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The Big Bitcoin Bet: Currency of the Future or Just a Better Casino?

Bit­coin’s near­ly par­a­bol­ic [1] rise in price this year [2] has, not sur­pris­ing­ly, led to a sim­i­lar rise in expec­ta­tions. What does the future hold for bit­coin? Could bit­coin replace gold [3]? Or might it grow even big­ger [4]:

Ron Paul: Bit­coin could ‘destroy the dol­lar’
By Jose Pagliery
Decem­ber 4, 2013: 12:01 PM ET

NEW YORK (CNN­Money)
Imag­ine a world in which you can buy any­thing in secret. No banks. No fees. No wor­ries infla­tion will make today’s mon­ey worth less tomor­row.

The dig­i­tal cur­ren­cy Bit­coin promis­es all these things. And while it’s far from achiev­ing any of them — its val­ue is unsta­ble and it’s rarely used — some have high hopes.

“There will be alter­na­tives to the dol­lar, and this might be one of them,” said for­mer U.S. con­gress­man Ron Paul. If peo­ple start using bit­coins en masse, “it’ll go down in his­to­ry as the destroy­er of the dol­lar,” Paul added.

It’s unlike­ly that Bit­coin would replace the dol­lar or oth­er gov­ern­ment-con­trolled cur­ren­cies. But it could serve as a kind of uni­ver­sal alter­na­tive cur­ren­cy that is accept­ed every­where around the globe. Con­cerned about the dol­lar’s infla­tion? Just move your cash to bit­coins and use them to pay your bills instead. Tired of hefty cred­it card fees? Bit­coin allows trans­ac­tions that bypass banks.

...

And who knows, maybe bit­coin real­ly will be the “destroy­er of the dol­lar”. But such a pos­si­bil­i­ty rais­es a fun ques­tion: Can a fixed-sup­ply dig­i­tal cur­ren­cy like bit­coin “destroy” the dol­lar by sup­plant­i­ng it the world’s reserve cur­ren­cy? Sure, it’s pos­si­ble [5]:

oftwominds.com
Could Bit­coin (or equiv­a­lent) Become a Glob­al Reserve Cur­ren­cy?
(Novem­ber 7, 2013)
Charles Hugh Smith

It’s a wor­thy thought exper­i­ment to ask if a dig­i­tal cur­ren­cy could also act as a reserve cur­ren­cy.

Could a non-state issued dig­i­tal cur­ren­cy like Bit­coin become a glob­al reserve cur­ren­cy? The idea came up in my recent con­ver­sa­tion with Max Keis­er on the Keis­er Report [6] dur­ing our dis­cus­sion of reserve cur­ren­cies.

The idea is intrigu­ing on a num­ber of lev­els. In terms of retain­ing val­ue though thick and thin, the ulti­mate reserve cur­ren­cy can­not be print­ed (and thus deval­ued) with aban­don by a gov­ern­ment. Gold and sil­ver have served as the ulti­mate reserve cur­ren­cy, as pre­cious met­als can be trad­ed for com­modi­ties and ser­vices, pro­vide col­lat­er­al for debt and serve as reli­able stores of val­ue.

While many observers believe gold is still the only reli­able reserve cur­ren­cy (or if you pre­fer, the only reli­able back­ing for gov­ern­ment-issued paper mon­ey), it’s a wor­thy thought exper­i­ment to ask if a dig­i­tal cur­ren­cy could also act as a reserve cur­ren­cy.

Since there is no real-world com­mod­i­ty back­ing the dig­i­tal cur­ren­cy, its val­ue must be based on scarci­ty and its ubiq­ui­ty as mon­ey. The two ideas are self-rein­forc­ing: there must be demand for the dig­i­tal mon­ey to cre­ate scarci­ty, and the source of demand is the dig­i­tal cur­ren­cy’s accep­tance as mon­ey that can be used to buy com­modi­ties, goods, ser­vices and (the ulti­mate test) gold.

It fol­lows that the first step in a non-state issued dig­i­tal cur­ren­cy becom­ing a reserve cur­ren­cy is that it isn’t cre­at­ed in quan­ti­ties that dwarf demand. If the dig­i­tal cur­ren­cy is issued with aban­don, it can­not be scarce enough to gain any val­ue. If I own one quat­loo (our hypo­thet­i­cal dig­i­tal cur­ren­cy) and a tril­lion new quat­loos are issued tomor­row, the val­ue of my one quat­loo will decline to near-zero.

The sec­ond step is its wide­spread accep­tance glob­al­ly as mon­ey, i.e. a store of val­ue and some­thing which can be trad­ed for goods and ser­vices.

There is a bit of a built-in con­flict in these two require­ments. To be use­ful in the $60 tril­lion glob­al econ­o­my, the quat­loo must be issued in size: there must be enough of it around to grease trans­ac­tions large and small in all sorts of mar­kets. Using the U.S. dol­lar as a guide (since the USD is the pri­ma­ry reserve cur­ren­cy), we can esti­mate that a min­i­mum of $1 tril­lion in quat­loos would be need­ed to become a prac­ti­cal glob­al cur­ren­cy.

To act as a reserve cur­ren­cy, anoth­er tril­lion or two would be need­ed, as nations would hold these quat­loos as reserves. (Nations hold an esti­mat­ed $7 tril­lion in USD reserves, about $3 tril­lion euros and $1 tril­lion or so in yen, pounds and oth­er cur­ren­cies.)

But issu­ing quat­loos in these quan­ti­ties would remove any scarci­ty val­ue. Thus the issuer of the quat­loo would have to care­ful­ly issue more quat­loos only when demand jus­ti­fied the need for more mon­e­tary “grease” for the glob­al econ­o­my.

If on the oth­er hand sky­rock­et­ing demand/scarcity drove the val­ue to the stratos­phere, hold­ers of the quat­loo would rejoice, but this volatil­i­ty would present its own set of risks for those seek­ing to use the quat­loo as a reserve against cur­ren­cy volatil­i­ty in the home-coun­try cur­ren­cy. If a dig­i­tal cur­ren­cy can leap ten-fold in a short time, then might it not drop with equal volatil­i­ty?

Volatil­i­ty is the ene­my of reserves; the hold­er of reserves needs a liq­uid (mean­ing it can eas­i­ly be sold or trad­ed in size) cur­ren­cy that pre­dictably retains its val­ue. A volatile cur­ren­cy pos­es risks, as do cur­ren­cies that can­not be trad­ed in size with­out dras­ti­cal­ly influ­enc­ing the mar­ket val­ue of the cur­ren­cy.

These con­di­tions pose a steep chal­lenge for any dig­i­tal cur­ren­cy, but they are not insur­mount­able. Even as a niche cur­ren­cy, non-state issued dig­i­tal cur­ren­cies could play a role in the glob­al econ­o­my, espe­cial­ly if gov­ern­ment-issued fiat cur­ren­cies destabilize/ deval­ue due to mas­sive mon­ey cre­ation by des­per­ate cen­tral banks and state trea­suries.

Is scarci­ty enough to back a non-state issued cur­ren­cy? Bit­coin offers a real-world exper­i­ment.

So yes, in the­o­ry, bit­coin or any oth­er dig­i­tal fixed-sup­ply cur­ren­cy could become the new dom­i­nant glob­al reserve cur­ren­cy if the US real­ly does descend into a hyper­in­fla­tion­ary death-spi­ral and if total val­ue of the new reserve cur­ren­cy becomes worth tril­lions of dol­lars (at today’s prices) and also becomes more sta­ble than any of the alter­na­tives. In oth­er words, yes, we could see a new non-state-backed dig­i­tal reserve cur­ren­cy, but that cur­ren­cy would have to have prop­er­ties not yet exhib­it­ed by bit­coin or any oth­er fixed-sup­ply cur­ren­cy and all oth­er major cur­ren­cies would have to fail. And such a sce­nario might not actu­al­ly do any­thing to reduce infla­tion any­ways [7] but, in the­o­ry, it could hap­pen.

So why is it that so many bit­coin enthu­si­asts are pre­dict­ing that the dol­lar’s death­blow has final­ly arrive? Well, in part it’s because there are a lot of Lib­er­tar­i­ans [8]. Also, a lot of Lib­er­tar­i­ans bought a lot of bit­coins [9]:

Forbes
ECB: “Roots Of Bit­coin Can Be Found In The Aus­tri­an School Of Eco­nom­ics”
11/03/2012 @ 11:04AM
Jon Mato­nis, Con­trib­u­tor

The ECB (Euro­pean Cen­tral Bank) has pro­duced the first offi­cial cen­tral bank study of the decen­tral­ized cryp­to­graph­ic mon­ey known as bit­coin, Vir­tu­al Cur­ren­cy Schemes [10]. Ignor­ing for a moment the ECB’s con­de­scend­ing and deroga­to­ry use of the vir­tu­al cur­ren­cy phrase and scheme phrase, the study pro­duced at least one land­mark achieve­ment.

In claim­ing that “The the­o­ret­i­cal roots of Bit­coin can be found in the Aus­tri­an school of eco­nom­ics,” the ECB for­ev­er linked Bit­coin to the proud eco­nom­ic her­itage of Menger, Mis­es, and Hayek as well as to Aus­tri­an busi­ness cycle the­o­ry [11]. This recog­ni­tion is also a direct tes­ta­ment to the mon­e­tary the­o­ry work of Friedrich von Hayek who inspired many with his 1976 land­mark pub­li­ca­tion of Dena­tion­al­i­sa­tion of Mon­ey [12].

Bit­coin ful­ly embod­ies the spir­it of dena­tion­al­ized mon­ey as it seeks no author­i­ty for its con­tin­ued exis­tence and it rec­og­nizes no polit­i­cal bor­ders for its cir­cu­la­tion. Indeed accord­ing to the report, pro­po­nents see Bit­coin as “a good start­ing point to end the monop­oly cen­tral banks have in the issuance of mon­ey” and “inspired by the for­mer gold stan­dard.”

Econ­o­mists from the 19th and mid-20th cen­turies [13] can be for­giv­en for not antic­i­pat­ing an inter­con­nect­ed dig­i­tal realm like the Inter­net with its p2p dis­trib­uted archi­tec­ture, but mod­ern econ­o­mists can­not be. From their own con­clu­sions (on page 48) which inac­cu­rate­ly lump Bit­coin togeth­er with Lin­den Dol­lars, here is what the mod­ern-day econ­o­mists at the ECB are still not get­ting:

1. ECB con­cludes that if mon­ey cre­ation remains at a low lev­el, bit­coin does not pose a risk to price sta­bil­i­ty. This is incor­rect on two lev­els. One, the cre­ation of new bit­coin is capped at 21 mil­lion with eight cur­rent dec­i­mal places so it grows through adop­tion and usage rather than mon­e­tary expan­sion. And two, as with gold, sil­ver, and oth­er com­modi­ties hav­ing a mon­e­tary com­po­nent, price sta­bil­i­ty is a func­tion of the mar­ket not cen­tral plan­ners;

2. ECB con­cludes that bit­coin can­not jeop­ar­dize finan­cial sta­bil­i­ty due to its low vol­ume and lim­it­ed con­nec­tion with the real econ­o­my. Con­verse­ly, bit­coin will tend to increase finan­cial sta­bil­i­ty and over­all sound­ness. Bitcoin’s con­nec­tion with the real econ­o­my is only a con­cern for the reg­u­lat­ed and taxed econ­o­my, where­as bit­coin inde­pen­dent­ly may thrive in the $10 tril­lion shad­ow or “orig­i­nal” econ­o­my [14]. Besides, with its repeat­ed mar­ket inter­ven­tions, no one has done more to jeop­ar­dize finan­cial sta­bil­i­ty than the ECB itself;

3. ECB con­cludes that bit­coin is cur­rent­ly not reg­u­lat­ed and super­vised by any pub­lic author­i­ty. It would be more accu­rate to say that State-spon­sored reg­u­la­tion is large­ly irrel­e­vant because of the inher­ent design prop­er­ties of a peer-to-peer dis­trib­uted com­put­ing [15] sys­tem. But hap­pi­ly, this is still a con­clu­sion that I can agree with and rec­om­mend that it remains the case;

4. ECB con­cludes that bit­coin could rep­re­sent a chal­lenge for pub­lic author­i­ties, giv­en the legal uncer­tain­ty and poten­tial for per­form­ing ille­gal activ­i­ties. While pub­lic author­i­ties will cer­tain­ly be chal­lenged by the intro­duc­tion of a mon­e­tary unit that can­not be manip­u­lat­ed for polit­i­cal pur­pos­es, bit­coin in some cas­es does have the abil­i­ty to pro­vide track­ing capa­bil­i­ty that far exceeds that of nation­al cash or mon­ey sub­sti­tutes. What author­i­ties will find most trou­bling though, with bit­coin, is that mon­ey flows between indi­vid­u­als and busi­ness­es will no longer be exploitable for pur­pos­es of unlim­it­ed iden­ti­ty track­ing and uncon­sti­tu­tion­al ‘fish­ing expe­di­tions’;

...

Bit­coin: Destroy­er of the dol­lar... yuan?

The ECB’s report on bit­coin dis­cussed above was pub­lished over a year ago. A lot’s changed with bit­coin over the last year, most notably the price [16]. But there have been plen­ty of oth­er changes too. For instance, a state-owned Chi­nese tele­com, Jiang­su Tele­com, recent­ly announced a deci­sion to accept bit­coin as pay­ments [17]. And just a few days lat­er, the most pop­u­lar search engine in Chi­na stopped accept­ing Bit­coins as pay­ments [18].

Why all the sud­den bit­coin pol­i­cy swings in Chi­na? Well, in part, it’s because the one of the oth­er big bit­coin changes over the past year has been the grow­ing recog­ni­tion of bit­coin’s poten­tial for affect­ing the “real” econ­o­my. It’s not that bit­coin is now wide­ly used for legal com­merce...that’s still a niche use for dig­i­tal cur­ren­cies [19]. Instead, as the author of the above arti­cle pre­dict­ed over a year ago, much of the con­cern over bit­coin’s impact on the “real” (non-under­ground) econ­o­my is due to bit­coin’s grow­ing appli­ca­tions for under­ground com­merce that can affect the “real” econ­o­my in real ways. Espe­cial­ly an econ­o­my like Chi­na’s with strict cap­i­tal con­trols a lot of very wealthy peo­ple with a lot of mon­ey. Mon­ey they would like to laun­der and then move out of the coun­try.

So a big part of the rea­son we saw a state-backed tele­com announce the accep­tance of bit­coin fol­lowed by a rejec­tion bit­coins by Baidu just days lat­er is that this hap­pened in between [20]:

The Verge
Bit­coin banned from Chi­nese banks amid fears of laun­der­ing

Reg­u­la­tors say indi­vid­u­als are still free to use the vir­tu­al cur­ren­cy at their own risk

By Amar Toor on Decem­ber 5, 2013 04:04 am

Chi­nese reg­u­la­tors have banned finan­cial insti­tu­tions from using Bit­coin, warn­ing that the vir­tu­al cur­ren­cy could be used for ille­gal activ­i­ties and spec­u­la­tion. Chi­na’s cen­tral bank, the Peo­ple’s Bank of Chi­na, announced the deci­sion in a state­ment [21] released Thurs­day, though it stopped short of ban­ning Bit­coin alto­geth­er. Indi­vid­u­als are still free to use the dig­i­tal cur­ren­cy in Chi­na, albeit at their own risk. Bit­coin prices fell in response to today’s announce­ment, drop­ping [22] to as low as $970.62 on Thurs­day after trad­ing at over $1,100 pri­or to the cen­tral bank’s deci­sion.

...

Chi­na has long imple­ment­ed tight cur­ren­cy con­trols, so it’s not sur­pris­ing that reg­u­la­tors would be wary of Bit­coin, which has yet to be reg­u­lat­ed in any coun­try. In its state­ment, the cen­tral bank said it would close­ly mon­i­tor the risks that Bit­coin pos­es, adding that it would take mea­sures to pre­vent the cur­ren­cy from being laun­dered for illic­it activ­i­ties.

“As Bit­coin trans­ac­tions can be done anony­mous­ly and are not restrict­ed by loca­tion, it’s dif­fi­cult to mon­i­tor cap­i­tal flows and it there­fore facil­i­tates mon­ey laun­der­ing and financ­ing for ter­ror­ist activ­i­ties,” the Peo­ple’s Bank of Chi­na said.

“There have been crim­i­nal activ­i­ties using Bit­coins, such as trad­ing of drugs and guns,” the bank added. “Rel­e­vant cas­es are under inves­ti­ga­tion.”

Yes, Chi­na just banned finan­cial firms from trad­ing in bit­coins over mon­ey-laun­der­ing and cap­i­tal con­trol con­cerns. For a coun­try like Chi­na that has long lim­it­ed the flow of mon­ey cross­ing its bor­ders bit­coin presents an new and rather poten­tial­ly pow­er­ful threat to Chi­na. Why? Because Chi­na’s long-stand­ing pol­i­cy of arti­fi­cial­ly sup­press­ing the val­ue of the yuan via cap­i­tal con­trols has result­ed in A LOT of cap­i­tal in the hands of peo­ple that want to move it out of Chi­na. Now. And the Chi­nese gov­ern­ment has mere­ly promised to even­tu­al­ly allow them to move all of that mon­ey out of the coun­try. Even­tu­al­ly. Maybe in 2020 at the ear­li­est [23]:

South Chi­na Morn­ing Post
Chi­na promis­es to loosen cap­i­tal con­trol, but no rapid progress expect­ed
Despite pledge to speed up dereg­u­la­tion, econ­o­mists raise con­cerns over funds out­flows and spec­u­la­tive activ­i­ties that may arise

Jane Cai in Bei­jing
xuejun.cai@scmp.com
PUBLISHED : Fri­day, 29 Novem­ber, 2013, 8:40am
UPDATED : Sat­ur­day, 30 Novem­ber, 2013, 2:03am

Julia Yang’s spir­its rose when the Com­mu­nist Par­ty said this month it would accel­er­ate the dereg­u­la­tion of the main­land’s cap­i­tal account to facil­i­tate cross-bor­der invest­ment.

“I will sell one of my apart­ments in Bei­jing to escape the prop­er­ty tax that will be launched soon­er or lat­er,” said the accoun­tant, who owns two flats. “I will buy some US stocks or look into prop­er­ties in Europe, where invest­ment oppor­tu­ni­ties should be bet­ter.”

Has­ten­ing the yuan’s con­vert­ibil­i­ty under the cap­i­tal account was one of the key reform pro­pos­als decid­ed on at the third plenum of the par­ty’s Cen­tral Com­mit­tee, accord­ing to a doc­u­ment released on Novem­ber 15. Tar­gets for what amounts to par­tial con­vert­ibil­i­ty are planned to be achieved by 2020.

When the cap­i­tal account is ful­ly opened, for­eign direct invest­ment, port­fo­lio invest­ment and oth­er cross-bor­der invest­ment can be con­duct­ed with­out restric­tions on con­vert­ing yuan.

Yang’s plans part­ly jus­ti­fy the con­cerns expressed by many econ­o­mists. They say the pace of cap­i­tal account open­ing up will be slow because pol­i­cy­mak­ers are wor­ried about large cap­i­tal out­flows in the ini­tial years of open­ing up and spec­u­la­tive cap­i­tal activ­i­ties that could cause finan­cial tur­moil in the absence of sound reg­u­la­to­ry mea­sures.

“Many peo­ple have high hopes of cap­i­tal-account lib­er­al­i­sa­tion but I think the new lead­ers will be cau­tious in advanc­ing the reform,” said Lu Ting, an econ­o­mist at Bank of Amer­i­ca Mer­rill Lynch.

Cen­tral bank gov­er­nor Zhou Xiaochuan says the cen­tral gov­ern­ment will sim­pli­fy admin­is­tra­tive mea­sures gov­ern­ing for­eign exchange, draw up a list of sec­tors where direct invest­ment will be pro­hib­it­ed and expand quo­tas under the qual­i­fied domes­tic and for­eign insti­tu­tion­al investor pro­grammes by 2020.

How­ev­er, Lu said, reforms on more impor­tant fronts, includ­ing loos­en­ing con­trols on cross-bor­der lend­ing and equi­ty port­fo­lio invest­ment, would “remain quite slow”.

Oppo­si­tion to rapid cap­i­tal-account lib­er­al­i­sa­tion has been strong since it was first put on the cen­tral gov­ern­men­t’s agen­da in the 1990s. Although cen­tral bank offi­cials gen­er­al­ly advo­cate speed­ing up the process, many aca­d­e­mics are against it, bear­ing in mind lessons from the 1997 Asian finan­cial cri­sis, when for­eign spec­u­la­tors under­mined the finan­cial sta­bil­i­ty of coun­tries with open cap­i­tal accounts fol­low­ing a cred­it binge.

Fan Wei, an ana­lyst at Hongyuan Secu­ri­ties, said: “I think the process will be pro­longed. Aca­d­e­mics, rep­re­sent­ed by those from the Chi­nese Acad­e­my of Social Sci­ences, strong­ly oppose it.”

Yu Yongding, a top econ­o­mist at the acad­e­my, told a forum this month: “So far I don’t see any neces­si­ty for the gov­ern­ment to accel­er­ate cap­i­tal-account lib­er­al­i­sa­tion.”

...

As the above excerpt indi­cates, if Chi­na’s cap­i­tal con­trols are lib­er­al­ized mon­ey will flow more eas­i­ly both in and out of the coun­try but at the moment there is just much more mon­ey ready to flow into Chi­na than out of it. And the lift­ing of those cap­i­tal-con­trols isn’t going to come any soon­er than 2020 and pos­si­bly much lat­er. Hence the con­cerns about bit­coin.

But keep in mind that Chi­na only barred its finan­cial insti­tu­tions from trad­ing in bit­coins. Indi­vid­u­als are still free to buy and sell all the bit­coins they want. And that pre­sum­ably includes indi­vid­u­als with a lot of mon­ey. And gam­bling prob­lem. A lot of mon­ey and gam­bling prob­lem in Macau [24]:

Busi­ness Insid­er
I’m Chang­ing My Mind About Bit­coin
Joe Weisen­thal

Dec. 1, 2013, 4:40 PM

I’m chang­ing my mind about Bit­coin.

I used to think it was a joke or at best a cur­ren­cy for clowns.

Now, I no longer think that. Now, I don’t know what its future is.

Here, let me explain.

...

Pro­vid­ed the mar­ket is liq­uid enough, and the trans­ac­tion infra­struc­ture is robust enough, both the buy­er and the sell­er should be able to con­duct a mutu­al­ly agree­able trans­ac­tion at a fair U.S. dol­lar-based price, with Bit­coin sim­ply pro­vid­ing the anonymi­ty need­ed for the actu­al swap.

The same argu­ment applies to the defla­tion­ary aspect of Bit­coin. If I’m buy­ing weed online, what do I care if oth­ers are hoard­ing it, or if the price has gone up five times in the last day? So long as at the cur­rent price, the sell­er and me are able to come to a mutu­al­ly agree­able price when trans­lat­ed back into U.S. dol­lars, the price rise just isn’t that big of an imped­i­ment. In fact, the price rise might actu­al­ly be help­ful (more on this lat­er).

Even if you don’t think drugs, online gam­bling, and oth­er ille­gal activ­i­ty is enough to sus­tain a “cur­ren­cy,” the same prin­ci­ple applied above could apply to some­thing more impor­tant: mon­ey laun­der­ing or cir­cum­vent­ing cap­i­tal con­trols.

This is what the excite­ment about Bit­coin in Chi­na is all about. In the Bit­coin com­mu­ni­ty, there’s tons of talk about how the future of Bit­coin is in Chi­na, and there does seem to be tons of trad­ing vol­ume hap­pen­ing there. Here’s the poten­tial: Chi­na has lots of rich peo­ple, but a frag­ile bank­ing sys­tem, and strict cap­i­tal con­trols, mean­ing it’s dif­fi­cult to get your wealth out of the coun­try. One way rich peo­ple get their wealth out of the coun­try is by laun­der­ing it through Macau. Mam­ta Bad­kar wrote a great explain­er of how this works. [25]

Basi­cal­ly, your Chi­nese mil­lion­aire gives mil­lions of dol­lars to a “jun­ket” oper­a­tor in the main­land. That jun­ket oper­a­tor then pro­vides them with mil­lions of dol­lars worth of chips at a casi­no in Macau. The mil­lion­aire then plays numer­ous hands of some game (prob­a­bly bac­carat) then at the end of the ses­sion cash­es in the chips in Macau’s cur­ren­cy, the Pat­a­ca. Then those Pat­a­cas are deposit­ed into a bank in Macau, and voila, the mil­lion­aire has just escaped Chi­na’s cap­i­tal con­trols, hav­ing suc­cess­ful­ly moved mil­lions out­side of the Chi­nese bank­ing sys­tem.

Bit­coin, the­o­ret­i­cal­ly, promis­es an even eas­i­er path to do this. Rich per­son buys a bunch of bit­coins, trans­fers them to a Bit­coin wal­let asso­ci­at­ed with a finan­cial insti­tu­tion out­side of Chi­na, sells the bit­coins into some new cur­ren­cy, and then voila.

Econ­o­mist Tyler Cowen [26] wrote a long post about Bit­coin and its poten­tial in Chi­na last week:

Right now, you can think of the val­ue of Bit­coin being set in the same way that the val­ue of an export license might be set through bids. If/when Chi­na ful­ly lib­er­al­izes cap­i­tal flows, the val­ue of Bit­coin like­ly will fall. A lot. To the extent the shad­ow mar­ket val­ue of the yuan ris­es, and approach­es the lev­el of the cur­rent qua­si-peg, the val­ue of Bit­coin will fall, by how much is not clear. Or maybe get­ting mon­ey out through Hong Kong (or Shang­hai) will become eas­i­er and again the val­ue of Bit­coin would fall. If Bei­jing shuts down BTC Chi­na [27], the main bro­ker, which by the way accounts for about 1/3 of all Bit­coin trans­ac­tions in the world, the val­ue of Bit­coin very like­ly will fall. A lot. You will recall that the Chi­nese gov­ern­ment shut down the vir­tu­al cur­ren­cy QQ in 2009 [28]; admit­ted­ly stop­ping Bit­coin could prove hard­er but still they could thwart or lim­it it.

If you are long Bit­coin for any appre­cia­ble amount of time, it seems you are bet­ting that the Chi­nese econ­o­my will do poor­ly and cap­i­tal con­trols will remain. Then more peo­ple will be increas­ing­ly des­per­ate to get more mon­ey out of the coun­try. Or you may be bet­ting that the Chi­nese use of Bit­coin to laun­der mon­ey will increase due to the mere spread of the idea, through social con­ta­gion. Accord­ing to this [29] source, the val­ue of Bit­coin is up by a fac­tor of 66 this year in Chi­na.

...

Note that the Macau casi­no jun­ket indus­try is dom­i­nat­ed by the Tri­ads [30] so the jun­ket oper­a­tors are prob­a­bly pret­ty good at pro­vid­ing a full-ser­vice expe­ri­ence.

Con­tin­u­ing...

...
Now, ear­li­er I men­tioned that the ris­ing price of Bit­coin, rather than being a hin­drance, could actu­al­ly be help­ful.

Here’s why. See, while every­one talks about Bit­coin, there are actu­al­ly a ton of cryp­to-cur­ren­cies. The web­site CoinMarketCap.com [31] lists 42 dif­fer­ent ones, and help­ful­ly lists the total “mar­ket cap” of each. The “mar­ket cap” is just the price of each coin mul­ti­plied by the num­ber of out­stand­ing coins there are for each.

Here’s a look at the top eight among them. Bit­coin, at over $10 bil­lion, is the biggest. Feath­er­coin, at over $19 mil­lion, is still pret­ty sub­stan­tial.

Now each one of these coin sys­tems are pret­ty sim­i­lar, but they have slight­ly dif­fer­ent char­ac­ter­is­tics. The sec­ond biggest one is Lite­coin, which adver­tis­es that trans­ac­tions are faster, and that the min­ing sys­tem is fair­er than bit­coins.

The­o­ret­i­cal­ly, any one of these would suf­fice if you’re a rich per­son in Chi­na look­ing to get your mon­ey out­side the bor­der. But in prac­tice, sev­er­al of these would­n’t suf­fice. For you to get your mon­ey out of Chi­na you need to be able to buy coins in size, and then be con­fi­dent that once you’ve switched them to a wal­let out­side of the coun­try, that you’d be able to sell those coins in size for rough­ly the same price.

If you want­ed to move $1 mil­lion worth of Feath­er­coin, you’d be try­ing to move over 5% of the entire Feath­er­coin mar­ket. It’s high­ly unlike­ly you’d be able to find that kind of liq­uid­i­ty in any rea­son­able peri­od of time. You’d be tak­ing a gigan­tic risk that when you want­ed to sell your Feath­er­coin, that there would be no buy­ers, and you’d be total­ly screwed.

Now that Bit­coin has, notion­al­ly, bil­lions of dol­lars in the ecosys­tem, mov­ing $1 mil­lion (just ~1,000 bit­coins) is less like­ly to cause any kind of splash. You can prob­a­bly obtain the coins and sell them with­out much dis­rup­tion. So although the­o­ret­i­cal­ly the com­pet­ing coins can tech­ni­cal­ly do the job of get­ting past the bor­der, you real­ly need the net­work effects of a sys­tem with a high “mar­ket cap” to make it work. So in a sense, the ris­ing price makes it eas­i­er for the whole sys­tem to oper­ate. Rather than being dis­cour­ag­ing to the Bit­coin ecosys­tem, it enables it, because there’s enough mon­ey in the sys­tem to absorb the needs of buy­ers and sell­ers doing trans­ac­tions.

Felix Salmon wrote a post titled Wait­ing for Bit­coin to get Bor­ing in which he argued that Bit­coin bulls should be more excit­ed by long peri­ods with lit­tle volatil­i­ty rather than the peri­ods like recent­ly where the price goes bal­lis­tic. But while that seems intu­itive if you think of Bit­coin like a “cur­ren­cy” that needs sta­bil­i­ty, it does­n’t nec­es­sar­i­ly jibe with the think­ing above. High­er and high­er bit­coin prices enable trans­ac­tions in size. It’s because Bit­coin has gone par­a­bol­ic, and the num­ber of dol­lars asso­ci­at­ed with it are now over $10 bil­lion that it could become a plau­si­ble avenue for rich Chi­nese to start think­ing of it as a way for them to get mon­ey out of the coun­try. Rather than the high price being a hin­drance, the high price expands the mar­ket.

...

So will bit­coin replace casi­no jun­kets in Macau as the method of choice for rich Chi­nese in need of some clean­ing ser­vices [32]? Only time will tell [33]!

Or maybe gam­blers can take their bit­coins to casi­nos direct­ly and just skip the jun­ket. That’s the idea behind Bit­mark­er, a new com­pa­ny that’s try­ing facil­i­ty the use of bit­coins for the financ­ing inter­est-free loans from casi­nos [34].

Either way, if bit­coin is going to laun­der in the “big leagues [35]” the bit­coin econ­o­my and the total val­ue of bit­coin is going to have to grow by many [36] orders [37] of [38] mag­ni­tude [39].

Gam­bling on bit­coins can involve a lot of gam­bling online with bit­coins
Bit­coin’s poten­tial to com­pete with the casi­no indus­try isn’t lim­it­ed to its poten­tial for mon­ey-laun­der­ing. Bit­coin also has anoth­er fea­ture that makes it a potent com­peti­tor with the online casi­no indus­try. It’s a fea­ture that makes bit­coin great for mon­ey-laun­der­ing but not so great for use as actu­al mon­ey: bit­coin trans­ac­tions are irre­versible [40]. It turns out that irre­versibil­i­ty may make bit­coin dif­fi­cult to use for gen­er­al com­merce, but irre­versibil­i­ty and qua­si [41]-anonymi­ty also make bit­coin close to the per­fect online pok­er chip [42].

Bit­coin’s near-per­fect pok­er chip-sta­tus is a real­i­ty that’s become self appar­ent by the fact that Satoshi Dice, the most pop­u­lar online bit­coin gam­bling site, has been sin­gle hand­ed­ly gen­er­at­ing around half of the total bit­coin trans­ac­tions for over a year [43]:

Forbes
Bit­coin Casi­nos Release 2012 Earn­ings

Jon Mato­nis, Con­trib­u­tor

1/22/2013 @ 11:35AM

It is earn­ings sea­son on Wall Street and it is report­ing sea­son for some of the lead­ing bit­coin casi­no oper­a­tors. Three sig­nif­i­cant Bit­coin-relat­ed gam­bling sites have report­ed their earn­ings and sta­tis­tics for cal­en­dar year 2012. Some of the data is fair­ly reveal­ing giv­ing us a fas­ci­nat­ing glimpse into the world­wide growth of bit­coin and gam­bling.

First up is the ven­er­a­ble SatoshiDice [44], which is the lead­ing bit­coin gam­bling site in terms of amount wagered. Respon­si­ble for more than 50% of dai­ly net­work vol­ume on the Bit­coin blockchain, SatoshiDice report­ed [45] first year earn­ings from wager­ing at an impres­sive ?33,310. Dur­ing the year, play­ers bet a total of ?1,787,470 in 2,349,882 indi­vid­ual bets at an aver­age month­ly growth rate of 78%. Earn­ings were cal­cu­lat­ed from eight months of data cov­er­ing May to Decem­ber, 2012.

With servers based in Ire­land and pro­mot­ed by Erik Voorhees, SatoshiDice is con­sid­ered a blockchain-based bet­ting game and it is self-described as the “most pop­u­lar Bit­coin game in the world.” Sim­i­lar to ran­dom num­ber gen­er­a­tion, the site uses a method to pro­duce a num­ber between 0 and 65,535 which is then wagered on by mak­ing a bit­coin trans­ac­tion to one of the sta­t­ic address­es rep­re­sent­ing dif­fer­ent pay­outs. The odds are cal­cu­lat­ed to give the house an edge of 1.90% with full trans­paren­cy because all dice rolls and earn­ings sta­tis­tics are ver­i­fi­able using the blockchain.

Oper­at­ing expens­es were min­i­mal in 2012 and the com­pa­ny also paid month­ly bit­coin div­i­dends to ‘pub­lic’ share­hold­ers which rep­re­sent 10% of the total 100,000,000 out­stand­ing shares. To invest [46] in the oper­a­tor and bet on the house, SatoshiDice shares are trad­ed on the MPEx [47] bit­coin stock exchange under tick­er sym­bol S.DICE (see August 19th, 2012 Prospec­tus [48]). At the cur­rent exchange rate of $17.00 per BTC, SatoshiDice is a com­pa­ny val­ued at $8.9 mil­lion.

Voorhees empha­sizes [49] that until the site’s legal sta­tus is clear, all bal­ances and account­ing will be main­tained in play-mon­ey bit­coin, because “it’s bet­ter to keep it com­plete­ly sep­a­rate from real life.” For all of the ven­ture cap­i­tal­ists out there, here [50] is how SatoshiDice start­ed. Where is the next [51] big one?

...

With pri­va­cy, effi­cien­cy, growth, pay­ment irre­versibil­i­ty, and cost sav­ings as demon­strat­ed by the above, it’s only a mat­ter of time before the main­stream casi­no oper­a­tors of Gibral­tar and Mal­ta real­ize the ben­e­fits of a gam­ing econ­o­my that lever­ages the ide­al dig­i­tal casi­no chip.

Keep in mind that SatoshiDice began gen­er­at­ing a major­i­ty of bit­coin’s dai­ly tran­sca­tions with­in 10 days of its launch last year [52] and was still gen­er­at­ing about half of the total num­ber of bit­coin trans­ac­tions as of August if this year [53]. If that sounds like an absurd­ly high per­cent­age of the total trans­ac­tion vol­ume for just a sin­gle site, keep in mind that bit­coins real­ly aren’t used for much else at this point. The top 100 bit­coin accounts con­sti­tute ~20% of the total num­ber of bit­coins mint­ed. The top 500 accounts hold ~35% of the total [54]. The top 927 accounts hold ~50% of the total [55]. And, per­haps more impor­tant­ly, the con­cen­tra­tion of bit­coins held by these big accounts has bare­ly changed over the course of the bit­coin boom [56]. A huge share of old-school bit­coin hold­ers are sim­ply not inter­est­ed in trad­ing their vast bit­coin hoards for goods and ser­vices. As a con­se­quence, bit­coin gam­bling — which pri­mar­i­ly trades just bit­coins back and forth — has become the dom­i­nant type of bit­coin trans­ac­tion.

Does bit­coin have a gam­bling prob­lem?
The fact that a sin­gle gam­bling site gen­er­ates close to half of the total bit­coin trans­ac­tions might seem like just anoth­er inter­est­ing fun-fact about bit­coins and lit­tle more. But there are some seri­ous con­se­quences to the bit­coin gam­bling phe­nom­e­na on bit­coin’s poten­tial to grow and become a true alter­na­tive cur­ren­cy (and also become a venue for big time mon­ey-laun­der­ing).

For exam­ple, SatoshiDice pays an enhanced “trans­ac­tion fee” to bit­coin min­ers, giv­ing the SatoshiDice trans­ac­tions pri­or­i­ty over wait­ing trans­ac­tions. When a huge per­cent­age of the total bit­coin traf­fic has pri­or­i­ty in trans­ac­tion clear­ing it risks poten­tial­ly clog­ging the bit­coin sys­tem with spam trans­ac­tions that cre­ate delays for non-gam­bling trans­ac­tions [57]. SatoshiDice even once con­tributed to the much fear “fork­ing” event (the dou­ble spend­ing of bit­coin) [58]. In oth­er words, the more bit­coin is used for gam­bling, instead of com­mer­cial trans­ac­tions, the less use­ful bit­coin becomes for com­mer­cial trans­ac­tions. At least, that’s one poten­tial out­come.

Or maybe bit­coin has a gam­bling solu­tion
There’s anoth­er argu­ment that could be made that bit­coin gam­bling is actu­al­ly cre­at­ing a stronger, more robust bit­coin ecosys­tem that will have to exist in order for bit­coin to have the trans­ac­tion pro­cess­ing capac­i­ty to com­pete with cred­it card trans­ac­tions. That’s because SatoshiDice, and bit­coin gam­bling com­mu­ni­ty in gen­er­al, also acts as a pow­er­ful finan­cial incen­tives to jump into the bit­coin min­ing game bay pro­vid­ing a steady stream of trans­ac­tion fees. If the demand for bit­coin trans­ac­tion clear­ances exceeds the sup­ply by too much the whole sys­tem [59] grinds to a halt. And if bit­coin is ever going to com­pete with cred­it cards, it’s going to have to get a lot big­ger and a lot faster. Maybe about three orders of mag­ni­tude faster [60]:

The Wash­ing­ton Post The Switch
Bit­coin needs to scale by a fac­tor of 1000 to com­pete with Visa. Here’s how to do it.

By Tim­o­thy B. Lee
Novem­ber 12 at 3:38 pm

At the heart of Bit­coin is the blockchain, a glob­al, shared record of every Bit­coin trans­ac­tion that has ever occurred. It gets its name from the fact that every 10 min­utes, on aver­age, the peer-to-peer Bit­coin net­work adds a new “block” con­tain­ing records of recent trans­ac­tions.

The blockchain is shared among the numer­ous com­put­ers that par­tic­i­pate in the trans­ac­tion-clear­ing process known as “min­ing.” To avoid over­load­ing those com­put­ers, Bit­coin soft­ware cur­rent­ly lim­its each block to one megabyte in size. The result: right now, the Bit­coin net­work is only capa­ble of pro­cess­ing around 7 trans­ac­tions per sec­ond. For com­par­i­son, the Visa net­work is designed to han­dle peak vol­umes of 10,000 trans­ac­tions per sec­ond.

So far, that has­n’t been a prob­lem because Bit­coin users are only gen­er­at­ing around 1 trans­ac­tion per sec­ond. But if the Bit­coin econ­o­my con­tin­ues to grow, it’s only a mat­ter of time before that lim­it becomes a prob­lem.

Can the Bit­coin net­work be tweaked to han­dle the much high­er trans­ac­tion vol­umes that could occur in the future? To answer that ques­tion, I talked to promi­nent Bit­coin devel­op­er Mike Hearn. He helped me under­stand the cur­rent lim­its on Bit­coin per­for­mance and how Bit­coin’s devel­op­ment team plans to over­come them.

Tim­o­thy B. Lee: Can you briefly describe the cur­rent lim­its on how many trans­ac­tions the Bit­coin net­work can accom­mo­date?

Mike Hearn: There are two dif­fer­ent kinds of Bit­coin client: Full nodes and “light nodes” we call sim­pli­fied pay­ment ver­i­fi­ca­tion (SPV) nodes. Light nodes don’t care how big the blocks are. And full nodes have a hard phys­i­cal lim­it [of one megabyte per block.]

So one megabyte every 10 min­utes, divid­ing by the aver­age size of trans­ac­tions [gives us] the cur­rent lim­it [of] about 7 per sec­ond.

How close are we to that lim­it right now?

If you look at a chart of the num­ber of trans­ac­tions per day, we’re peak­ing at 70,000 trans­ac­tions per day. We’re not even at one per sec­ond [e.g. 86,400 trans­ac­tions per day] yet. It’s grown. It’s grown pret­ty nice and fast. If you plot the over­all graph from the sys­tem. It has this nice lit­tle expo­nen­tial slope. We’re quite a way from hit­ting these lim­its. It’s a lit­tle bit fuzzy as well, for var­i­ous rea­sons. We’re not in any dan­ger of run­ning out of capac­i­ty right now.

What’s going to be required to get beyond 7 trans­ac­tions per sec­ond?

We just need to take away the lim­it and get peo­ple to upgrade their nodes. The rea­son it has­n’t been done yet is that we’re still try­ing to fig­ure out whether there should be a new lim­it or no lim­it at all. [If there’s no lim­it,] how do we ensure some­one does­n’t mine an arti­fi­cial­ly bloat­ed block that’s just there to annoy peo­ple?

...

Note that debates over top­ics like “whether there should be a new lim­it or no lim­it at all. [If there’s no lim­it,] how do we ensure some­one does­n’t mine an arti­fi­cial­ly bloat­ed block that’s just there to annoy peo­ple?” are, in part, debates over whether or not bit­coin gam­bling should be allowed.

Con­tin­u­ing...

...

Gavin [Andresen, Bit­coin’s lead devel­op­er] is work­ing on some of the work that’s need­ed for this to be done. He’s work­ing on reform­ing the fee sys­tem. The design we’re head­ing toward is that there won’t be any lim­it, but by default min­ers will refuse to process blocks that are ridicu­lous­ly big.

Can you explain how Bit­coin fees work and why the sys­tem has them?

You can attach a fee [e.g. a pay­ment to the min­er pro­cess­ing the trans­ac­tion] to any trans­ac­tion in Bit­coin. Orig­i­nal­ly when Bit­coin was new, all trans­ac­tions were free, and over time the rules were adjust­ed so you can still send free trans­ac­tions but they’re slow­er. Fees act as a kind of a throt­tle for pre­vent­ing flood­ing the net­work with bogus trans­ac­tions. If every trans­ac­tion was always free, you’d get peo­ple bounc­ing coins back and forth all the time.

The main issue we have at the moment is the way that fees are set and nego­ti­at­ed across the net­work is very basic. They’re not real­ly nego­ti­at­ed. The min­i­mum fee size was picked by Gavin less than a year ago. It was picked at a time when the Bit­coin price was much low­er than today. Because the num­bers are fixed in the soft­ware, they’re not spec­i­fied in terms of dol­lars, they’re spec­i­fied in terms of Bit­coins. So Bit­coin trans­ac­tions have become more expen­sive for no good rea­son. Gavin is work­ing on changes to how that works.

Nodes will watch the trans­ac­tions that get broad­cast on the sys­tem, and then they’ll watch how long trans­ac­tions take. So they’ll say “if you want to get processed in 3 blocks, you should pay this much.” The idea is that min­ers set the fees they are will­ing to charge, and nodes observe the oper­a­tion of the mar­ket and esti­mate observed behav­ior. My hope, if oth­er things have been done cor­rect­ly, is that fees will fall sig­nif­i­cant­ly.

...

As the above arti­cle points out, there is cur­rent­ly a fixed num­ber of bit­coins that gets paid to the min­ing team that suc­cess­ful­ly gen­er­ates the each suc­ces­sive “blockchain” of val­i­dat­ed trans­ac­tions (cur­rent­ly 25). Even­tu­al­ly, once all 21 mil­lion bit­coins are “mined”, there will no longer be any bit­coins award­ed and instead it will be sole­ly trans­ac­tion fees that finance the bit­coin min­ing indus­try. But for now, every 10 min­utes or so a “lucky [61]” bit­coin min­ing team is award­ed 25 bit­coins. On a day like Novem­ber 29th, 2013 [62], bit­coin was award­ing the equiv­a­lent of 25 ounces of gold to a min­ing team every ten min­utes on top of any trans­ac­tion fees that would have been paid by the users.

And bit­coin min­ers aren’t the only one’s mak­ing large amounts of mon­ey (or at least mak­ing lots of bit­coins): In July of 2013, the own­er of SatoshiDice, Erik Voorhees [63], became the first “Bit­coin mil­lion­aire” after sell­ing SatoshiDice to an undis­closed buy­er for 126315 bit­coins (worth ~$11.5 mil­lion at the time and a lot more now) [64]. Erik Voorhees, an ardent Lib­er­tar­i­an [65] and staunch oppo­nent of the Fed­er­al Reserve [66], dis­cov­ered bit­coin in 2011 after mov­ing to New Hamp­shire to become part of the Free State Project [67] (which calls for +20k Lib­er­tar­i­ans to move to New Hamp­shire and get the state to secede [68]). Dur­ing his expe­ri­ences with bit­coin Mr. Voorhees learned many lessons. One of the lessons he learned was that “Amer­i­ca is a lie” and “Amer­i­ca is not the land of free mar­kets and free peo­ple that it was adver­tised to be in Gov­ern­ment schools when I was grow­ing up” [69].

We don’t know yet if any of Mr. Vorhees’s sub­stan­tial SatoshiDice for­tune will be put towards future Free State Projects since he’s not inter­est­ed in trad­ing his 156,315 bit­coins “for fiat toi­let paper” [70]. But should he ever decide to cash out and finance a new coun­try he’ll prob­a­bly have a lot of sim­i­lar­ly mind­ed bit­coin mil­lion­aires to join him [71].

There’s gold in them mines! Want to buy some min­ing equipt­ment?
There’s anoth­er sec­tor of the bit­coin econ­o­my that’s been mak­ing quite of bit of mon­ey late­ly. And not just bit­coin “mon­ey”: but actu­al mon­ey mon­ey. It’s most­ly min­ers’ mon­ey [72]:

South Chi­na Mon­rn­ing Post
Bit­coin min­ers find it increas­ing­ly hard to make mon­ey

It’s becom­ing increas­ing­ly tough to earn mon­ey from mak­ing bit­coins; it’s the mak­ers of souped-up com­put­er equip­ment that are mint­ing it

PUBLISHED : Sun­day, 10 Novem­ber, 2013, 3:26am
UPDATED : Thurs­day, 28 Novem­ber, 2013, 9:58am

Tucked away in an air­con­di­tioned data cen­tre in Sil­i­con Val­ley is a hotch­potch of black box­es, cir­cuit boards and cool­ing fans owned by 27-year-old Aaron Jack­son-Wilde, a mod­ern-day prospec­tor look­ing for bit­coins.

Since dis­cov­er­ing the dig­i­tal cur­ren­cy a few months ago, Jack­son-Wilde has paid about US$2,000 for his “rigs”, which are pow­ered by spe­cialised com­put­er chips. They are designed to help oper­ate and main­tain the bit­coin net­work — and, in return, gen­er­ate a small reward in a process known as “bit­coin min­ing”.

...

In a key twist that keeps infla­tion in check, the dif­fi­cul­ty of the cryp­to­graph­ic maths that leads to new­ly mint­ed coins grows as more com­put­ers join the net­work.

That has led some tech­nol­o­gy pro­fes­sion­als to tar­get a new mar­ket in souped-up com­put­ers and spe­cialised chips aimed at the grow­ing ranks of bit­coin “min­ers”.

...

The goal of bit­coin min­ers is to pull in more than what they spend on their rigs — some cost over US$20,000 — and the elec­tric­i­ty they need to keep the machines run­ning 24 hours a day.

It has become so hard to make a prof­it that com­par­isons to the 19th cen­tu­ry Cal­i­for­nia gold rush, when mon­ey was often made sell­ing shov­els to naive prospec­tors, have become a run­ning joke among bit­coin min­ers.

“It’s the guys who sell the equip­ment who are mak­ing the mon­ey, not the bit­coin min­ers,” said Jack­son-Wilde, a man­ag­er at a com­pa­ny that makes motor­cy­cle bat­ter­ies.

Coin­T­er­ra believes spend­ing on new bit­coin min­ing chips could eas­i­ly hit US$100 mil­lion a year for the next three years, assum­ing no change in prices. While that is peanuts for large semi­con­duc­tor com­pa­nies like Intel and Qual­comm, it is a lucra­tive mar­ket for small devel­op­ers.

About 11.9 mil­lion bit­coins, worth US$2.4 bil­lion at recent prices, have been mint­ed since the cur­ren­cy began cir­cu­lat­ing. Based on recent activ­i­ty, the net­work is on track to cre­ate around 1.4 mil­lion new bit­coins annu­al­ly over the next three years, the equiv­a­lent of more than US$280 mil­lion a year at recent exchange rates.

Reflect­ing grow­ing com­pe­ti­tion, Jack­son-Wilde says his gear — which fea­tures mod­el names like Erupter, Jalapeno and Spar­tan — now pulls in a tiny frac­tion of the bit­coins it used to, but he expects anoth­er US$10,000 worth of next-gen­er­a­tion equip­ment to put him in the black.

...

Keep in that the val­ue of the 1.4 mil­lion bit­coins slat­ed to be mint­ed over the next three years and award­ed to min­ers will be worth a lot more that $280 mil­lion today even after the recent price melt­down fol­low­ing the bit­coin trad­ing ban for Chi­nese banks [73]. There’s a poten­tial for­tune to be “mined” over the next few years, and the high­er the bit­coin bub­ble gets the big­ger that ~10 minute award gets and the greater the com­pe­ti­tion for more bit­coin com­put­ing pow­er.

There’s gold in them hills! Let’s set up a casi­no to mine it.
And, of course, the greater the price of bit­coin, the more temp­ta­tion there’s going to be for schemes. Schemes like get­ting a super­com­put­ing min­ing cen­ter and then set­ting up gam­bling site so you can mine your site’s own trans­ac­tions and all the oth­er trans­ac­tions (which are still most­ly gam­bling trans­ac­tions that pay fees).

And, of course, some­one is already doing that: Mas­sive Luck Invest­ments — a Hong Kong based invest­ment firm that owns betcoin.tm, a SatochiDice clone — recent­ly decid­ed to plunge into the bit­coin min­ing busi­ness. It involves mul­ti­ple gen­er­a­tions of min­ing machines planned for sale to the pub­lic and even a pri­vate­ly held mul­ti-peta­hash/sec­ond cut­ting edge sys­tem for the in-house min­ing. The advanced chips appear to be tar­get­ed towards a cloud-min­ing oper­a­tion. Based in Chi­na. Using two super­com­put­ing cen­ters. For one of the super­com­put­ing cen­ters, the “Shang­hai super­com­put­er cen­ter will be respon­si­ble for the over­all facil­i­ty design and staff train­ing”. At least that’s all what they announced this April [74]. Part of that announce­ment includ­ed:

“The Chi­nese gov­ern­ment pro­vides pref­er­en­tial poli­cies to attract FDI [for­eign direct invest­ment] in cer­tain high tech areas that ben­e­fit the Chi­nese econ­o­my,” said the Mas­sive Luck exec. “They require tra­di­tion­al CPU-based tra­di­tion­al com­put­ing pow­er to address the acute short­age of it. Shang­hai super­com­put­er cen­ter will be respon­si­ble for the over­all facil­i­ty design and staff train­ing.”

Could a super­com­put­ing cen­ter ded­i­cat­ed to bit­coin min­ing that’s designed by the Shang­hai Super­com­put­ing Cen­ter and run by the own­ers of a SatoshiDice clone real­ly be in the works? The Chi­nese gov­ern­ment does have an ambi­tious pro­gram to build super-com­put­ing sites [75]. The recent rul­ing by the Chi­nese gov­ern­ment did­n’t restrict pri­vate bit­coin activ­i­ty at all [76] and before the bit­coin bank ban, signs were point­ing towards an embrace of bit­coin by Bei­jing [77]. Busi­ness­es like this could be handy if the Chi­nese elites real­ly do have an inter­est in expand­ing their oppor­tu­ni­ties for get­ting a head start on the lift­ing of cap­i­tal con­trols.

But bit­coin min­ers with less-than-super­com­put­ing capa­bil­i­ties should­n’t fret quite yet. Betcoin.tm users have already charged betcoin.tm with not actu­al­ly imple­ment­ing [78] the math­e­mat­i­cal­ly “prov­ably fair” [79] gam­bling pro­to­cols and are alleged to have been attack­ing bet­coin’s com­peti­tors with denial-of-ser­vice attacks and gen­er­at­ing fraud­u­lent bets using scripts to puff up their num­bers [80]. As SatoshiDice founder Eric Voorhees put it “Bit­coin is absolute­ly the Wild West of finance, and thank good­ness [69]”. Yes it is. So this par­tic­u­lar bit­coin adven­ture could end up being most­ly good [81] PR [82]. Then again, maybe there real­ly are super­com­put­ing cen­ters in Chi­na get­ting set up to mine bit­coins [83]. That might bode well for the investors in the super­com­put­ing cen­ter, but what do pos­si­ble pub­lic-pri­vate part­ner­ships with Chi­nese super­com­put­ing cen­ters say about bit­coin’s poten­tial to live the dream and slay the Beast [84] when you have to own a super­com­put­ing clus­ter to even begin seri­ous­ly com­pet­ing in the Great Dig­i­tal Gold Rush? We’re not at that point yet, but if bit­coin takes off, it’s com­ing. And in race of com­put­ing speed and pow­er guess who wins [85].

The sto­ry of betcoin.tm and Mas­sive Luck Invest­ments is an exam­ple of what is pos­si­ble nowa­days: Bit­coin min­ing is an unreg­u­lat­ed com­pe­ti­tion and if a pub­lic or pri­vate orga­ni­za­tion wants to allo­cate super­com­put­ing resources towards the bit­coin min­ing mar­kets they just might go ahead and do that. And maybe there will be pub­lic-pri­vate part­ner­ships using very pow­er­ful com­put­ing resources. Why not, espe­cial­ly if bit­coin takes off? Bit­coin has the poten­tial to enrich gov­ern­ments and their pri­vate part­ners too. Don’t for­get that bit­coin had a pret­ty pos­i­tive recep­tion dur­ing the recent US Con­gres­sion­al hear­ings [86] and Chi­na’s gov­ern­ment real­ly did­n’t do all that much to restrict bit­coin’s usage. And there’s no rea­son the world’s Big Broth­ers have to hate dig­i­tal cryp­tocur­ren­cies [41]. Espe­cial­ly if the gov­ern­ments of the world con­tin­ue to seize sig­nif­i­cant per­cent­ages of bit­coins in sin­gle crim­i­nal busts [87]. Con­trary to pop­u­lar opin­ion, Big Pow­er (gov­ern­ment) may not have much to fear from this dig­i­tal gov­ern­ment-slay­er.

We’ll have to wait and see how all of this turns out. Bit­coin could fiz­zle out in months [88] or just keep par­a­bol­i­cal­ly chug­ging along for years to come. And if bit­coin does­n’t end up slay­ing the twin beasts of Big Mon­ey and Big Pow­er and does­n’t assume the man­tel as the new glob­al cur­ren­cy for a post-gov­ern­ment cryp­to-gold­en age oth­ers will keep try­ing [89]. Some dreams don’t die eas­i­ly, espe­cial­ly the col­lec­tive night­mares [90].

And regard­less of whether or not bit­coin suc­ceeds in becom­ing the got­ta have cur­ren­cy, one thing is clear: Big Elec­tric­i­ty has got to be lov­ing this new pro­cess­ing-inten­sive dig­i­tal cryp­tocur­ren­cy craze. Absolute­ly [91] lov­ing [92] it [93].