Mining Bitcoin Has Become A Ruthlessly Competitive Business

A huge aircraft hangar in Boden, in northern Sweden, big enough to hold a dozen helicopters, is now packed with computers--45,000 of them, each with a whirring fan to stop it overheating.

The machines work ceaselessly, trying to solve fiendishly difficult mathematical puzzles.

The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital "crypto-currency".

The machines in Boden are in competition with hundreds of thousands more worldwide. The first to solve a puzzle earns 25 bitcoins, currently worth $6,900. Since bitcoin's invention in 2008 by a mysterious figure calling himself Satoshi Nakamoto, people have increasingly traded it for real money, albeit at a wildly varying price (see chart).

Although there are only $3.8 billion-worth of them in circulation--about twice the value of Paraguayan guaraníes in use--bitcoins have three useful qualities in a currency: they are hard to earn, limited in supply and easy to verify.

But stability is important too: just over a year ago a bitcoin was worth four times as many dollars as now. But then Mt Gox, the crypto-currency's biggest exchange, collapsed and the bitcoin bubble burst.

Critics make comparisons with 17th-century "tulip mania", and predict that bitcoin mania will fizzle out in similar fashion. On January 5th Bitstamp, another bitcoin exchange, halted operations and reported that 19,000 of the currency units had vanished in an apparent hacking attack.

The price collapse and the exchanges' woes do not tell the whole story, though: increasing numbers of businesses are accepting payment in bitcoin, including Time Inc and Microsoft; and whatever the fate of bitcoin, the technology may spawn a range of alternative crypto-currencies and provide the basis for other businesses involving such things as the transfer of assets.

When Mr Nakamoto announced his invention (but not his true identity, see book reviews, "Bitcoin: Much more than digital cash"), several digital-cash schemes, including DigiCash and e-gold, had failed, or were in their death throes. But whereas some had tried to create the electronic equivalents of bills and coins, bitcoins only exist as entries in a giant electronic ledger called the "blockchain".

This contains the history of every transaction in the coin, and copies of it are held on many computers around the world. What this means is that unlike conventional currencies and earlier digital ones, bitcoins do not need trusted third parties to handle flows of money or a "central bank" to issue it.

The computers that solve the puzzles also process transactions in the currency and update the blockchain. Every ten minutes each machine or group of machines takes a block of pending transactions, and uses it as the input for a mathematical puzzle. The first to find a solution announces it to the rest, which check that it is right, and that the transactions are valid. If a majority approve, the block is cryptographically attached to the ledger and the computers move on to a new set of transactions.

If a fraudster wanted to spend a bitcoin twice, he would need to disguise it by rewriting the ledger. To do this he would single-handedly have to control more than half of the network's computing capacity. But such a "51% attack" would be prohibitively expensive: Coinometrics, a data provider, reckons it would cost $425m in equipment and electricity.

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The enigmatic Mr Nakamoto designed the system to keep everybody honest.

For instance, successful miners have to wait for a further 99 blocks of transactions to be processed before they get their rewards--so there is a constantly refreshed pool of participants with an interest in ensuring that everyone else keeps to the rules.

The system of rewarding successful miners with bitcoin has proved an effective way to get the currency into circulation.

Operators of conventional payment systems live on transaction fees, but that business model would not have worked for bitcoin in its early days, because of a lack of users.

However, as bitcoin becomes more popular, the idea is that miners will be able to start charging significant transaction fees, and that these will become their main source of income. It will need to: the system cuts the reward for solving puzzles every four years or so.

Despite the slump in bitcoin's value--last year it performed even worse than the Russian rouble and Ukrainian hryvnia--the combined mining power on the network is still increasing, and some miners are still investing in upgrading their machines, making this one of the fastest-moving parts of the IT industry.

Brew your own money

In the crypto-currency's early days, most miners were small-scale, trying to mint money on their home computers. This was Mr Nakamoto's libertarian dream: home-brewed money, without the need for central authorities. But as bitcoin's value rose, it all became more businesslike. Individual miners started to combine their computing power and share the rewards. Most mining today is provided through such "pools".

Startups from all over the world began building specialised hardware powered by custom-built chips, known as application-specific integrated circuits (ASICs). Leaving the amateurs behind, these firms soon became locked in a digital arms race. Microprocessors usually double their power every 18 months, a rhythm called Moore's law. In the case of mining ASICs, this doubling has occurred every six months.

Mining has also moved into the cloud. Firms have started selling online mining capacity in "gigahashes per second", or Gh/s--that is, for a fee they will provide enough computing power to make one billion attempts a second to solve a "hash function", as the puzzles are called. For instance, Genesis Mining charges $702 for 1,000 Gh/s plus a small fee for electricity.

Given the nature of the business, one would expect the bosses of bitcoin-mining firms to be super-geeks. But instead of coming from Silicon Valley, they typically hail from places like Sweden and Georgia--and talk (and often look) more like real miners. "I'm no libertarian but a businessman," says Sam Cole, the "C" in KnCMiner, the operator of the giant mining facility in Boden and a maker of mining computers.

Like other energy-intensive industries such as smelting aluminium, minting bitcoins is more efficiently done at scale, and in places where electricity is cheap and reliable.

It also helps to be somewhere cold, to reduce the cost of cooling the machines. KnCMiner's hangar is near the Arctic Circle and right next to a hydroelectric dam.

The makers of mining computers benefit from the way the bitcoin system adjusts the difficulty of the puzzles, every two weeks, according to how much computing power is hooked up to the system.

In theory the difficulty can be adjusted in both directions: upwards, to ensure that the system does not get swamped by an excess of prize-seeking machines; and downwards, to encourage miners to keep their machines online when things get too quiet.

But until now the difficulty has mostly gone upwards: since the first ASIC chips were introduced in early 2013, it has increased by a factor of 10,000. As a result, new mining computers, which each cost several thousand dollars, have been becoming obsolete in a matter of months.

When the bitcoin price was rising, many of its fans thought investing in mining equipment was a better bet than simply buying and holding the currency. They were willing to plunk down top dollar months ahead of delivery of the computers. These advance payments allowed KnCMiner and other makers to manage without having to raise any financing.

What happens in the wake of the bitcoin price collapse is unclear. The long queues for mining rigs have dispersed. Demand for renting cloud-based hashing-power is stagnant.

Many equipment-makers have ended up running the machines for their own benefit--and selling some of their stock of bitcoins to cover costs. Some people say this is why the currency has kept falling.

People in the industry are already discussing at what price mining becomes unprofitable. But Mr Cole is unfazed. Where others see a weak price, he just sees all the bitcoin yet to be mined, and lots of struggling rivals set to exit the business.

He recently raised $14m in venture capital, looking forward to a bigger slice of a less competitive market. If other miners do give up, the difficulty of the puzzles may fall--so winning bitcoins would get easier.

Perhaps it is a good thing that the breakneck growth of a year ago has ended: had it continued, the system would soon have hit the limits of its capacity. The bitcoin protocol in its current form can only process seven transactions per second--nothing compared with the capacity of conventional payment systems such as Visa, which can handle 10,000.

Not very green

A more fundamental worry is that digital-currency mining, like other sorts of mining, has environmental costs: all that number-crunching uses a lot of electricity, and not all of it comes from renewable sources, as it does in Boden.

The rapid development of the ASICs chips has made the machines more efficient, but even if all mining worldwide were carried out in modern facilities like Boden's, the combined electricity consumption would be 1.46 terawatt-hours per year--the consumption of about 135,000 average American homes.

A bigger concern is that, as the mining pools have got bigger, it no longer seems inconceivable that a bunch of miners might amass enough capacity to dominate the system and become capable of mounting a 51% attack. Last June one pool, GHash.IO, had the bitcoin community running scared by briefly touching that level, before some users switched to other pools.

Such is the complexity of the system that some analysts wonder if it might be possible for a rogue pool to launch an attack with a much smaller share. And the truth is that no one is sure how concentrated the industry already is. About a fifth of mining power is classified as "unknown", meaning it is not clear who owns it.

Chances are that many of these mystery machines live in China. At any rate, mining is likely to grow rapidly there. Miners in Inner Mongolia--where electricity is cheap thanks to abundant coal, over-investment in power plants and lax environmental rules--are reportedly building data centres much bigger than any in the West.

"I've always feared that mining will concentrate in a few countries," says Yifu Guo, a founder of Avalon, a designer of mining chips. He even worries that a hostile government might seize control of the bitcoin system. Others worry that it might, at least, end up as a monopoly.

Whether the bitcoin system can avoid such outcomes will depend on whether its participants can agree on reforms to stop it becoming too concentrated. However, it may have become too successful for its own good: when billions are at stake, vested interests tend to defend the status quo.

As with the internet, the governance of bitcoin follows the principle of "rough consensus and running code". Everybody can pitch in on online forums. If there is general agreement and the solution has proved workable, the system's software code is updated by one of its five main developers--who "emerged" as pre-eminent figures during bitcoin's early days.

Then follows the real test: whether miners accept the changes. They "vote" in favour of a software update by installing it on their machines. And it only becomes part of the system if a large majority do so. That has not been a problem so far. But miners may still balk at any future changes they fear could cost them money.

Gavin Andresen, one of the five main developers, is optimistic this can be avoided. If miners did block better solutions, there would be a "fork", meaning that a part of the bitcoin community would start a new currency.

Some groups have already launched their own crypto-currencies. Many of these "altcoins" are the bitcoin equivalent of stock markets' highly speculative "penny stocks". But some offer real innovation: Ripple and Stellar do away with mining altogether and use other mechanisms, such as voting, to create the currency and update the blockchain.

Now there is much talk about "side-chains", new blockchains pegged to that of bitcoin in such a way that the currency and other assets can be transferred between them, which could unleash even more experimentation.

Other groups are using the blockchain in ways Mr Nakamoto never intended. Some, such as CoinSpark, are offering services to transact in any asset over the network, including stocks and bonds, or use it for notarized messaging (by embedding the location and a summary of the message in a bitcoin transaction).

Where all this may lead to is a constellation of linked crypto-currencies and blockchains, with all sorts of uses: stores of value, means of exchange, mechanisms for transferring assets and verifying transactions, whatever. The original bitcoin may remain at the centre of this constellation--or not.

Whether its price recovers from last year's slump may not matter. Whoever and wherever he is, Mr Nakamoto can be proud of having unleashed a wave of financial innovation, and founded what looks set to become a sizeable new branch of the global IT industry.

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Is Bitcoin the Future?

Below is the November 30th Thoughts from the Frontline, republished in full.

Bitcoin is a topic of discussion almost everywhere I go. My introduction to Bitcoin came when I was speaking at a gold conference in Palm Springs and three bright-eyed, bushy-tailed college students approached me with a video camera and asked for my thoughts on Bitcoin. Noting my confusion, they began to evangelistically espouse the virtues of Bitcoin and tell me how it would save us from the evils of the Federal Reserve. I kept from rolling my eyes (you do want to encourage passion in the young) and mentioned a meeting that I had to go to – at that very moment as it turned out.

Since that time Worth Wray and I and our entire team at Mauldin Economics have done a great deal of research on Bitcoin.  We will soon release a video documentary that is one of the best productions I've ever been involved with and that does a good job of explaining both the controversy around Bitcoin and its considerable promise. We talked with skeptics, enthusiasts, and people willing to put up tens of millions of dollars betting on the future of Bitcoin.

Worth Wray has written this week's letter as a summary of what we know about Bitcoin. Delving into its history and bringing us up to date, he also offers a glimpse of the future. At the end of the letter I offer a few of my own thoughts on the relationships among gold, fiat money, Bitcoin, and financial transactions.

If nothing else, Bitcoin offers a provocative way to think of the future of money. Now let me turn it over to Worth.

Is Bitcoin the Future?

By Worth Wray

"Growth demands a temporary surrender of security."

– Gail Sheehy

"When people write the history of this thing, of bitcoin, they are not going to write the story of 6 million to a billion. What is truly remarkable is the story of zero to 6 million. It has already happened! And we're not paying attention! That's incredible. That's what had one chance in a million, and it already happened."

– Wences Casares, Founder & CEO of Xapo

"[Virtual currencies] may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system."

– Ben Bernanke, Chairman of the Federal Reserve, USA

Yusko's Rule

Before I teamed up with John Mauldin in July 2013, I worked as the portfolio strategist for an $18-billion money manager in Houston that, among its other businesses, co-managed (with an elite team of investors from the university endowment world) one of the largest registered funds of funds in the United States.

I had a front-row seat for every investment decision in a multi-billion-dollar portfolio for almost five years, and for a bright-eyed kid from South Louisiana it was a life-changing experience that no graduate school in the world could have offered… an opportunity to learn from some of the most experienced minds in finance and hone the skills I would need to identify disruptive macro trends and build more balanced portfolios with those forces in mind.

That opportunity to learn, not just about investments but also how to think about emerging trends, continues to inform everything I do today; and Morgan Creek Capital Management's Mark Yusko – a man who has built his career on incorporating investment talent and macro themes into highly diversified portfolios – continues to be one of my most important teachers.

In the course of his daily business (which involves bouncing around the world searching for new ideas and world-class talent), Yusko has evolved a rule for vetting new ideas:

If I hear something once, I remember it. If I hear it twice, I write it down. If I hear it three times, I do something about it.

It sounds simple, as the most valuable investment insights usually are; but Mark is not just talking about "new" ideas that appear on the front page of the New York Times or the opening segment of CNBC's Squawk Box. He's saying that in the course of tapping into a large pool of truly world-class thinkers – who range from hedge fund legends like Julian Robertson and Stanley Druckenmiller to venture capitalists like David Hornik and Marc Andreesson – it pays to pay attention.

Innovative ideas can grow into consensus views and missed investment opportunities before our very eyes in a world awash with information. With constant access to the web through our computers, tablets, and smart phones, it's easy for investors to filter out valuable information in an effort to cut through all the noise; but even still, it's possible to catch emerging trends early enough in their life cycles by holding to a homework rule: When an idea comes up over and over again – especially when it's validated by experienced investors who command and influence vast sums of capital – it's not necessarily time to buy, but it's time to do your homework.

And when it comes to Bitcoin, I should have done my homework earlier.

Thank goodness it's still early…

What is Bitcoin, Anyway?

Bitcoin is a peer-to-peer digital currency that trades on public exchanges and can be instantly transferred between any two people anywhere in the world with the speed of an email… and at FAR lower cost than for transactions processed through the traditional financial system.

While a lot of people have experimented with digital currencies in the internet age, Bitcoin's mysterious creator, "Satoshi Nakamoto," was the first person to solve the issue of "double spending" in a completely decentralized network, meaning that all transactions are made directly between parties, with no middlemen, yet in a way that is verifiable across the entire network and virtually impossible to counterfeit.

Much like the internet itself, the Bitcoin hive is essentially a distributed network of computers and people that are relying on a common technological process – the Bitcoin protocol – to confirm and validate every transaction made, using a unit of account called a "bitcoin" that can be broken down into fractions, thereby enabling previously impossible micro-transactions.

The genius behind the Bitcoin protocol is an element of the system called the "blockchain" – essentially a giant, globally shared ledger of every bitcoin and every transaction in the history of the network. Whenever two people follow through with a transaction, it is broadcast throughout the entire network, and the blockchain expands as that exchange is automatically lumped together with other transactions in a new "block."

While it requires a MASSIVE amount of computing power to verify, confirm, and record every transaction that occurs within the network, it's basically a self-funding system.

Bitcoins are created through a process called "mining," which happens to be the same mathematical process that seals blocks of new transactions onto the blockchain by verifying that every exchange is valid and using real bitcoins. By rewarding "miners" with new bitcoin for devoting their time and computing power to maintenance of the blockchain, the Bitcoin protocol provides the incentive for the network to continue running in a completely decentralized manner.

In the early days, the mining process could be competitively and profitably run from a series of graphics cards linked to a home computer, but in recent years bitcoin mining has become a BIG business. Today, a lot of the mining is done on massive server farms in places like Iceland, where temperatures are cool and power is cheap.

There is an upper limit of 21 million bitcoins that can ever be minted, and the protocol is designed to release a "reward" of a new bitcoin every 10 minutes until every unit of the digital currency has been created. As of today, roughly 13.5 million bitcoins have been mined, with roughly 7.5 million to go.

Source: Coinbase

On paper, Bitcoin is an elegant and efficient way to streamline a global payments system; but in practice, the web of businesses and support structures around the Bitcoin protocol must pass a wide range of tests, from storage security and compliance to the creation of tradable derivatives and merchant adoption, before any kind of digital revolution can begin.

That said, Bitcoin – or something like it – has the potential to do for finance what the internet has done for communications and commerce… and we're already six years into the process.

Bit by Bit

When I heard about Bitcoin for the first time, I dismissed it almost immediately. It seemed like a half-baked scheme cooked up by a bunch of technically skilled but financially naïve computer nerds to disrupt a global financial system that none of them really understood.

Early adopters espoused ideas about freeing the individual from the tyranny of a government-controlled money supply; but in order to pull off their grand vision, Bitcoin's programming forefathers had to convince enough people to put their trust in the system – without governments shutting them down in the process. It seemed unlikely.

In the early days – 2009 and 2010 – a single bitcoin traded for pennies… – but its value was basically unknowable. The digital currency had virtually no daily trading volume; its price swung around wildly (volatility that only became more pronounced over time); and aside from experimental transactions within a small online community, it was virtually useless as a reliable unit of account or medium of exchange.

Internet legend has it that the first real-world Bitcoin transaction was a long-distance arrangement made on May 18, 2010, between an American programmer named Laszlo Hanyecz and a fellow enthusiast he met on the Bitcoin Talk forum. Apparently, Hanyecz offered to pay 10,000 bitcoins to anyone willing to buy him pizza, and an Englishman took him up on the offer… making an international phone call to a Papa John's in Jacksonville, Florida, in exchange for roughly $25 in bitcoins at the then-current exchange rate.

I can't help but wonder if that Englishman turned around and spent his 10,000 bitcoins or saved them for a rainy day. At today's US dollar exchange rate, they would be worth nearly $3.8 million.

 

The second time I heard about Bitcoin (about a year later), it sounded a lot more interesting as a medium of exchange; but it seemed imminently doomed by regulation. The virtual currency had risen from a price around of $0.0025 the day of Laszlo Hanyecz's pizza purchase to nearly $30 in early 2011 as Bitcoin became the basis for real-world transactions within the Bitcoin community… and the preferred medium of exchange for nefarious activities on the web.

 

Following the embarrassing release of US diplomatic cables to the general public in late 2010, the US government organized a financial blockade against the hacker/whistleblower Julian Assange and his nonprofit firm WikiLeaks. When Bank of America, Visa, Mastercard, PayPal, and Western Union refused to transmit donations to WikiLeaks, the nonprofit started accepting donations in Bitcoin.

As the price of Bitcoin began to rise, it saw another big uptick in volume when an online black market named Silk Road launched in early 2011, enabling the sale of illicit drugs and forged IDs exclusively in exchange for Bitcoin.

Business boomed, and the Bitcoin community expanded from computer nerds to mischievous hackers and anonymous drug dealers who wished to skirt the financial system and/or the eyes of the law. And for the libertarians and anarchists who embraced Bitcoin as an anti-QE investment at this stage, it essentially became an enlightened bet against corrupt governments.

Matt Habel

Teething Issues

Within a few months the price of Bitcoin surged to nearly $30… and then Mt. Gox, the most popular Bitcoin exchange, was hacked and trading suspended for several days in June 2011.

In the following months the price collapsed by roughly 90% to less than $3, but that was not the end of Bitcoin.

"Naturally there were teething issues," my friend Grant Williams explained in his April 2013 letter, "Bit Happens," "exchanges were hacked and wallets full of bitcoins stolen after being left unprotected on users' computers; and [there was] much bad press… but slowly and steadily the marketplace weathered the growing pains and, as more and more merchants began accepting payment in bitcoins, the community broadened into something more than just a weird underground movement."

Trading volume increased in the months that followed, and the price of Bitcoin trended upward, albeit in volatile fashion with two 35%+ drops in 2012:

 

But Bitcoin generally stayed under most investors' radars until March 16, 2013, when a banking crisis in Cyprus sent savers across southern Europe scrambling for a way to get their money out of harm's way.

Google searches for the word bitcoin surged to all-time highs.

Source: Google Trends

Although the financial risks to the Cypriot banking system were rather obvious to economists in the months leading up to the panic, it struck almost without warning for most citizens, explains Sovereign Man's Simon Black:

On Friday, March 15, 2013, practically everyone in [Cyprus] went to bed thinking that everything was just fine. Many had probably gone to the bank that very day to do business, or logged on to an Internet banking platform.

Yet the very next morning, they woke to a completely new reality: the nation's banks were broke, and the government was in no position to rescue them.

All the promises they had been told about government guarantees and having a 'well-regulated', sound banking system turned out to be lies. The government proclaimed a bank holiday, and banks remained closed for the next several days. Accounts were frozen and ATM withdrawals were limited to only 100 euros a day.

Eventually the plan materialized [as a hard-line demand from the island nation's German creditors]: substantial portions of deposits over 100,000 euros would be confiscated in exchange for equity in the banks. (Just imagine – Bank of America, RBC, or Lloyds takes your money and gives you stock certificates that subsequently plummet in value!)

And for everyone else, severe capital controls were instituted – some of the worst in decades.

Here again we see a peculiar property of Bitcoin: its value is bid up in a time of desperate uncertainty, and it is able to circumvent the traditional banking system and government-imposed restrictions on capital flows.

Savers in Cyprus could convert their cash to Bitcoin in an effort to escape local capital controls, but most of their funds had already been locked up in the bank holiday, aside from 100 euros a day, which in aggregate had a meaningful effect on Bitcoin's price.

The burning question at that moment was how much Cypriot savers could expect to recover. Their fate was a warning to savers in other fragile Eurozone member states. With the rising fear that the same kind of policies could be imposed on their countries next, savers in Greece, Spain, Portugal, etc. started abandoning their euro-denominated bank accounts for the "safety" of Bitcoin.

In the event of contagion and banking collapse, Bitcoin balances could be moved out of the country rather than getting clogged in the system… and so the price naturally surged to a peak of $230 by early April 9, 2013.

But with more trading volume than the exchange could handle, problems arose, and hackers attacked, forcing another trading halt and making off with over $8.5 million in customer bitcoins. Then the idea of widespread levies on Cypriot bank accounts was dropped, and fears subsided across the Euro area. The price of a bitcoin fell more than 60%, although it remained far above its pre-crisis peak of $47.

With the virtual currency in the news and on the periphery of my radar screen, this was the third time I was forced to think about Bitcoin. I assumed the price surge would be the beginning of a government crackdown and the likely legal death of the experiment… so I continued to ignore it as an investment opportunity. Wrong again.

Bitcoin fell back into relative obscurity for several months, as indicated by Google searches:

 

Source: Google Trends

But rather than cracking down on Bitcoin itself, the US government went after nefarious dealers like Silk Road and effectively found itself invested in the virtual currency (which it later auctioned off to the general public).

Despite the price collapse, Bitcoin had caught the world's attention, and venture capitalists started pouring real money ($88 million in 2013 compared to $36 million in 2012) into a wide range of related businesses, from wallet providers and exchanges to payment processing and other financial services. That meant not only an injection of capital but also a massive influx of expertise into an industry still dominated by inefficient and/or poorly run firms.

At that moment, it started to seem that Bitcoin might just change the world.

Bitcoin downloads spread like wildfire across the emerging world by the summer of 2013…

… and the search term bitcoin was suddenly more popular than ever:

 

Then China's state-owned TV station, CCTV, aired a documentary on the crypto-currency around the same time that serious cracks started to show in China's "miracle" economy. Suddenly China's credit markets were acting more erratically than during the global financial crisis, and Bitcoin saw its greatest surge in demand to date – again as a way of circumventing the traditional banking system and the limited mix of financial assets available to Chinese investors.

As China's interbank market began to freeze in the summer of 2013, John and I were watching closely. Here's an excerpt from the August 31, 2013 Thoughts from the Frontline, "How Do I Hate Thee":

The next chart shows the recent price spike in the Chinese SHIBOR (their short-term interbank rate, more or less equivalent to LIBOR). It is difficult to trust any of the economic data (positive or negative) coming out of China, so we really do not know whether China's growth story is simply moderating or whether we are seeing a hard landing in progress; but the sudden shock in interbank lending rates is an important sign that all is not well in the Middle Kingdom. The big question: is the recent SHIBOR spike a harbinger of a banking crisis, or does it presage an RMB devaluation? Interbank rates do not spike from 3% to 13% (in about 2.5 weeks) in a healthy economy, and a big event along these lines in China would have enormous implications for global growth.

 

As I've written over the course of the past year, John and I have been nervously watching China's slowdown and have voiced real concern over the possibility of capital flight if and when a debt crisis bubbles over; but we clearly underestimated the role that Bitcoin was already playing in China.

By late November 2013 demand for the virtual currency had grown so fast in the People's Republic that BTC China quickly became the largest Bitcoin exchange in the world, and over 100,000 bitcoins were trading every day in China alone:

The price of Bitcoin surged by more than 10x, from $87 to over $1000, as Chinese savers piled in…

 

… until emerging-market central banks in places like China, India, Taiwan, and Thailand started to grasp the threat that Bitcoin's rise posed in a world where US monetary policy was tightening and capital flows could reverse dramatically.

While the People's Bank of China did not explicitly ban owning or mining Bitcoin, it issued a statement in December 2013 saying that the virtual currency was "not a currency in the real meaning of the word" and that "it cannot and should not be used as a currency circulating in the market."

In addition to firm language intended to cool the speculative fever among Chinese investors, the State Council mandated a series of prohibitions on Bitcoin trading and forced banks and other payment institutions to refrain from dealing in the cryptocurrency… warning that virtual currencies like Bitcoin posed "a risk to the public interest and legal status of the renminbi."

In other words, the People's Bank of China all but spelled out that Bitcoin was an avenue by which local savers could circumvent long-standing Chinese capital controls. If Chinese investors continued to pile into Bitcoin, they could set up a situation where capital could leave very quickly in the event of a panic… or, in the meantime, the money could leave temporarily and then "round-trip" its way back into the Chinese economy, seeking the benefits afforded only to foreign investors.

From its peak in early December 2013, the price of Bitcoin fell more than 40% before finding its bottom. And the average daily trading volume in China fell from over 100,000 in November 2013 to only 2,000 today.

As if the crackdowns in China and other emerging markets in December 2013 and January 2014 were not enough, rumors began to swirl in February that the world's largest Bitcoin exchange, Mt. Gox, had been hacked and more than $460 million in customer Bitcoin had been stolen.

In a Wired magazine article published in March 2014, "The Inside Story of Mt. Gox, Bitcoin's $460 Million Disaster," Robert McMillan explained it was not just one-time event but a "years-long hack," dating back to the June 2011 incident. "According to a leaked Mt. Gox document… hackers had been skimming the company for years."

Mt. Gox quickly went offline and collapsed into bankruptcy. It was a devastating blow to confidence in the entire Bitcoin system. With the shock that client accounts could be so insecure for so long, the value of Bitcoin plummeted another 60%+ in the following months.

With the successive blows, Bitcoin fell from nearly $1,200 in early December 2013 to less than $360 by April 2014 – a whopping 70% loss.

And then I really started paying attention.

At a dinner following John's annual Strategic Investment Conference in San Diego, Raoul Pal (author of Global Macro Investor and co-founder of Real Vision TV) helped me to see Bitcoin in a totally different light. He explained that Bitcoin could be as transformative for finance as the internet has been for commerce and communication, and it could happen FAST… especially if central banks and governments mismanage the next global downturn to the detriment of a highly leveraged, highly interconnected financial system. Or, in a less extreme scenario, the Bitcoin protocol could quietly but steadily replace the decades-old payment system that underpins the current system.

Up to that moment I had never really taken the time to understand the technology behind Bitcoin or how it could change the world… but the sudden fall in valuation was interesting. I had seen a lot of chatter about Bitcoin's wild price swings in the media and on Twitter (feel free to follow us at @WorthWray and @JohnFMauldin), and I had heard wild claims from Libertarians and anarchists that this Bitcoin would soon replace the US dollar and all other forms of fiat money. I knew Bitcoin was an interesting way that money could flow freely around government-imposed capital controls in the emerging world. But until that moment I completely failed to grasp what Bitcoin could really mean for the global financial system.

I'll omit the finer details of my conversation with Raoul, but suffice it to say that it kicked off the six-month research project that has inspired and enabled this letter… and pushed my wife, Adrienne, and me to start buying some Bitcoin of our own… not as an all-out bet on Bitcoin's future but as an option on its development. Either Bitcoin becomes a new foundation stone of the global financial system – delivering a handsome return in the process – or it will give way to something even more powerful. It's a pretty binary range of outcomes, but it's worth taking on some exposure with a small percentage of our savings.

The Five Phases of Adoption

In an effort to understand how Bitcoin could continue to mature, I sat down with Barry Silbert, founder of the Bitcoin Investment Trust. As one the most active venture capitalists in the industry (with investments in over 30 bitcoin-related portfolio companies through the Bitcoin Opportunity Corp), Barry has gone all-in on Bitcoin and Bitcoin-related businesses.

He believes the halting rise of Bitcoin from 2009 to 2014 is just the beginning… and that the virtual payment system may be approaching a big inflection point as Wall Street takes the baton from Silicon Valley.

Barry thinks about Bitcoin adoption in five general phases:

1. Experimentation phase (2009 – 2010)
   • No real value associated with Bitcoin. Hackers & developers playing around with the source code. Experimenting with Bitcoin as a medium of exchange.

2. Early adopters phase (2011 – 2013)
   • Interest from investors and entrepreneurs started to grow with substantial press coverage in the wake of the Silk Road bust. First generation of Bitcoin-related companies (exchanges, merchant processors, wallet providers, etc.) started. Potential began to shine through poor management.

3. Venture capital phase (2013 – present)
   • World-class VCs started investing in Bitcoin companies, and rapid ramp-up is already outpacing the early days of the internet. VCs poured more than $90 million into Bitcoin-related businesses in 2013 and are on track to invest more than $300 million in 2014 (compared to $250 million invested in internet-related businesses in 1995).

4. Wall Street phase (2015?)
   • Institutional investors, banks, and broker-dealers begin moving money into Bitcoin. Rising price and volume (in addition to development of derivatives) become the catalyst for mass adoption as retail investment follows.

5. Global consumer adoption phase (?)
   • Only happens if (a) companies continue to innovate and make it easier for consumers to buy, hold, and spend Bitcoin, (b) volume expands dramatically so that large merchants can start accepting payment in Bitcoin, and (c) Bitcoin awareness continues to rise with these developments.

If Barry is right, Bitcoin's continued rise depends on (1) Wall Street money flowing in to deepen the digital currency's trading volume and fuel the development of hedging instruments, (2) continued innovation to make Bitcoin more secure and more user friendly, (3) broad acceptance by merchants as a medium of exchange, and (4) an explosion in public awareness.

It's impossible to know for sure yet… but it looks like all four of those are taking place.

Satoshi's Revolution Crosses the Chasm

While search volumes have moderated, the trend in broad public interest is rising.

Source: Google Trends

And while the price of Bitcoin has continued its downward trend, it seems that the network continues to deepen and mature.

 

Over time, many investors have realized that it was not a problem with the Bitcoin protocol that allowed the security breach at Mt. Gox or the frequent theft of unsecured bitcoins, it was inadequate security – basically, poor business practices – at the exchanges and wallet providers. Rather than exposing some flaw in Bitcoin, the collapse of Mt. Gox revealed the desperate need for better management and the opportunity for improving the services that surround the Bitcoin network. And the venture capital community has certainly responded.

This year, by the end of Q3 2014, over $290 million of venture investments had flowed into Bitcoin-related businesses, compared to the $250 million that poured into internet-related businesses in 1995.

 

Source: CoinDesk

And the trend toward greater average daily trading volume has continued to rise.

Source: Blockchain.info

Not only is real money starting to flow into the growth industries surrounding Bitcoin, but real businesses are starting to accept bitcoins as payment. At the end of Q3 2014, the top eight companies accepting payments in Bitcoin had annual revenues totaling more than $85 billion, and among them was Dell.

 

Source: CoinDesk

The price of Bitcoin may swing dramatically in the coming days, months, quarters, and years. The currency may not survive in its current form… but the technology underpinning it is not going away any time soon.

Thoughts on Bitcoin from John

If you ask me whether I truly believe that in 2050 the main medium of exchange will be paper money, the very quick answer is that I don't. I also think there is a better than reasonable chance that it won't be a fiat currency. But will it be Bitcoin? My best guess is that it will not be Bitcoin as currently constructed but rather an evolved version.

I know the following will be somewhat controversial, but work through with me on what I hope will be a helpful way to think about money in general. The current structure of Bitcoin carries the same inherent flaw that gold does (and to some extent the euro, too): in a world of ever-increasing abundance, gold is massively deflationary and provides unreasonable "rents" to those who hold it. Even given that inherent flaw, it has been the most stable store of value for millennia.

To think about what money will be in the future you have to shake off the chains of the past and your preconceived notions of what money is. Money is not just, or should I say, is more than a medium of exchange. It is also a medium of information. It tells us what the marketplace wants and the price it is willing to pay for a particular good or service. The (often fatal) flaw in fiat currencies is that they manipulate and distort the information contained within the currency, thereby damaging the information flows involved in the exchange of goods and services. For instance, the practice of quantitative easing engaged in by major central banks has encouraged money to go into certain markets (such as stocks), distorting the information reflected in the price.

Rather than looking for the information provided by the market and adjusting our investments and purchases accordingly, we are forced to focus on the information provided by the Federal Reserve and its quantitative easing. To confuse the actions of the Federal Reserve with the actions of the market is to miss the point that the Federal Reserve is actively manipulating the market for its own purposes, however positively motivated.

Advocates of gold believe that a gold-backed currency would eliminate that price distortion, and they have a point. However, if we were to decide to use gold as the sole basis for our currency, we would have to value it at some order of magnitude higher than it is today in order not to create massive deflationary instability. I'm not sure that $10,000 or even $20,000 per ounce of gold would be nearly high enough, given the massive amount of sovereign debt in the world.

But even supposing that we (as a global system) could somehow manage to deal with the logistical nightmare of moving to a single, physical, commodity-backed currency, future growth in the world would soon overwhelm the limited supply of gold, and the prices of goods and services would deflate over time, creating their own backlash. History buffs will recall William Jennings Bryan and his famous cry, "We [mostly referring to farmers] will not be crucified on a cross of gold!"

Now some might see ever-falling prices as a good thing, but they would induce a different type of instability in the system. Given the overwhelming extent of global debt, I think the chances of moving to a physical currency based on gold are slim to none, and Slim left on the morning train. Go back and read the economic history of the latter half of the 1800s in the US. From one point of view it was a golden era of growth and prosperity driven by huge leaps in technology. But it created serious problems for many of those on the lower economic rungs. If you think income inequality is a problem today, then you won't like what happened in the late 1800s.

The leaders of that era came together to try to create a new system that could prevent the frequent panics and crashes that were inherent in the financial system of the day, and eventually we got the Federal Reserve and other ostensible improvements. But that does not mean the current system of central banks and fiat currencies does not have its own flaws. We should not limit our thinking to the economic systems of the past or present as we think about a future economic system. How do we create a truly stable, equitable, and efficient basis for exchange?

While I think that Bitcoin as currently configured has limitations, the technology of the blockchain is one of the most potentially revolutionary developments of the last century. I think we evolve to Bitcoin 2.0 or 3.0, using the same blockchain technology, but with a way to make the new currency a truly stable medium of information that can be easily exchanged for goods and services.

Why not create a currency that is backed by a number of commodities, with gold perhaps as the backbone? Why even limit ourselves to commodities? Bitcoin as currently configured could be part of the basket. Anything that can be represented in a digital form and has a reasonably stable long-term value could be considered.

All I want from my currency is to be able to buy and sell goods and services, make investments, and have a reasonable expectation as to what my currency will be worth in terms of purchasing power if I hold it for months or years.

I think that some of the clever venture capitalists who are exploring Bitcoin will join forces with one or more large international investment banks and create something along those lines. And once someone shows the way, breaking the chains of the past, we will have a period of innovation rivaling the Cambrian explosion.

The vast majority of my purchases are electronic today. I think that percentage will continue to grow. Frankly, I really don't care what happens inside "the system" after I wave my iPhone over the new Apple Pay device (or use my credit card). I just want to walk out of the store with my purchases. (In the not too distant future there will be an extremely tiny RFID chip embedded in my hand, or at least on my person, which will also serve 100 other purposes.)

The Bitcoin blockchain technology allows for the most secure electronic transactions ever devised. Its adoption and acceptance seem inevitable to me. It will be used to validate everything we purchase: stocks, homes, investments, airplane tickets, etc. It will be a far cheaper and much more secure way to validate your ownership of anything, from your home to your stocks.

The blockchain will form the basis for the perfect medium of information exchange (at least as perfect as we humans can create), which in turn will be the basis for whatever electronic medium of financial exchange we evolve in the future. The market (that would be you and me) will move to whatever new medium serves our purposes best.

Satoshi, as technologically brilliant as he (or she or they) was, was limited in his understanding of economic exchange. He was trying to create electronic gold. To some degree, he was confusing technology with money. He was trying to overcome the flaws of our current monetary system (a very laudable goal, I might add) but limited himself to thinking within the box in which the current monetary system placed him.

The next generation of Bitcoin developers are going to crawl out of that box and create whole new realms of possibilities. Once you realize that money is just information, and all you need to do is to provide the most stable mechanism of the transfer of information, you turn thinking about money on its head.

This is going to be massive amounts of fun to watch.

Staying Close to Home

Thanksgiving and its aftermath has been a relaxing time for me, letting me charge my batteries for the rather large amount of work that I must do before the end of the year. There is a lot to think about. While there are a few potential trips in December, I will spend the bulk of my time here in Dallas before my travel schedule picks up next year.

It's time to hit the send button. I think I will close the letter without my usual personal comments. Have a great week!

Your excited about all the innovations coming in our future analyst,

John Mauldin

subscribers@mauldineconomics.com

The article Thoughts from the Frontline: Is Bitcoin the Future? was originally published at mauldineconomics.com.

Cryptocurrency

The bitcoin, a virtual medium of exchange, could be a real alternative to government-issued money—but only if it survives hoarding by speculators.
By James Surowiecki on August 23, 2011

When the virtual currency bitcoin was released, in January 2009, it appeared to be an interesting way for people to trade among themselves in a secure, low-cost, and private fashion. The Bitcoin network, designed by an unknown programmer with the handle "Satoshi ­Nakamoto," used a decentralized peer-to-peer system to verify transactions, which meant that people could exchange goods and services electronically, and anonymously, without having to rely on third parties like banks. Its medium of exchange, the bitcoin, was an invented currency that people could earn—or, in Bitcoin's jargon, "mine"—by lending their computers' resources to service the needs of the Bitcoin network. Once in existence, bitcoins could also be bought and sold for dollars or other currencies on online exchanges. The network seemed like a potentially useful supplement to existing monetary systems: it let people avoid the fees banks charge and take part in noncash transactions anonymously while still guaranteeing that transactions would be secure.

Yet over the past year and a half Bitcoin has become, for some, much more. Instead of a supplement to the dollar economy, it's been trumpeted as a competitor, and promoters have conjured visions of markets where bitcoins are a dominant medium of exchange. The hyperbole is out of proportion with the more mundane reality. Tens of thousands of bitcoins are traded each day (some for goods and services, others in exchange for other currencies), and several hundred businesses, mostly in the digital world, now take bitcoins as payment. That's good for a new monetary system, but it's not disruptive growth. Still, the excitement is perhaps predictable. Setting aside Bitcoin's cool factor—it might just as well have leapt off the pages of Neal ­Stephenson's cult science-fiction novel Snow Crash—a peer-to-peer electronic currency uncontrolled by central bankers or politicians is a perfect object for the anxieties and enthusiasms of those frightened by the threats of inflation and currency debasement, concerned about state power and the surveillance state, and fascinated with the possibilities created by distributed, decentralized systems.

Bitcoin is not going to make government-backed currencies obsolete. But while the system's virtues, such as anonymity and the lack of bank fees, may not matter much to most consumers, one can envision it being useful in a variety of niche markets (some legal, others not, like recreational drugs). Where anonymity is valuable, where trusted third parties are hard to find or charge high rates, and where persistently high inflation is a problem, it's possible that bitcoins could in fact flourish as an alternative currency.

Before they become such an alternative, though, the system will have to overcome a major, and surprising, problem: people have come to see it primarily as a way to make money. In other words, instead of being used as a currency, bitcoins are today mostly seen as (and traded as) an investment. There's a good reason for that: as people learned about Bitcoin, the value of bitcoins, in dollar terms, skyrocketed. In July 2010, after the website Slashdot ran an item that introduced the currency to the public (or at least the public enthusiastic about new technologies), the value of bitcoins jumped tenfold in five days. Over the next eight months, the value rose tenfold again. This attracted an enormous amount of publicity. More important, it also made people think that buying and holding bitcoins was an easy way to make a buck. As a result, many—probably most—Bitcoin users are acquiring bitcoins not in order to buy goods and services but to speculate. That's a bad investment decision, and it also hurts Bitcoin's prospects.

Thing Reviewed:

Bitcoin

www.bitcoin.org

True believers in Bitcoin's usefulness prefer to deny that speculation is driving the action in bitcoins. But the evidence suggests otherwise. The value of the currency has been tremendously volatile over the past year. A bitcoin has been worth as little as a few pennies and as much as $33, and after seeming to stabilize at around $14 over the summer, the bitcoin's value tumbled by almost 50 percent in a matter of days in August. Media coverage has had an outsized impact on the value of bitcoins, even when it has not had a major impact on the number of transactions conducted. Blog posts in which people talk about buying bitcoins because of how much they've increased in value are common. In May, Rick Falkvinge, founder of the Swedish Pirate Party, which focuses on patent and copyright reform, posted that he had decided to put all his savings into Bitcoin. Although he had previously published a series of posts arguing for the bitcoin's viability as a currency, his first listed reason for investing in bitcoins was that their value had risen a thousandfold against the U.S. dollar in the previous 14 months. That's classic speculative thinking.

The problem with having the Bitcoin economy dominated by speculators is that it gives people an incentive to hoard their bitcoins rather than spend them, which is the opposite of what you need people to do in order to make a currency successful. Successful currencies are used to transact day-to-day business and lubricate commerce. But if you buy bitcoins hoping that their value will skyrocket (as anyone investing in bitcoins would), you're not going to be interested in exchanging those bitcoins for goods, since then you'll lose out when the value of bitcoins rises. Instead, you're going to hold onto them and wait until you can cash out.

This kind of hoarding is made more likely by the way Bitcoin is set up. Whereas the supply of modern, "fiat" currencies is controlled by central banks, the supply of bitcoins is permanently limited; there will never be more than 21 million bitcoins in existence. (The total number of coins is a result of the system's initial rules governing how many bitcoins miners could earn, and how often.) Bitcoin's limited money supply is one of the things that people like about it: the currency cannot be debased, as money can when central bankers print more of it. But the flip side is that if the demand for bitcoins rises, for whatever reason, then the value of bitcoins will necessarily rise as well. So if you think that bitcoins are going to become more and more popular, then—again—it's foolish to spend your bitcoins today. The rational thing to do is hoard them and eventually sell them to new users. But that means there will be fewer bitcoins in circulation (and more in people's virtual wallets), making them less useful as an actual medium of exchange and making it less likely that businesses and consumers will ever see Bitcoin as legitimate.

Now, even traditional currencies can be subject to this kind of cycle, which economists call a "deflationary spiral"—although with conventional currencies, the cycle occurs when falling prices lead people to start hoarding cash in the expectation that prices will keep falling (which in turn holds down demand and makes prices fall further). The quintessential recent case is Japan after its real-estate bubble burst in the 1990s.

With ordinary currencies, though, there's a limit to how far down the spiral can go, since people still need to eat, pay their bills, and so on, and to do so they need to use their currency. But these things aren't true of bitcoins: you can get along perfectly well without ever spending them, so there's no imperative for people to stop hoarding and start spending. It's easy to imagine a scenario in which the vast majority of bitcoins are held by people hoping to sell them to other people.

We may already be living in that scenario, since despite all the buzz about Bitcoin, the number of actual transactions conducted in bitcoins, and the value of those transactions, has been shrinking. According to bitcoinwatch.com, the best source of Bitcoin data, more than a million dollars' worth of bitcoins were traded on June 13. By early August, less than half a million dollars in bitcoins were being used in transactions; even the currency's value had been cut in half. Successful network technologies do not tend to see usage plateau, let alone shrink, this early in their history. And the lack of growth in the number of transactions conducted via Bitcoin is not what you'd expect to see if the technology were, as Falkvinge said, on its way to being a part of "normal daily commerce." It's true that there aren't all that many goods and services one can (or would want to) buy with bitcoins. But in a way, that's the real problem: a falling rate of use makes businesses less, not more, interested in accepting bitcoins, and ordinary consumers less interested in spending them.

So just now the bitcoin boom of the past year looks not so much like the birth of a new currency as like a classic bubble. And this has created a real paradox for bitcoin enthusiasts. The best thing for bitcoins would be for people to stop thinking of them as an investment and start thinking of them as a currency. That probably requires the bubble to burst, as it may be doing right now. But if the bubble bursts, it's possible that people's interest in Bitcoin will just fade away. After all, would you accept bitcoins in exchange for your work or products if you knew their value had fallen 50 percent in a matter of days? The challenge for Bitcoin now is whether, having become popular because of the cycle of hype, it can somehow avoid being devoured by it. Only then might we be able to say, Good-bye, asset; hello, currency.

Putting the Greek back into Stoicism

However the Greek crisis pans out, it's likely that for the Greeks, things will get worse before they get better - and this is on top of years of austerity, declining incomes and collapsing public services. How do you cope with calamities like this? Stoicism, a Greek-inspired school of philosophy, may hold some answers, writes professor William Irvine.

It was the Greeks who gave us the word "crisis". It is derived from the Greek krinein, meaning "decide", and indeed, the Greek government now has lots of important decisions to make, as the result of years of reckless borrowing from overly-eager lenders.

Its citizens also have some important decisions to make, including how best to deal with the lean times that likely lie ahead. Fortunately for them, the ancient Greeks, besides giving us our word for crisis, provided us with a splendid strategy for dealing with crises: the philosophy known as Stoicism.

Contrary to popular belief, Stoicism does not advocate that we keep a stiff upper lip - that we stand there mutely and impassively, and take whatever the world throws at us. It instead provides us with a number of specific strategies which, if practised, can make our days go better, in both good times and bad.

One component of the Stoic strategy is to distinguish between things we can control and things we can't. Our life, say the Stoics, will be miserable if we spend our time worrying about things over which we have no control. That time and energy is far better spent thinking about things we can affect. To quote Roman Stoic Marcus Aurelius, "Nothing is worth doing pointlessly."

One of the things we have no control over is the past. We cannot alter it. We therefore need to decide whether we are going to spend our life filled with regret over choices we have made in the past, or whether we are going to let go of that past and instead focus our attention on the choices that lie ahead. It ought to be an easy decision to make. It is also a decision that many people, tragically, fail to make.

The Stoics have a simple technique for making our days go better: we should think about how they could have been worse. Notice that I didn't say dwell on how they could have been worse; that would be a recipe for a miserable existence. Instead, we should allow ourselves to entertain flickering thoughts about the loss of our friends, money, lover, job, health - all the things we value.

If we do lose any of these things, we will have been prepared by our negative thinking, and this will likely lessen the blow of our loss; we will, in a sense, have seen it coming. And if we don't lose these things, we will find ourselves far more appreciative of them than would otherwise have been the case.

A life filled with people and things that we appreciate is easy to enjoy. The Stoics were smart enough to realise that we have it in our power to appreciate the life we find ourselves living if we can just bear in mind that things are a lot better than they could have been.

The Stoics valued self-control, as did most ancient philosophers. If we have self-control, we control ourselves; lack it, and it is someone or something else that controls us. Do we really want to spend the one life we have controlled by someone or something else?

The current Greek crisis can be attributed to a lack of self-control: the Greek government borrowed more money than it could comfortably pay back. Borrowing money, unfortunately, is like using drugs: it feels good at first and feels bad later on. This makes it easy for borrowers to focus their attention on the pleasant present and put off thoughts about a future in which the only choices open to them are painful.

The Stoics thought people could develop self-control by engaging in acts of self-denial. They didn't advocate anything extreme: it was their philosophical rivals the Cynics who suggested doing such things as hugging statues on cold winter days. The Stoics instead advocate that we periodically go out of our way to make ourselves somewhat uncomfortable. Fail to do this, and we will lose our tolerance for discomfort, meaning that the slightest inconvenience will have the power to ruin our day. Those inured to discomfort, the Stoics realised, are almost always happier than those who lead a pampered existence.

Star Trek creator Gene Roddenberry said he thought of Spock as a Stoic, but Stoics are not unemotional - they cultivate positive emotions and avoid negative ones

The current Greek crisis will doubtless cause people much discomfort. Many Greeks will respond, as people often do, by bemoaning their fate. The Stoics among them, though, will treat a time of economic austerity as a kind of test. When life throws an obstacle in their way, Stoics do their best to take it in their stride or even to profit from it.

Zeno of Citium was a merchant who found himself in Athens as the result of a shipwreck. While there, he took an interest in philosophy and ended up founding his own school, which became known as the Stoics because he gave his lectures at the Stoa Poikile, a colonnade in the Agora of Athens.

Regarding this turn of events, Zeno subsequently commented that "I made a prosperous voyage when I suffered shipwreck."

Zeno of Citium

The Roman philosopher Musonius Rufus is another example of a Stoic who profited from what others would take to be misfortune. This occurred after he somehow managed to annoy Emperor Nero (Tacitus says it was because Nero envied his fame as a philosopher) and was banished to the Greek island of Gyaros, in the Aegean Sea. The island was desolate, bleak, and nearly waterless, a miserable place to be put; indeed, even in the 20th Century, the Greek government used Gyaros as a dumping ground for its leftist enemies.

Instead of letting himself be crushed by his circumstances, Musonius took an interest in Gyaros and its inhabitants, mostly impoverished fishermen. He discovered a new spring and thereby made the island more habitable. Those who visited him reported that they never heard him complain or saw him disheartened. He had transformed what could have been a personal tragedy into a personal triumph.

As they suffer privations in the coming months and years, Greeks should keep Musonius in mind. They may have it bad, but it beats banishment to Gyaros - beats it by a long shot.

Three Stoical strategies

• Focus on things you can control - get over things that you cannot control

• Bear in mind that things could have been worse

• Learn self-control through occasional acts of self-denial

Die wahre Gefahr des Grexit

Markus Diem Meier am Montag den 15. Juni 2015

Tritt Griechenland aus der Eurozone aus, geht es mit der Währungsunion aufwärts: So lautet eine weit verbreitete Ansicht. Wer das glaubt, hat die Eurokrise nicht verstanden.

«Die Griechen wählen die Armut, lasst sie doch diesen Weg gehen». So lautet der Titeleines Kommentars des italienischen Ökonomen Francesco Giavazzi in der «Financial Times» von letzter Woche. Giavazzi ärgert sich darüber, dass die Währungsunion sich seit Jahren mit den Griechen herumschlagen muss, deren Anteil an der Wirtschaftsleistung des Euroraums nur gerade 1,8 Prozent ausmacht. Giavazzis Schlussfolgerung:

«We should ask ourselves whether it is really so important to keep Greece inside the EU. The criterion should not be the protection of our credit: that is gone, like it or not. Nor should it be the risk that there might be a run on the euro because of contagion: thanks to the actions of the European Central Bank, monetary union today is resilient enough to withstand Grexit. European leaders should stop treating the Greek problem as if it were merely a financial issue. It goes to the heart of European integration. That project has undoubtedly accelerated as a result of monetary union. But the euro cannot be a substitute for further political integration. Indeed, without such integration, the euro cannot survive — and today, Greece stands in the way of it.»

Eine ausgezeichnete Antwort auf Giavazzis Kommentar liefert der irische Ökonom Karl Whelan. Einige seiner Überlegungen fliessen auch in diesen Beitrag ein. Aber es geht hier nicht nur um Giavazzis Ansichten. Er bringt besonders offen eine Haltung zur ganzen Auseinandersetzung um Griechenland zum Ausdruck, die viele teilen – auch führende Politiker und Technokraten der Eurozone. Die wichtigsten Punkte dieser Sichtweise sind:

• dass Griechenland durch seine Verweigerungshaltung an seinen Problemen gänzlichselbst Schuld ist,
• dass ohne das Hindernis Griechenland die Währungsunion gedeihen würde,
• dass keine grössere negative Verwerfungen durch den Austritt zu erwarten sind.

Klären wir nun, warum diese Sichtweise von einer gewaltigen Verharmlosung der Probleme der Eurozone zeugt.

Wie steht es um die Verweigerung der Griechen bei den Reformen?

Werfen wir bei diesem Thema einen Blick auf die Entwicklung des griechischen Wirtschaftsausstosses seit der Finanzkrise (Datenquelle ist der Internationale Währungsfonds IWF):

Kein anderes Land der Eurozone ist durch eine vergleichbar schwere Krise gegangen. Die Entwicklung entspricht etwa jener der USA während der grossen Depression. Absolut und preisbereinigt liegt das BIP sogar tiefer als im Jahr 2000 vor dem Beitritt Griechenlands zur Währungsunion. Unter diesen Umständen die Wirtschaft stark zu reformieren, wäre in jeder Demokratie extrem schwierig. Und dennoch haben die Griechen – anders als von Giavazzi behauptet – viel unternommen. Unten eine Auswahl. Die Details mit Quellen und Grafiken finden sich im bereits erwähnten Beitrag von Karl Whelan.

• Die Anzahl der öffentlichen Beschäftigten sank in Griechenland zwischen 2009 und 2014 von 907'351 auf 651'717. Das ist ein Rückgang von 255'000, bzw. 25 Prozent.
• Das staatliche Defizit betrug im Jahr 2009 noch 15,6 Prozent. Im Jahr 20014 sank es auf -2,5 Prozent. Wie Whelan schreibt, hat kein Land der Welt das Defizit in einem solchen Ausmass in derart kurzer Zeit reduziert.
• Griechenland hatte vor den Reformen eines der tiefsten durchschnittlichen Pensionsalter in Europa, jetzt zählt es zu den höchsten.

In den letzten Jahren hat Griechenland mehr Reformen durchgepaukt als selbst das dafür oft gelobte Spanien oder Italien, so die Folgerung von Karl Whelan:

«Overall, you can credibly argue that Greece's governments have achieved more substantive reform in recent years than the post-Berlusconi governments have managed in Italy or Mariano Rajoy has managed in Spain.»

Die Löhne in Griechenland sind ausserdem (gemessen an der Entschädigung pro Stunde im Privatsektor) in Griechenland zwischen 2007 und 2014 gesunken, während sie selbst in anderen Krisenländern wie Spanien oder Portugal gestiegen sind. Das zeigt die folgende Grafik von Guntram Wolff vom Think Tank Bruegel:

Tatsächlich hat Griechenland mit Ausnahme von Litauen und Lettland mittlerweile die tiefsten Löhne Europas.

Wie steht es um die Verweigerung beim Sparen?

Der wohl zentrale Punkt der Auseinandersetzung zwischen Gläubigerländern und Griechenland dreht sich um das sogenannte Primärdefizit – den Budgetüberschuss der Regierung abzüglich der Zinskosten für den Schuldendienst. Wie Martin Sandbu von der «Financial Times» treffend festhält, drehen sich letztlich auch alle anderen Reformen um diesen Punkt, da sie den Zweck haben, die Ausgaben des griechischen Staates zurückzuschrauben, um die Rückzahlung der Schulden zu ermöglichen.

Gemäss dem laufenden Programm müsste Griechenland einen Primärüberschuss von 3 Prozent gemessen am Bruttoinlandprodukt im laufenden Jahr und von 4,5 Prozent im nächsten Jahr erzielen. Durch die Verschlechterung der Wirtschaftslage seit Jahresbeginn rechnen nun die Beteiligten mit einem Primärdefizit von –2/3 Prozent. Allein ein schrumpfendes BIP senkt die Überschussquote (bzw. erhöht die Defizitquote). Zudem verschlechtern rezessionsbedingt tiefere Steuereinnahmen und höhere Sozialausgaben das Budget. Laut Silvia Merler vom Brüsseler Thinktank Bruegel würden die Gläubiger Griechenland für das laufende Jahr neu einen Primärüberschuss von 1 Prozent zugestehen. Wieso nur zeigen sich die Griechen für ein solches Entgegenkommen nicht dankbar?

Schlicht, weil das die Lage weiter drastisch verschlimmert – auch die Verschuldungsquote. Die detaillierte Rechnung führt Martin Sandbu hier und ausführlicher hier vor. An dieser Stelle nur die Schlussfolgerungen: Um das primäre Budget um 1 2/3 Prozent (von –2/3 bis +1) gemessen am BIP zu verbessern, müsste die griechische Regierung wegen der dadurch weiter einbrechenden Wirtschaft Sparmassnahmen im Umfang der doppelten Quote von 3 1/3 Prozent umsetzen und die Verschuldungsquote würde trotz dem Primärüberschuss um rund 9 Prozent ansteigen. Es bliebe zwar Geld für eine Rückzahlung übrig, aber auf Kosten einer noch weiter geschwächten Wirtschaft und einer damit noch geringeren Tragfähigkeit der Schulden. Entsprechend verlief auch die bisherige Entwicklung der Schuldenquote, die trotz Schuldenschnitt und Sparmassnahmen weiter angestiegen ist.

Die Grafik unten aus der «Financial Times» zeigt nur die Zunahme der Bruttoverschuldung in Prozent des BIP seit 2008 (die dunkle Linie). Die helle Linie zeigt die Zunahme allein durch den BIP-Rückgang (weil der Nenner in der Berechnung der Quote - Verschuldung/BIP - schrumpft). Wie der Unterschied zur dunklen Linie deutlich macht, ist die Verschuldung aber auch unabhängig davon deutlich weiter gestiegen - wie erwähnt weil die Einnahmen zurückgehen und die Sozialkosten steigen.

Diese Zusammenhänge sind allen Beteiligten klar. Aber es scheint wichtiger zu sein, die Zitrone noch weiter auszupressen, als anerkennen zu müssen, dass die Schulden schlicht nicht mehr zurückbezahlt werden können.

Sind die Griechen an der Eurokrise schuld?

Seit Beginn der Eurokrise war es ein beliebtes Argument, die konkreten Umstände in einzelnen Ländern und das Verhalten von deren Politikern für die Probleme der Eurozone verantwortlich zu machen. Würden die doch nur besser mitspielen, gäbe es keine Krise, so die Botschaft. Diese moralische Betrachtung hat schon immer die Sicht auf die ökonomischen Zusammenhänge vernebelt. Wie hier und anderswo schon oft aufgezeigt, liegt der Ursprung der Probleme der Eurozone bei der Einführung der Währungsunion. Die bejubelten scheinbaren «Glanzjahre» mit hohen Wachstumsraten in Spanien, Irland und Griechenland in den 2000er-Jahren sind genauso Zeugen der Fehlentwicklung wie der Absturz dieser Länder seit 2008.

Die Besonderheit von Griechenland liegt nur darin, dass dort anders als in Spanien und in Irland sich der Staat und nicht die Privaten exzessiv verschuldet hat. Dank dem Eurosystem mit seinen tiefen Zinsen und seinem besonders einfachen grenzüberschreitenden Kapitalverkehr hatten damals alle Freude an dieser Entwicklung, auch im von Nettoexporten abhängigen Deutschland, dessen Banken angesichts einer schwachen Binnenkonjunktur ihr Geld lieber in die boomenden Randregionen gepumpt haben. Seit der Krise wird nun überall brutal deutlich, welche Folgen das Fehlen der üblichen Institutionen hat, die sonst für Linderung und Ausgleich sorgen. Das gilt vor allem für eine Geld- und Währungspolitik, die den Bedürfnissen der jeweiligen Mitgliedsländer angemessen ist. Etwas verkürzt gesagt, fehlt es in der Eurozone generell an Mechanismen und Institutionen, die Ungleichgewichte korrigieren, statt sie zu fördern.

Die Verweigerung Griechenlands gegenüber der bisherigen Logik der Hilfsprogramme – die zu 90 Prozent der Bezahlung der Schulden an die Gläubiger dienen – ist die Folge eines demokratischen Entscheids der Griechen. Nun bietet sich auch hier an, zu behaupten, dass die Griechen eben einfach von den anderen profitieren wollten. Tatsächlich wäre es blauäugig, anzunehmen, dass sich der Widerspruch zwischen den Ansprüchen an Selbstbestimmung einer Bevölkerung und jener der gesamten Eurozone nach einem Ausscheiden Griechenlands anderswo nicht erneut zeugen würde. Der Raum für eigenständige demokratische Entscheide ist in der Währungsunion  überall klein. Das liegt in der vom Ökonomen Dani Rodrick eindrücklich beschriebenen Logik der«Hyperglobalisierung», wie sie die Eurozone darstellt (mehr dazu hier und hier).

Wäre ein Grexit die beste Lösung für die Eurozone?

Aus den obigen Ausführungen ergibt sich bereits, dass Griechenland nicht das Hindernis ist, das der Eurozone auf ihrem Weg in die strahlende Zukunft einzig noch im Wege steht. Die besonders grossen, auch historisch bedingten institutionellen Mängel in Griechenland und das wenig verantwortungsbewusste Gebaren ihrer Politiker in der Vergangenheit haben es besonders einfach gemacht, die Eurokrise ursächlich an Griechenland festzumachen und damit vom wahren Ausmass der institutionellen Schwächen des Europrojekts abzulenken. Dass auch die Lage in anderen Ländern der Zone alles andere als stabil ist, konnte dabei verdrängt werden - Thema für ein andermal.

Die Leichtigkeit, mit der das mögliche Ausscheiden Griechenlands aus der Eurozone mittlerweile hingenommen wird, stammt auch von der Einschätzung, dass eine solche Entwicklung der Eurozone anders als vor ein paar Jahren kaum mehr etwas anhaben kann. Denn anders als damals sitzen die Banken nicht mehr auf hohen Schulden des Landes, deren Ausfall eine neue Finanzkrise heraufbeschwören könnte.

Es ist nicht ausgeschlossen, dass sich diese optimistische Einschätzung mit Blick auf die im engeren Sinn ökonomischen Auswirkungen als richtig erweist. Skepsis ist hingegen angebracht. Denn bei einem «Grexit» ist allen klar, dass die Eurozone eben doch keine unumkehrbare Gemeinschaft mehr ist. Ab diesem Moment würden alle auftretenden oder sich verschärfenden Probleme in jedem Euroland neu beurteilt. Nie könnte ausgeschlossen werden, dass am Ende ein Ausschluss droht. Es wäre sehr überraschend, wenn sich das nicht früher oder später auf den Kapitalmärkten etwa in hohen Zinskosten bedrohter Ländern niederschlagen würde und damit erneut eine Spirale nach unten auslösen würden.

Es wäre überdies nicht das erste Mal, dass die Wirkungszusammenhänge solcher Ereignisse zu wenig verstanden und verharmlost werden und dann das böse Erwachen folgt. So hat man auch geglaubt, im Herbst 2008 die Investmentbank Lehman Brothers ohne grösseren Schaden fallen lassen zu können. Es kam anders.

Nicht berücksichtigt bleiben hier die politischen Wirkungen eines Austritts. Die europäische Integration würde sich als umkehrbarer Prozess erweisen. Diese Botschaft würden alle Parteien und politischen Bewegungen überall auch so verstejem. Entsprechend geringer wäre die Bereitschaft zusammenzustehen, wenn die nächste Krise folgt - und sie folgt ohnehin.

Gänzlich unberücksichtigt blieb in diesem Beitrag auch die Folge eines Austritts für Griechenland selbst, das heisst für seine wirtschaftliche und seine politische Stabilität. Eine Katastrophe in diesen Bereichen würde zudem kaum ohne schwer absehbare geopolitischen Konsequenzen bleiben.