price down right now is uncertainty and probably price manipulation.  Price manipulation in such an immature and unregulated market is bound to have an affect and it’s no big deal, providing we’re not worried about day-to-day price differences (if you bought your holiday money 6 months early would you be watching the price every day thereafter in case you could have bought at a better rate?)  Right now the slow-down in exchange rate increase is is providing some breathing space for more people who could benefit from Bitcoin’s long-term growth to buy some whilst the price is as low as it is (relative to its potential).  I’d like to see all the cool people in the world get some before the uncool people jump on board 🙂

Why?  Because the one thing it does have in common with Tulip mania (a parallel commonly made) is that everybody who buys after you adds value to your stake holding as well as that of everyone else who bought before them.  This does not make it a ponzi scheme or make it evil or unjust or unsustainable as many would have you believe.  It does however mean whenever it does eventually peak people buying then with the sole intention of selling again at a higher price will have lost out.  But regardless of when bought, for all those still buying to use it to spend and send (or even to save, accepting it may eventually – even tomorrow – lose some value) then it is still serving its purpose. The only people who can lose out are people buying for ‘the wrong’ reasons at ‘the wrong’ time.

But seeing as this mechanism is integral to the way bitcoin works I’d like to see Sudanese and Zimbabweans and landless Indians and musicians worldwide and those imaginative creative people who could change the world for the better buy soon so that they are subsequently empowered by the latecomer ‘establishment money’.  Be aware though that hedge fund and banker money is already beginning to pour into bitcoin.  But there is no immediate rush because the risk-averse, slow-minded, old-money folk won’t moblise that quickly and with any luck those in most need of Bitcoin will already be on board by then.  In the bigger picture whatever price you buy for in 2013 is likely to be early enough – and as I just said, if your purpose is to use it then anytime is early enough 🙂

*****************************************************************************

* I will do a ‘Thoughtfan Introduces Bitcoin’ post at some point but for now think of it as an internet currency where users have ‘wallets’ (on their computers or smartphones or in the cloud)  containing bitcoin which can be sent or spent to another wallet anywhere on the internet like an email for hardly any cost.  Although technically there is a ‘ledger’ that keeps track of this it is easier to think of it as cash because once it has gone from your wallet you no longer have it.  Likewise if you lose your wallet it or it gets stolen you no longer have its contents.  Bitcoins can’t be forged because it uses ridiculously strong cryptography (the same kind that banks use to protect their cash machines).  An immensely powerful decentralised network of computers enables the whole concept to work by doing stuff like checking nobody successfully spends the same money twice (you can copy it as many times as you want but it can only be spent once) and creating new bitcoins (in a strictly controlled and predictable manner).  So this network consisting of loads of computers owned and run by bitcoin supporters takes the role of the central bank meaning there’s no government or company owning it or controlling it.  The software is ‘Open Source’ meaning it is free for anyone to look into (to check it is not corrupt) or adapt and use for their own use. You send it between you and your peers with no intermediary hence ‘peer to peer’ or p2p and whilst it only works because of the supporting network it belongs to you and is entirely in your control.

** I am aware I’ve not got the causation straight in my simplistic hypothetical situation because in reality there are so many other factors at work in determining supply, demand and subsequent price.

*** Those of you who have heard me rave on and on about Bitcoin have always heard me make clear that its value could disappear overnight.  Even a few days back I posted the Southpark video on my Facebook saying ‘Something anybody considering investing in anything – even if it’s putting money away ‘safely’ in a bank should see – but especially anybody considering Bitcoin!!’  However, although I can not say there is no longer any risk I would personally like to see anybody I care about – or would care about if I knew them – buy some bitcoin soon with view to holding for the long term and eventually using to take part in the bitcoin economy.  I’m confident even a tenner’s worth, if the price goes through the roof as I think it will, will be worth something pretty substantial unless something catastrophic happens.

An appeal to the sense of fairnes in London home owners

We are in a situation where we have two doors and one of them is about to close.  Fewer and fewer young working Londoners are able to buy their own homes simply because the prices are getting out of their reach.  But there is another door that could be closed that would re-open the home-buying option for those embarking on their working lives.  What this door represents is a little more complicated to describe – hence my attempt at a graphic!

photofun-2907012780

When house values go up, other than home improvements almost all the increase  is due to higher demand for its location.  Higher demand comes about because its location is attractive – and a location becomes more attractive because of the activities of everybody (other than thieves and muggers) in the area.  From street entertainers to employers to night-club owners to shopkeepers to businesses-hardly-anybody-understands-what-they-do to hospital workers and funding authorities, council rubbish collectors, public and private transport providers and as imperfect as they are, the police and justice system.

People engage in these activities for their own reasons and are rewarded accordingly.  But what most people seem not to realise is that in the process of doing so they are also, in making the location more attractive and the land more valuable, constantly bringing the gift of higher value to land owners.

Now I actually don’t have a problem with that in principle.  In fact I am benefiting from the same thing happening with my bitcoin holding.  I was fortunate enough to have bought bitcoin last year.  Everybody who decides they want to participate in the Bitcoin economy now and henceforth by providing services in exchange for bitcoin or simply changing local currency for bitcoin increase the value of all bitcoin – including mine.  Thank you!  Exactly the same as with land.

The problem with the land scenario is only one of the two aforementioned doors can remain open.  In order for young working Londoners in future to be able to buy their own homes something has to change.  And that which in my eyes makes most sense is to close the door to existing home-owners perpetually receiving gifts from everybody else.  Close that door and the other will re-open.

And the mechanism by which this can be done is by means of a Location Charge.  The technical economic term for the ‘gifts’ we’ve been talking about is ‘economic rent’.  The idea behind the Location Charge is that the economic rent is diverted into the public purse instead of accruing to the home owners.  There are all kinds of fantastic other advantages to doing this, including the potential abolition of all other forms of taxation, which I won’t go into here because this is about a means of opening the door for the youngsters. Even among London home owners the likelihood is because of other repercussions of the introduction of the Location Charge many will still be better off so I have no need to appeal to you either.

To those relatively few in the highest value locations in London this is the cost I am asking you to consider accepting.  Paying an annual Location Charge on your property means by the time you go sell it you will have paid an equivalent to the increase in value whilst you owned it – as will the buyer need to continue to pay.  This takes the incentive out of buying a house as an appreciating asset, lowering demand and thereby lowering value. And it gets ‘worse’…

There are vast numbers of vacant potential development plots in London currently owned by speculators who can simply sit on them for decades at virtually no cost whilst receiving the gift of increased value we’ve been talking about.  By taking the gift away whilst at the same time demanding the same Location Charge per square foot as a neighbouring house they will be heavily incentivised to either do something with it or sell it to someone who will.  The result?  Loads of new properties coming on the market increasing supply relative to demand resulting in even lower property prices. There are no two ways about it.  In order for house prices to be low enough for those starting their working lives to afford prices will have to come down meaning the value of your property will come down.

In years to come when the switch to a Location Charge as the sole means of raising public revenue has occurred it won’t be so painful to home owners.  Values will have settled and home owners will have accepted the era of an automatic increase in their net worth year on year is over.

But for today’s home-owning residents of Mayfair, Chelsea & Islington I’m asking you to make a tough choice.  If it’s any consolation, all proponents of Land Value Taxation (what the ‘Location Charge’ has been called for decades) agree other forms of taxation should reduce as it is introduced.  This means should you decide to sell you won’t have to pay stamp duty; you don’t need to accommodate for inheritance tax; whether you put your money in a bank or in any other investment you won’t have to pay capital gains – and if you decide to invest in a business with it there will be no corporation tax.  The only investment that would incur an annual charge is land.  So there’s no getting away from the fact if a Location Charge comes into force, choosing to remain in one’s home will mean both paying a high annual charge whilst watching the value of one’s home decrease.

Is this something you could live with to make the world a fairer place?

PS Apologies for the poor quality of my graphic.  If there is anyone who has even a smidgen of ability with graphic stuff who’d be happy to make this piece not look quite so amateurish I’d greatly appreciate it – for a charge if required.

Asking ‘what’ instead of ‘who’ for raising public revenue

It would appear to me the vast majority of people – whether you’re talking about economic schools of thought, political parties or disgruntled citizens – are giving their attention to ‘who’ to tax.  Of course once the question is asked there is only one answer that will not have a politician kicked into oblivion or an individual branded as uncaring.  Yes you’ll even hear Cameron and the Tories on BBC’s Question Time agree that the ‘who’ to tax are ‘the wealthy’ and ‘big business’ – and before you run away I’m not saying that’s wrong.  What I’m suggesting is that by asking the wrong question we’re never going to get to an answer that has the potential to fix things.

Senior advisers to Chancellor Angela Merkel are suggesting taxing property rather than ‘levying’ bank accounts* if and when Spain (or whichever is next to fall) seek another bailout.  They seem to be coming round to the idea that raiding peoples’ bank accounts is stupid not least because the smart will simply take their money elsewhere.  So with ‘the wealthy’ as the ‘who’  to be targeted they’re flailing around trying to find ways of getting money from them and have for the time being landed on property.

Proponents of Land Value Taxation (LVT) – what I’m going to call the Location Charge** – like this because it is a big step towards a solution that could work.  But even if it works in terms of raising revenue whilst simultaneously stimulating the economy (which is what a Location Charge does) it will fail for as long as its intended purpose is the taxing of wealthy people and multinationals  because many of these intended targets do not hold a high proportion of their wealth in property – and are even less likely to if such a policy is on the cards.

But what if instead we gave our attention to ‘what’ to tax?  What if we recognised that introducing a charge on the value of land would bring vast swathes of redundant (development) land into use, would allow for an immense reduction if not abolition of all (other) forms of taxation creating an enormous economic stimulus and would lower land values thus enabling those starting their working lives today to have a chance at buying their own home?***

Then the ‘who’ doesn’t matter.  Of course there is a ‘who’ who will catch the brunt of it and it is land owners in the highest-demand areas.  These are the estimated 20% of tax payers who would, even if all other forms of taxation were abolished, be worse off under a Location Charge system.  Labour supporters of LVT like that because generally speaking those land owners are very wealthy so it ticks the right box.  But it’s not the point.  The land has its high value in those locations because of the economic activity in the vicinity.  It is because of the activities of employers, workers, shops and service providers – and of course public services such as hospitals and the police (how long would Mayfair properties retain their value if there were no disincentives to burglary and kidnapping?) that there is such a high demand on that land and subsequent high value.  The current incentive to get a piece of land and sit on it on the almost guaranteed long-term assumption its value will increase will with a Location Charge no longer be attractive.  The owner will no longer receive the ‘free gift’ of increased value provided by those I just listed and instead landowners will be incentivised to make most efficient use of the land, releasing development land for building on etc.

As difficult as it may be for many, could it be time to let go of the idea that the reason to tax someone heavily is because they earn a lot or have got a lot of money?  Could you live with the idea that it’s OK that a very rich person who doesn’t want to pay simply sells their property if in the act of selling the property they are making it available to someone who will pay?  Could you live with Starbucks not paying huge amounts on their profits if instead they had to pay ‘only’ on the value of the land of their premises****?

A Location Charge is as good an idea now as it was when Henry George proposed it and when Lloyd George first tried to implement it.  But as persuasive as the economic arguments are the focus is too often on ‘who’ (for Lloyd George it was a means of getting at his enemy, the landed gentry).  If we can let go of this fixation with seeing economic justice as ‘getting more out of the rich’ then we can finally get beyond the politics of envy and start working constructively, dare I say ‘together’ towards solutions.  It’s not a matter of ‘us’ v. ‘them’, it’s simply a matter of what makes sense 🙂

* I’m really not trying to put off readers but I’m finding it funny that the first link in my blog is to the Telegraph with a picture of Merkel and Cameron on it!

** because in my book it doesn’t qualify as a tax – but that’s another story for another time.

*** Again, I won’t here go into the nitty gritty of how and why LVT works.  My point in this piece is on asking a helpful interrogative (what) rather than one which will never work (who).

**** It is not coincidental I chose Starbucks as an example because we all know the kind of location they go for for their premises.  What the Location Charge ensures is when they do take a prime spot thus depriving everybody else of the same spot they contribute accordingly.  And from a practical perspective it has to be easier than trying to get the world’s tax jurisdictions to work together to try and ‘corner’ them into paying on the basis of the profits someone deems to have originated from their UK operations?

Edit:  I got a load of questions about this from a Redditor over on reddit.com/r/GeoLibertarianism/ which I’ve had a go at replying to.  If any Geosits with a deeper understanding fancy popping over to give some better answers you’d be most welcome 🙂